UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34177
DISCOVERY COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 35-2333914 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
One Discovery Place Silver Spring, Maryland |
20910 | |
(Address of principal executive offices) | (Zip Code) |
(240) 662-2000
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Total number of shares outstanding of each class of the Registrants common stock as of October 26, 2011:
Series A Common Stock, par value $0.01 per share |
141,134,505 | |||
Series B Common Stock, par value $0.01 per share |
6,571,772 | |||
Series C Common Stock, par value $0.01 per share |
116,565,487 |
DISCOVERY COMMUNICATIONS, INC.
FORM 10-Q
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
September 30, 2011 |
December 31, 2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 1,032 | $ | 466 | ||||
Receivables, net |
976 | 880 | ||||||
Content rights, net |
83 | 83 | ||||||
Deferred income taxes |
53 | 81 | ||||||
Prepaid expenses and other current assets |
155 | 225 | ||||||
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Total current assets |
2,299 | 1,735 | ||||||
Noncurrent content rights, net |
1,293 | 1,245 | ||||||
Property and equipment, net |
371 | 399 | ||||||
Goodwill |
6,299 | 6,434 | ||||||
Intangible assets, net |
577 | 605 | ||||||
Investments |
816 | 455 | ||||||
Other noncurrent assets |
146 | 146 | ||||||
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Total assets |
$ | 11,801 | $ | 11,019 | ||||
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 48 | $ | 87 | ||||
Accrued liabilities |
438 | 393 | ||||||
Deferred revenues |
123 | 114 | ||||||
Current portion of stock-based compensation liabilities |
40 | 118 | ||||||
Current portion of long-term debt |
20 | 20 | ||||||
Other current liabilities |
38 | 53 | ||||||
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Total current liabilities |
707 | 785 | ||||||
Long-term debt |
4,229 | 3,598 | ||||||
Deferred income taxes |
354 | 304 | ||||||
Other noncurrent liabilities |
108 | 99 | ||||||
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Total liabilities |
5,398 | 4,786 | ||||||
Commitments and contingencies (Note 13) |
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Equity: |
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Discovery Communications, Inc. stockholders equity: |
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Series A convertible preferred stock: $0.01 par value; 75 shares authorized; 71 shares issued at 2011 and 2010 |
1 | 1 | ||||||
Series C convertible preferred stock: $0.01 par value; 75 shares authorized; 57 shares issued at 2011 and 2010 |
1 | 1 | ||||||
Series A common stock: $0.01 par value; 1,700 shares authorized; 141 and 138 shares issued at 2011 and 2010, respectively |
1 | 1 | ||||||
Series B convertible common stock: $0.01 par value; 100 shares authorized; 7 shares issued at 2011 and 2010 |
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Series C common stock: $0.01 par value; 2,000 shares authorized; 142 shares issued at 2011 and 2010 |
2 | 2 | ||||||
Additional paid-in capital |
6,460 | 6,358 | ||||||
Treasury stock, at cost: 23 and 3 Series C common shares at 2011 and 2010, respectively |
(837 | ) | (105 | ) | ||||
Retained earnings |
796 | | ||||||
Accumulated other comprehensive loss |
(22 | ) | (33 | ) | ||||
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Total Discovery Communications, Inc. stockholders equity. |
6,402 | 6,225 | ||||||
Noncontrolling interests |
1 | 8 | ||||||
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Total equity |
6,403 | 6,233 | ||||||
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Total liabilities and equity |
$ | 11,801 | $ | 11,019 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
3
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in millions, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
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Distribution |
$ | 580 | $ | 456 | $ | 1,563 | $ | 1,363 | ||||||||
Advertising |
442 | 402 | 1,328 | 1,185 | ||||||||||||
Other |
73 | 68 | 222 | 210 | ||||||||||||
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Total revenues |
1,095 | 926 | 3,113 | 2,758 | ||||||||||||
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Cost and expenses: |
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Costs of revenues, excluding depreciation and amortization |
342 | 261 | 903 | 782 | ||||||||||||
Selling, general and administrative |
295 | 306 | 864 | 894 | ||||||||||||
Depreciation and amortization |
30 | 32 | 90 | 98 | ||||||||||||
Restructuring and impairment charges |
2 | 15 | 7 | 18 | ||||||||||||
Gain on disposition |
| | (129 | ) | | |||||||||||
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Total costs and expenses |
669 | 614 | 1,735 | 1,792 | ||||||||||||
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Operating income |
426 | 312 | 1,378 | 966 | ||||||||||||
Interest expense, net |
(56 | ) | (49 | ) | (154 | ) | (155 | ) | ||||||||
Loss on extinguishment of debt |
| | | (136 | ) | |||||||||||
Other expense, net |
(5 | ) | (16 | ) | (10 | ) | (57 | ) | ||||||||
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Income before income taxes |
365 | 247 | 1,214 | 618 | ||||||||||||
Provision for income taxes |
(127 | ) | (83 | ) | (417 | ) | (171 | ) | ||||||||
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Income from continuing operations, net of taxes |
238 | 164 | 797 | 447 | ||||||||||||
(Loss) income from discontinued operations, net of taxes |
(1 | ) | 25 | (1 | ) | 25 | ||||||||||
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Net income |
237 | 189 | 796 | 472 | ||||||||||||
Net income attributable to noncontrolling interests |
| (3 | ) | | (10 | ) | ||||||||||
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Net income attributable to Discovery Communications, Inc. |
237 | 186 | 796 | 462 | ||||||||||||
Stock dividends to preferred interests |
| | | (1 | ) | |||||||||||
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Net income available to Discovery Communications, Inc. stockholders |
$ | 237 | $ | 186 | $ | 796 | $ | 461 | ||||||||
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Income per share from continuing operations available to Discovery Communications, Inc. stockholders: |
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Basic |
$ | 0.60 | $ | 0.38 | $ | 1.97 | $ | 1.03 | ||||||||
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Diluted |
$ | 0.59 | $ | 0.37 | $ | 1.95 | $ | 1.01 | ||||||||
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(Loss) income per share from discontinued operations available to Discovery Communications, Inc. stockholders: |
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Basic |
$ | 0.00 | $ | 0.06 | $ | 0.00 | $ | 0.06 | ||||||||
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Diluted |
$ | 0.00 | $ | 0.06 | $ | 0.00 | $ | 0.06 | ||||||||
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Net income per share available to Discovery Communications, Inc. stockholders: |
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Basic |
$ | 0.60 | $ | 0.44 | $ | 1.97 | $ | 1.08 | ||||||||
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Diluted |
$ | 0.59 | $ | 0.43 | $ | 1.95 | $ | 1.07 | ||||||||
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Weighted average shares outstanding: |
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Basic |
398 | 426 | 404 | 425 | ||||||||||||
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Diluted |
401 | 431 | 408 | 431 | ||||||||||||
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Income per share amounts may not foot since each is calculated independently.
The accompanying notes are an integral part of these consolidated financial statements.
4
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Operating Activities |
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Net income |
$ | 796 | $ | 472 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
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Content expense |
623 | 526 | ||||||
Intangible impairment charges |
| 11 | ||||||
Stock-based compensation |
70 | 153 | ||||||
Depreciation and amortization |
90 | 100 | ||||||
Gains on dispositions |
(129 | ) | (12 | ) | ||||
Deferred income tax expense (benefit) |
71 | (89 | ) | |||||
Noncash portion of loss on extinguishment of debt |
| 12 | ||||||
Other noncash expenses, net |
48 | 46 | ||||||
Changes in operating assets and liabilities: |
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Receivables, net |
(127 | ) | (41 | ) | ||||
Content rights |
(653 | ) | (558 | ) | ||||
Accounts payable and accrued liabilities |
8 | (8 | ) | |||||
Stock-based compensation liabilities |
(107 | ) | (128 | ) | ||||
Income tax receivable |
91 | (11 | ) | |||||
Other, net |
(21 | ) | (28 | ) | ||||
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Cash provided by operating activities |
760 | 445 | ||||||
Investing Activities |
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Purchases of property and equipment |
(42 | ) | (29 | ) | ||||
Proceeds from dispositions, net |
| 24 | ||||||
Business acquisitions, net of cash acquired |
| (38 | ) | |||||
Investments in and advances to equity method investees |
(93 | ) | (71 | ) | ||||
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Cash used in investing activities |
(135 | ) | (114 | ) | ||||
Financing Activities |
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Borrowings from long-term debt, net of discount and issuance costs |
639 | 2,970 | ||||||
Principal repayments of long-term debt |
| (2,883 | ) | |||||
Principal repayments of capital lease obligations |
(16 | ) | (8 | ) | ||||
Repurchases of common stock |
(732 | ) | (38 | ) | ||||
Cash distributions to noncontrolling interests |
(7 | ) | (21 | ) | ||||
Proceeds from stock option exercises |
43 | 27 | ||||||
Excess tax benefits from stock-based compensation |
18 | 9 | ||||||
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Cash (used in) provided by financing activities |
(55 | ) | 56 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(4 | ) | 6 | |||||
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Net change in cash and cash equivalents |
566 | 393 | ||||||
Cash and cash equivalents, beginning of period |
466 | 623 | ||||||
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Cash and cash equivalents, end of period |
$ | 1,032 | $ | 1,016 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
5
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited; in millions)
Supplemental Cash Flow Information |
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Cash paid for interest, net: |
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Periodic interest payments for debt, interest rate swaps and capital lease obligations |
$ | 115 | $ | 136 | ||||
Make-whole premiums, termination payments, and repayment of original issue discount |
| 148 | ||||||
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Total cash paid for interest, net |
$ | 115 | $ | 284 | ||||
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Cash paid for taxes, net |
$ | 206 | $ | 282 | ||||
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Noncash Investing and Financing Transactions |
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Investment in OWN |
$ | 273 | $ | | ||||
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Assets acquired under capital lease arrangements |
$ | | $ | 20 | ||||
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Stock dividends to preferred interests |
$ | | $ | 1 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
6
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
Three Months Ended September 30, 2011 |
Three Months Ended September 30, 2010 |
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Discovery Stockholders |
Noncontrolling Interests |
Total Equity |
Discovery Stockholders |
Noncontrolling Interests |
Total Equity |
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Beginning balance |
$ | 6,513 | $ | 1 | $ | 6,514 | $ | 6,486 | $ | 28 | $ | 6,514 | ||||||||||||
Comprehensive income: |
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Net income |
237 | | 237 | 186 | 3 | 189 | ||||||||||||||||||
Other comprehensive (loss) income: |
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Foreign currency translation adjustments, net |
(12 | ) | | (12 | ) | 21 | | 21 | ||||||||||||||||
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Total comprehensive income |
225 | | 225 | 207 | 3 | 210 | ||||||||||||||||||
Stock-based compensation |
13 | | 13 | 11 | | 11 | ||||||||||||||||||
Excess tax benefits from stock-based compensation |
1 | | 1 | 5 | | 5 | ||||||||||||||||||
Issuance of common stock in connection with stock-based plans |
5 | | 5 | 12 | | 12 | ||||||||||||||||||
Repurchases of common stock |
(355 | ) | | (355 | ) | (38 | ) | | (38 | ) | ||||||||||||||
Cash distributions to noncontrolling interests |
| | | | (19 | ) | (19 | ) | ||||||||||||||||
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Ending balance |
$ | 6,402 | $ | 1 | $ | 6,403 | $ | 6,683 | $ | 12 | $ | 6,695 | ||||||||||||
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Nine Months Ended September 30, 2011 |
Nine Months Ended September 30, 2010 |
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Discovery Stockholders |
Noncontrolling Interests |
Total Equity |
Discovery Stockholders |
Noncontrolling Interests |
Total Equity |
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Beginning balance |
$ | 6,225 | $ | 8 | $ | 6,233 | $ | 6,197 | $ | 23 | $ | 6,220 | ||||||||||||
Comprehensive income: |
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Net income |
796 | | 796 | 462 | 10 | 472 | ||||||||||||||||||
Other comprehensive income (loss): |
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Foreign currency translation adjustments, net |
11 | | 11 | (9 | ) | | (9 | ) | ||||||||||||||||
Market value adjustments and reclassifications for securities and derivatives |
| | | 7 | | 7 | ||||||||||||||||||
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Total comprehensive income |
807 | | 807 | 460 | 10 | 470 | ||||||||||||||||||
Stock dividends declared to preferred interests |
| | | (1 | ) | | (1 | ) | ||||||||||||||||
Stock-based compensation |
41 | | 41 | 29 | | 29 | ||||||||||||||||||
Excess tax benefits from stock-based compensation |
18 | | 18 | 9 | | 9 | ||||||||||||||||||
Issuance of common stock in connection with stock-based plans |
43 | | 43 | 27 | | 27 | ||||||||||||||||||
Repurchases of common stock |
(732 | ) | | (732 | ) | (38 | ) | | (38 | ) | ||||||||||||||
Cash distributions to noncontrolling interests |
| (7 | ) | (7 | ) | | (21 | ) | (21 | ) | ||||||||||||||
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Ending balance |
$ | 6,402 | $ | 1 | $ | 6,403 | $ | 6,683 | $ | 12 | $ | 6,695 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
7
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Discovery Communications, Inc. (Discovery or the Company) is a leading nonfiction media and entertainment company that provides programming across multiple distribution platforms throughout the world and operates a diversified portfolio of website properties and other digital media services. The Company also develops and sells curriculum-based products and services, as well as postproduction audio services. The Company classifies its operations in three segments: U.S. Networks, consisting principally of domestic cable and satellite television networks, websites, and other digital media services; International Networks, consisting primarily of international cable and satellite television networks and websites; and Education and Other, consisting principally of curriculum-based product and service offerings and postproduction audio services. Financial information for Discoverys reportable segments is presented in Note 14.
Basis of Presentation
The consolidated financial statements include the accounts of Discovery, its majority-owned subsidiaries in which a controlling interest is maintained, and variable interest entities (VIE) for which the Company is the primary beneficiary. Inter-company accounts and transactions between consolidated entities have been eliminated in consolidation.
Unaudited Interim Financial Statements
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) applicable to interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments, consisting only of those of a normal recurring nature, necessary to state fairly the financial position, results of operations, and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Discoverys Annual Report on Form 10-K for the year ended December 31, 2010 (the 2010 Form 10-K).
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments, and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Management continually evaluates its estimates, judgments, and assumptions, and managements assessments could change. Actual results may differ from managements estimates and could have a material impact on the consolidated financial statements.
Significant estimates inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, allowances for doubtful accounts, content rights, depreciation and amortization, business combinations, stock-based compensation, income taxes, contingencies and the determination of whether the Company is the primary beneficiary of entities in which it holds variable interests.
Reclassifications
The Company expanded the types of revenue included in distribution revenue in its consolidated statements of operations for the three and nine months ended September 30, 2011 and reclassified prior year amounts. Distribution revenues include fees charged for the right to view Discovery network branded content made available to customers through a variety of distribution platforms and viewing devices. The largest component of distribution revenue continues to be fees charged to cable, direct-to-home (DTH) satellite and telecommunications service providers for distribution rights to Discoverys television networks. Beginning July 1, 2011, distribution revenues also include fees charged for certain licensing arrangements, including those for digital streaming of library content, which totaled $83 million and $93 million for the three and nine months ended September 30, 2011, respectively. Such fees, which totaled $4 million and $17 million for the three and nine months ended September 30, 2010, respectively, and $10 million for the six months ended June 30, 2011, were previously classified as other revenue and have been reclassified to distribution revenue to conform to the current presentation.
8
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accounting and Reporting Pronouncements Adopted
A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring
In April 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to identifying and disclosing troubled debt restructurings (TDRs). This guidance provides clarification in assessing whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for the purpose of determining whether a restructuring constitutes a TDR. The Company adopted this new guidance effective July 1, 2011. The adoption of the new guidance did not impact the Companys consolidated financial statements.
Fair Value Measurements
In January 2010, the FASB issued guidance that requires additional disclosures about recurring and nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 of the fair value measurement hierarchy, and separately presenting information regarding purchases, sales, issuances, and settlements in the reconciliation of Level 3 fair value measurements. The Company prospectively adopted the new guidance effective January 1, 2010, except for Level 3 reconciliation disclosures, which was effective for the Company on January 1, 2011. The adoption of the new guidance did not impact the Companys consolidated financial statements.
Revenue Recognition for Multiple-Element Revenue Arrangements
In October 2009, the FASB issued guidance that changed the determination of when the individual deliverables included in a multiple-element revenue arrangement may be treated as separate units of accounting, modified the manner in which the arrangement consideration is allocated across the separately identified deliverables, and expanded the disclosures required for multiple-element revenue arrangements. Under the new guidance, the Company must allocate the arrangement consideration to each deliverable based on managements estimate of the price at which each element would be separately sold, if vendor specific information or third party evidence of selling price is not available. The Company prospectively adopted the new guidance effective January 1, 2011. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.
Accounting and Reporting Pronouncements Not Yet Adopted
Fair Value Measurements
In May 2011, the FASB and the International Accounting Standards Board (IASB) issued guidance which results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards (IFRS). There are several changes under the new guidance. The highest and best use valuation concepts are only relevant when measuring the fair value of nonfinancial assets. The prohibition of the application of a blockage factor extends to all financial measurements. The Company must disclose quantitative information about unobservable inputs used to assess fair value and provide a qualitative discussion about the sensitivity of the measurements for recurring Level 3 fair value measurements. The Company will prospectively adopt the new guidance effective January 1, 2012. The Company is currently assessing the impact of this guidance on its consolidated financial statements.
Comprehensive Income
In June 2011, the FASB issued guidance eliminating the current option to report other comprehensive income and its components in the statement of changes in equity. Entities may elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. Under the new guidance, each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, are required to be disclosed under either alternative. The guidance is effective January 1, 2012, but early adoption is permitted. The Company is currently assessing the impact of this guidance on its consolidated financial statements.
Testing for Goodwill Impairment
In September 2011, the FASB issued guidance which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, but early adoption is permitted. The Company is currently assessing the impact of this guidance on its
9
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
consolidated financial statements. The Companys 2010 goodwill impairment testing did not indicate that there were any reporting units for which a 20% decline in fair value would result in the reporting units carrying value exceeding its fair value. The assumptions used in the Companys fair value modeling at the time of the Companys impairment review have not changed significantly. There is no change or trigger event that indicates an impairment of the Companys reporting units exists as of September 30, 2011.
Concentrations Risk
Receivables
The Companys trade receivables do not represent a significant concentration of credit risk as of September 30, 2011, due to the wide variety of customers and market segments dispersed across the many geographic areas in which the Company operates.
Financial Institutions
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks and money market mutual funds that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed on demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
Lender Counterparties
There is a risk that the counterparties associated with the Companys revolving credit facility will not be available to fund as obligated. If funding under the revolving credit facility is unavailable, the Company may have to acquire a replacement credit facility from a different counterparty at a higher cost or may be unable to find a suitable replacement. Typically, the Company seeks to manage these exposures by contracting with experienced large financial institutions and monitoring the credit quality of its lenders. As of September 30, 2011, the Company did not anticipate nonperformance by any of its counterparties.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
London Uplink Facility
On February 17, 2010, the Company acquired all interests in an uplink facility in London, including its employees and operations, for a payment of $35 million. The uplink facility has been included in the Companys operating results since the date of acquisition.
Dispositions
Discovery Health Network
On January 1, 2011, the Company contributed the domestic Discovery Health network to OWN LLC in connection with the launch of The Oprah Winfrey Network (OWN), which resulted in a pretax gain of $129 million as discussed in Note 3. As the Company continues to be involved in the operations of the Discovery Health network through its ownership interests in OWN LLC, the Company has not presented the financial position, results of operations, and cash flows of the Discovery Health network as discontinued operations.
Antenna Audio
On September 1, 2010, the Company sold its Antenna Audio business for net cash proceeds of $24 million, which resulted in a $9 million gain, net of taxes. During the three months ended September 30, 2010, the Company recorded a $12 million gain, net of taxes, in its results of operations in income (loss) from discontinued operations, net of taxes on the consolidated statements of operations. However, during the three months ended December 31, 2010, the Company recorded an adjustment to a deferred tax asset, which reduced the gain by $3 million. Antenna Audios operating results are classified as discontinued operations in the consolidated statements of operations. Excluding the impact of the net gain on the sale of the business, Antenna Audios revenues were $9 million and $30 million for the three and nine months ended September 30, 2010, respectively. Excluding the impact of the net gain on the sale of the business, Antenna Audios income before taxes and net income were not significant for the three and nine months ended September 30, 2010.
10
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Ascent Capital Group, Inc. (formally known as Ascent Media Corporation)
In September 2010, the Company received a tax refund, which eliminated a $12 million obligation to repay amounts to Ascent Capital Group, Inc. (ACG), an entity spun off in 2008. The reversal of this obligation has been recorded as a benefit in income (loss) from discontinued operations, net of taxes on the consolidated statements of operations.
NOTE 3. VARIABLE INTEREST ENTITIES
In the normal course of business, the Company enters into joint ventures or makes investments that support its underlying business strategy and provide it the ability to enter new markets for its brands, develop programming, and distribute its existing content. In certain instances, a joint venture or an investment may qualify as a VIE. As of September 30, 2011 and December 31, 2010, the Companys VIEs primarily consisted of Hub Television Networks LLC and OWN LLC, which are 50-50 joint ventures that operate pay-television networks. The Company previously had ownership interests in joint ventures with BBC Worldwide (the BBC) that were VIEs, substantially all of which were consolidated. On November 12, 2010, the Company acquired the BBCs interests in these joint ventures. The Company now wholly owns these entities and continues to consolidate them.
As of September 30, 2011 and December 31, 2010, the Company accounted for its interests in joint venture VIEs using the equity method. The aggregate carrying values of these equity method investments were $816 million and $453 million as of September 30, 2011 and December 31, 2010, respectively. During the three and nine months ended September 30, 2011, the Company recognized losses of $3 million and $10 million, respectively, for its portion of net losses generated by VIEs accounted for using the equity method, which were recorded in other expense, net on the consolidated statements of operations. During the three and nine months ended September 30, 2010, the Company recognized losses of $11 million and $27 million, respectively, for its portion of net losses generated by VIEs accounted for using the equity method, which were recorded in other expense, net on the consolidated statements of operations.
The Companys estimated risk of loss for investments in VIEs was approximately $851 million as of September 30, 2011, which includes the carrying value of its investments, the unfunded portion of contractual funding commitments to joint ventures, and guarantees made on behalf of joint ventures. Actual amounts funded to the joint ventures exceed contractual funding commitments, and the Company intends to continue to fund significant amounts to OWN. The Company has not recorded any amounts for future funding. The estimated risk of loss excludes the Companys operating performance guarantee for Hub Television Networks LLC disclosed below.
Hub Television Networks LLC
Hub Television Networks LLC operates The Hub, which is a pay-television network that provides childrens and family entertainment and educational programming that launched October 10, 2010. The Company is obligated to provide the joint venture with funding up to $15 million and services such as distribution, sales, and administrative support. The Company has not provided funding as of September 30, 2011. See Note 12 for further discussion of services provided to the joint venture.
Based upon the level of equity investment at risk, the joint venture is a VIE. Discovery and its joint venture partner, together, direct the activities of The Hub that most significantly impact its economic performance, because decisions about programming and marketing strategy require the consent of both joint venture partners. The joint venture partners share equally in voting control and jointly consent to operating, financing and investing decisions, neither has special governance rights, and both are equally represented on the Board of The Hub. The joint venture partners also share equally in the profits, losses, and funding of the joint venture. The Company has determined that it is not the primary beneficiary of The Hub. Accordingly, the Company accounts for its investment in The Hub using the equity method.
Through December 31, 2015, the Company has guaranteed a certain level of operating performance for the joint venture that requires compensation to the joint venture partner to the extent that distribution metrics decline versus levels historically achieved by the Discovery Kids channel. This guarantee extends on a declining basis through the period of guarantee. Upon inception of the joint venture, the maximum amount potentially due under this guarantee was $300 million. As of September 30, 2011, the maximum amount potentially due under this guarantee was less than $175 million. The maximum exposure to loss is expected to decline to zero during 2015. As the joint ventures distribution is generally provided under long-term contracts with stable subscriber levels, the Company believes the likelihood is remote that the performance levels will not be achieved and, therefore, the performance guarantee is unlikely to have a material adverse impact on the Companys financial position, operating results, or cash flows. Accordingly, the fair value of the guarantee was not material as of September 30, 2011.
11
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On May 23, 2011, The Hub revised its arrangement with Hasbro Studios to increase the license fees paid to Hasbro Studios for animated programming. This change created a trigger event for purposes of intangible asset and goodwill impairment testing. The Hubs management prepared a fair value assessment using a discounted cash flow valuation model for purposes of performing step one of the goodwill impairment test. The underlying assumptions, such as future cash flows, weighted average cost of capital, and long-term growth rates were generally not observable in the marketplace, and therefore, involved significant judgment. The estimated fair value of The Hub exceeded its carrying value; no impairments were recorded. Given that the early results of The Hubs operations have been below its initial long-term business plan, there is a possibility that future results may vary from the current assumptions in the long-term business plan. The Company will monitor the valuation of its investment in accordance with GAAP, which requires an impairment charge when there is an other-than-temporary decline in the investments value.
The carrying values of the Companys investment in The Hub were $338 million and $344 million as of September 30, 2011 and December 31, 2010, respectively.
OWN LLC
OWN LLC operates OWN, which is a pay-television network and website that provides adult lifestyle content focused on self-discovery and self-improvement that launched on January 1, 2011. In connection with the launch of OWN, the Company contributed the domestic Discovery Health network to the joint venture. The contribution did not impact the Companys ownership interest, voting control, or governance rights related to OWN. The Company no longer consolidates the domestic Discovery Health network subsequent to the contribution, which was a component of its U.S. Networks segment. The assets of the Discovery Health network included goodwill and other identifiable assets with carrying values of $136 million and $8 million, respectively.
The Company recorded the contribution at fair value, which resulted in a pretax gain of $129 million. The fair value of the Companys retained equity interest in OWN was estimated to be $273 million. The gain represents the fair value of the equity investment retained less the carrying values of contributed assets. The gain resulted in tax expense of $27 million. The fair value of the contribution of the Discovery Health network to OWN was determined utilizing customary valuation methodologies including discounted cash flows. The underlying assumptions, such as future cash flows, weighted average costs of capital, long-term growth rates, marketplace valuation methodologies, and market comparable transactions and multiples were generally not observable in the marketplace, and therefore, involved significant judgment. The early results of OWNs operations have been below its initial long-term business plan, and there is a possibility that future results may vary from the current assumptions in the long-term business plan. If these trends continue, the Company will monitor such financial results along with other relevant business information to determine the recoverability and valuation of its investment in accordance with GAAP, which requires an impairment charge when there is an other-than-temporary decline in the investments value.
Based upon the level of equity investment at risk, OWN is a VIE. While the joint venture partners share equally in voting control, power is not shared because certain activities that significantly impact OWNs economic performance are directed by Harpo Inc. (Harpo). Harpo holds operational rights related to programming and marketing, as well as selection and retention of key management personnel. The Company has determined that it is not the primary beneficiary of OWN, because it does not control these activities that are critical to OWNs operating performance and success. Accordingly, the Company accounts for its investment in OWN using the equity method.
Net losses generated by OWN are allocated to both joint venture partners based on their proportionate ownership interests, which are 50-50. Prior to the contribution of the Discovery Health network to OWN at its launch, the Company recognized 100% of OWNs net losses. Future net income generated by OWN will initially be allocated 100% to the Company up to $104 million, the amount of pre-contribution net losses recognized. After the Company has recouped its losses, any excess net income will be allocated to both joint venture partners based on their proportionate ownership interests.
The Company provides the joint venture funding and services such as distribution, licensing, sales, and administrative support. See Note 12 for further discussion. As the Company has provided all required funding as of September 30, 2011, the Companys total funding to OWN, including interest accrued on outstanding borrowings, was $254 million, which is in excess of its commitment of $189 million. While the Company expects to provide significant additional funding to OWN, the Company also expects to recoup amounts funded. The funding to OWN accrues interest at 7.5% compounded annually. There can be no event of default on the borrowing until 2023. However, borrowings are scheduled for repayment four years after the borrowing date to the extent that OWN has excess cash to repay the borrowings then due. The funding is secured by the assets acquired by OWN. OWN will distribute its initial excess cash to the Company to repay funding then due. Following repayment of funding then due, OWNs subsequent cash distributions will be shared equally between the Company and Harpo.
12
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The carrying value of the Companys investment in OWN, including its equity method investment and note receivable balance, was $394 million and $52 million as of September 30, 2011 and December 31, 2010, respectively.
Pursuant to the joint venture agreement, Harpo has the right to require the Company to purchase all or part of its interest in OWN every two and one half years commencing on January 1, 2016 at fair market value up to a maximum put amount. The maximum put amount is a range from $100 million on the first put exercise date up to $400 million on the fourth put exercise date. No amounts have been recorded for the put right.
NOTE 4. FAIR VALUE MEASUREMENTS
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the following three categories:
Level 1 | | Quoted prices for identical instruments in active markets. | ||
Level 2 | | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. | ||
Level 3 | | Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
Assets and liabilities measured at fair value on a recurring basis consisted of the following (in millions).
September 30, 2011 | ||||||||||||||||||
Category |
Balance Sheet Location |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||||
Trading securities: |
||||||||||||||||||
Mutual funds |
Prepaid expenses and other current assets |
$ | 71 | $ | | $ | | $ | 71 | |||||||||
Available-for-sale securities: |
||||||||||||||||||
Money market mutual funds |
Cash and cash equivalents |
657 | | | 657 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 728 | $ | | $ | | $ | 728 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||
Deferred compensation plan |
Accrued liabilities |
$ | 71 | $ | | $ | | $ | 71 | |||||||||
Other |
Other current liabilities |
| 1 | 1 | 2 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
$ | 71 | $ | 1 | $ | 1 | $ | 73 | ||||||||||
|
|
|
|
|
|
|
|
December 31, 2010 | ||||||||||||||||||
Category |
Balance Sheet Location |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||||
Trading securities: |
||||||||||||||||||
Mutual funds |
Prepaid expenses and other current assets |
$ | 55 | $ | | $ | | $ | 55 | |||||||||
Available-for-sale securities: |
||||||||||||||||||
Money market mutual funds |
Cash and cash equivalents |
172 | | | 172 | |||||||||||||
U.S. Treasury securities |
Cash and cash equivalents |
| 200 | | 200 | |||||||||||||
Other |
Cash and cash equivalents |
| 3 | | 3 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 227 | $ | 203 | $ | | $ | 430 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||
Deferred compensation plan |
Accrued liabilities |
$ | 55 | $ | | $ | | $ | 55 | |||||||||
Other |
Other current liabilities |
| 6 | | 6 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
$ | 55 | $ | 6 | $ | | $ | 61 | ||||||||||
|
|
|
|
|
|
|
|
13
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Trading securities are comprised of investments in mutual funds held in a separate trust, which are owned as part of the Companys deferred compensation plan. The fair value of Level 1 trading securities was determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. The fair value of the related deferred compensation plan liability was determined based on the fair value of the related investments elected by employees.
Available-for-sale securities represent investments in highly liquid instruments with original maturities of 90 days or less. The fair value of Level 1 available-for-sale securities was determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs.
In addition to the financial instruments listed in the tables above, the Company holds other financial instruments, including cash, accounts receivable, accounts payable, and debt. The carrying values for cash, accounts receivable, and accounts payable approximated their fair values. The estimated fair value of the Companys outstanding senior notes using quoted market prices was $4.5 billion and $3.7 billion as of September 30, 2011 and December 31, 2010, respectively.
NOTE 5. CONTENT RIGHTS
Content rights consisted of the following (in millions).
September 30, 2011 |
December 31, 2010 |
|||||||
Produced content rights: |
||||||||
Completed |
$ | 2,260 | $ | 1,963 | ||||
In-production |
237 | 229 | ||||||
Coproduced content rights: |
||||||||
Completed |
492 | 446 | ||||||
In-production |
77 | 76 | ||||||
Licensed content rights: |
||||||||
Acquired |
362 | 297 | ||||||
Prepaid |
18 | 19 | ||||||
|
|
|
|
|||||
Content rights, at cost |
3,446 | 3,030 | ||||||
Accumulated amortization |
(2,070 | ) | (1,702 | ) | ||||
|
|
|
|
|||||
Total content rights, net |
1,376 | 1,328 | ||||||
Current portion |
(83 | ) | (83 | ) | ||||
|
|
|
|
|||||
Noncurrent portion |
$ | 1,293 | $ | 1,245 | ||||
|
|
|
|
Content amortization and impairments, components of costs of revenues, totaled $242 million and $176 million for the three months ended September 30, 2011 and 2010, respectively, and $623 million and $526 million for the nine months ended September 30, 2011 and 2010, respectively. Content impairments were $33 million and $11 million for the three months ended September 30, 2011 and 2010, respectively. Content impairments were $43 million and $42 million for the nine months ended September 30, 2011 and 2010, respectively. Content payables were $81 million and $57 million as of September 30, 2011 and December 30, 2010, respectively.
NOTE 6. DEBT
Outstanding debt consisted of the following (in millions).
September 30, 2011 |
December 31, 2010 |
|||||||
3.70% Senior Notes, semi-annual interest, due June 2015 |
$ | 850 | $ | 850 | ||||
5.625% Senior Notes, semi-annual interest, due August 2019 |
500 | 500 | ||||||
5.05% Senior Notes, semi-annual interest, due June 2020 |
1,300 | 1,300 | ||||||
4.375% Senior Notes, semi-annual interest, due June 2021 |
650 | |
14
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2011 |
December 31, 2010 |
|||||||
6.35% Senior Notes, semi-annual interest, due June 2040 |
850 | 850 | ||||||
Capital lease obligations |
110 | 126 | ||||||
|
|
|
|
|||||
Total long-term debt |
4,260 | 3,626 | ||||||
Unamortized discount |
(11 | ) | (8 | ) | ||||
|
|
|
|
|||||
Long-term debt, net |
4,249 | 3,618 | ||||||
Current portion of long-term debt |
(20 | ) | (20 | ) | ||||
|
|
|
|
|||||
Noncurrent portion of long-term debt |
$ | 4,229 | $ | 3,598 | ||||
|
|
|
|
Senior Notes
On June 20, 2011, Discovery Communications, LLC (DCL), a wholly-owned subsidiary of the Company, issued $650 million aggregate principal amount of 4.375% Senior Notes due on June 15, 2021 (the 2021 Notes). DCL received net proceeds of approximately $641 million from the offering after the $4 million issuance discount and $5 million of deferred financing costs.
DCL may, at its option, redeem some or all of the 2021 Notes at any time by paying a make-whole premium, plus accrued and unpaid interest, if any, through the date of repurchase. Interest on the 2021 Notes is payable on June 15 and December 15 of each year. The 2021 Notes are unsecured and rank equally in right of payment with all of DCLs other unsecured senior indebtedness and are fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Discovery.
Revolving Credit Facility
On August 8, 2011, DCL modified its $1.0 billion revolving credit agreement to extend the expiration date two years to October 12, 2015 and to reduce interest rates and fees. The terms of the arrangement are otherwise consistent with the previous arrangement, as DCL continues to be the borrower, Discovery continues to be the guarantor, and the lenders named therein, are consistent with the original credit agreement. The obligations under the credit agreement are unsecured and are fully and unconditionally guaranteed by Discovery.
If DCL draws on the new revolving credit facility, outstanding balances will bear interest at one of the following rates as elected by DCL. Each Libor loan will bear interest at the applicable Libor rate based on the term selected by DCL, plus a margin ranging from 75 basis points to 145 basis points based on DCLs credit rating. Each Base Rate loan and Swing Line loan will bear interest at the Base Rate plus a margin ranging from zero basis points to 45 basis points based on DCLs credit rating. The Base Rate is the highest of (i) the Federal funds rate as published by the Federal Reserve Bank of New York plus 50 basis points, (ii) Bank of Americas prime rate as publicly announced, and (iii) the one month Eurocurrency rate plus 100 basis points.
DCL is required to pay a facility fee, which ranges from 12.5 basis points to 30 basis points, based on DCLs credit rating, multiplied by the actual daily amount of the lenders aggregate commitments under the senior credit facility, regardless of usage. The facility fee is payable quarterly in arrears. DCL will also pay a letter of credit fee equal to the applicable margin for Eurocurrency rate loans multiplied by the dollar equivalent of the daily amount available to be drawn under such letter of credit.
DCL may optionally prepay the loans or irrevocably reduce or terminate the unutilized portion of the commitments under the revolving credit facility, without premium or penalty at any time by the delivery of a notice to that effect as provided under the credit agreement.
There were no amounts drawn under the revolving credit facility as of September 30, 2011 and December 31, 2010.
The revolving credit facility contains affirmative and negative covenants, including an interest coverage ratio and leverage ratio, events of default and other customary provisions. The Company was in compliance with all covenants and there were no events of default as of September 30, 2011 and December 31, 2010.
15
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7. EQUITY
Stock Repurchase Program
On August 3, 2010, the Company implemented a stock repurchase program with authorization to purchase up to $1.0 billion of its common stock. On July 27, 2011, the Companys Board of Directors authorized the Company to purchase an additional $1.0 billion of its common stock under this stock repurchase program. In total, the Company has been authorized to purchase $2.0 billion of its common stock under its repurchase program. The repurchase program has no expiration date. During the three and nine months ended September 30, 2011, the Company repurchased 10 million and 20 million shares, respectively, of its Series C common stock for an aggregate purchase price of $355 million and $732 million, respectively, through open market transactions. During the three and nine months ended September 30, 2010, the Company repurchased 1 million shares of its Series C common stock for an aggregate purchase price of $38 million through open market transactions. The repurchases were funded using cash on hand. As of September 30, 2011, the Company had remaining authorization of $1.2 billion for future repurchases of its common stock. The stock repurchases were recorded in a separate account at cost, which was reported as a reduction in equity.
16
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8. STOCK-BASED COMPENSATION
The Company has various incentive plans under which unit awards, stock options, performance based restricted stock units (PRSUs), time based restricted stock units (RSUs), and stock appreciation rights (SARs) have been issued. The Company does not intend to grant additional unit awards or SARs, which are cash-settled, except as may be required by contract or to employees in countries in which stock options, PRSUs, or RSUs are not permitted. During the nine months ended September 30, 2011, the vesting and service requirements of stock-based awards granted were consistent with the arrangements disclosed in the 2010 Form 10-K.
Stock-Based Compensation Expense
Stock-based compensation expense was as follows (in millions).
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Unit awards |
$ | 8 | $ | 48 | $ | 29 | $ | 111 | ||||||||
Stock options |
8 | 8 | 26 | 23 | ||||||||||||
PRSUs and RSUs |
5 | 3 | 15 | 6 | ||||||||||||
Other |
| | | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation expense |
$ | 21 | $ | 59 | $ | 70 | $ | 153 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Tax benefit recognized |
$ | 8 | $ | 22 | $ | 26 | $ | 57 | ||||||||
|
|
|
|
|
|
|
|
Compensation expense for all awards was recorded in selling, general and administrative expense on the consolidated statements of operations. As of September 30, 2011 and December 31, 2010, the Company recorded total liabilities for cash-settled awards of $45 million and $125 million, respectively.
Stock-Based Award Activity
Unit Awards
Unit award activity was as follows (in millions, except years and weighted-average grant price).
Unit Awards |
Weighted- Average Grant Price |
Weighted- Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding as of December 31, 2010 |
8.8 | $ | 21.98 | 0.79 | $ | 198 | ||||||||||
Granted |
2.3 | 41.17 | ||||||||||||||
Settled |
(4.2 | ) | 19.34 | 106 | ||||||||||||
Forfeited |
(0.1 | ) | 21.64 | |||||||||||||
|
|
|||||||||||||||
Outstanding as of September 30, 2011 |
6.8 | 30.28 | 1.05 | 73 | ||||||||||||
|
|
|||||||||||||||
Vested and expected to vest as of September 30, 2011 |
6.3 | 30.21 | 1.03 | 69 | ||||||||||||
|
|
|||||||||||||||
Vested and unpaid as of September 30, 2011 |
0.1 | 23.08 | 1 | |||||||||||||
|
|
Unit awards represent the contingent right to receive a cash payment for the amount by which the vesting price exceeds the grant price. Because unit awards are cash-settled, the Company remeasures the fair value and compensation expense of outstanding unit awards as of the last day of the most recent fiscal period until settlement. As of September 30, 2011, the weighted-average fair value of unit awards outstanding was $13.60 per unit award. The Company made cash payments to settle vested unit awards totaling $106 million and $72 million during the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there was $43 million of unrecognized compensation cost, net of estimated forfeitures, related to unit awards, which is expected to be recognized over a weighted-average period of 1.95 years.
17
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Stock Options
Stock option activity was as follows (in millions, except years and weighted-average grant price).
Stock Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding as of December 31, 2010 |
15.7 | $ | 19.26 | 5.21 | $ | 350 | ||||||||||
Granted |
1.2 | 39.20 | ||||||||||||||
Exercised |
(2.6 | ) | 16.61 | 68 | ||||||||||||
Forfeited |
(0.9 | ) | 22.44 | |||||||||||||
|
|
|||||||||||||||
Outstanding as of September 30, 2011 |
13.4 | 21.41 | 5.20 | 223 | ||||||||||||
|
|
|||||||||||||||
Vested and expected to vest as of September 30, 2011 |
13.1 | 21.29 | 5.27 | 219 | ||||||||||||
|
|
|||||||||||||||
Exercisable as of September 30, 2011 |
4.3 | 17.15 | 4.96 | 88 | ||||||||||||
|
|
The Company received cash payments from the exercise of stock options totaling $43 million and $27 million during the nine months ended September 30, 2011 and 2010, respectively. The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2011 was $14.45 per option. As of September 30, 2011, there was $52 million of unrecognized compensation cost, net of expected forfeitures, related to stock options, which is expected to be recognized over a weighted-average period of 1.45 years.
PRSUs and RSUs
PRSU and RSU activity was as follows (in millions, except years and weighted-average grant price).
PRSUs and RSUs |
Weighted- Average Grant Price |
Weighted- Average Remaining Contractual Term (years) |
Aggregate Fair Value |
|||||||||||||
Outstanding as of December 31, 2010 |
1.5 | $ | 32.66 | 2.29 | $ | 61 | ||||||||||
Granted |
1.0 | 38.87 | ||||||||||||||
Converted |
| | | |||||||||||||
Forfeited |
(0.1 | ) | 35.51 | |||||||||||||
|
|
|||||||||||||||
Outstanding as of September 30, 2011 |
2.4 | 35.26 | 2.05 | 89 | ||||||||||||
|
|
|||||||||||||||
Vested and expected to vest as of September 30, 2011 |
2.0 | 35.02 | 2.04 | 74 | ||||||||||||
|
|
PRSUs represent the contingent right to receive shares of the Companys Series A common stock based on continuous service and whether the Company achieves certain operating performance targets. During the nine months ended September 30, 2011, the Company granted 0.7 million PRSUs with a weighted-average grant date fair value of $38.79 per PRSU. As of September 30, 2011, there was $28 million of unrecognized compensation cost, net of expected forfeitures, related to PRSUs, which is expected to be recognized over a weighted-average period of 1.74 years based on the Companys current probability assessment of the PRSUs that will vest, which may differ from actual results.
RSUs represent the contingent right to receive shares of the Companys Series A common stock based on continuous service. During the nine months ended September 30, 2011, the Company granted 0.3 million RSUs with a weighted-average grant date fair value of $39.04 per RSU. As of September 30, 2011, there was $16 million of unrecognized compensation cost, net of expected forfeitures, related to RSUs, which is expected to be recognized over a weighted-average period of 2.68 years.
SARs
18
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
There were immaterial amounts of SARs outstanding as of September 30, 2011 and December 31, 2010. The Company made cash payments totaling $1 million and $54 million during the nine months ended September 30, 2011 and 2010, respectively, to settle exercised SARs.
Employee Stock Purchase Plan
On May 17, 2011, the Companys stockholders approved the Discovery Communications, Inc. 2011 Employee Stock Purchase Plan (the DESPP), which enables eligible employees to purchase shares of the Companys common stock through payroll deductions or other permitted means. Unless otherwise determined by the Companys Board of Directors, the purchase price for shares offered under the DESPP is 85% of the closing price of the Companys common stock on the purchase date. The Company will record an estimated charge to selling, general and administrative costs over the service period. The Company has authorized 5.0 million shares of the Companys common stock to be issued under the DESPP. No shares were issued under the DESPP during the three and nine months ended September 30, 2011.
NOTE 9. INCOME TAXES
The Companys provisions for income taxes were $127 million and $83 million, and the effective tax rates were 35% and 34% for the three months ended September 30, 2011 and 2010, respectively. The effective tax rate for the three months ended September 30, 2011 was consistent with the U.S. federal statutory income tax rate of 35% as production activity deductions were offset by state taxes. The effective tax rate for the three months ended September 30, 2010 differed from the U.S. federal statutory income tax rate of 35% due primarily to production activity deductions partially offset by state taxes.
The Companys provisions for income taxes were $417 million and $171 million, and the effective tax rates were 34% and 28% for the nine months ended September 30, 2011 and 2010, respectively. The effective tax rate for the nine months ended September 30, 2011 differed from the U.S. federal statutory income tax rate of 35% principally because the Company was not required to record a deferred tax liability of $21 million with respect to the portion of the outside basis in the OWN joint venture attributable to the nondeductible goodwill contributed to OWN and production activity deductions. These items were partially offset by state taxes. The effective tax rate for the nine months ended September 30, 2010 differed from the U.S. federal statutory income tax rate of 35% primarily due to the reversal of a $28 million previously established foreign tax reserve recorded in connection with the completion of a tax audit, production activity deductions and a $16 million tax expense reduction for a change in the Companys election to claim foreign tax credits that were previously taken as deductions, which were partially offset by state taxes.
The Company is currently under examination by the Internal Revenue Service (IRS) for its 2009 and 2008 consolidated federal income tax returns. With few exceptions, the Company is no longer subject to audit by the IRS, state tax authorities, or foreign tax authorities for years prior to 2006. Certain of the Companys subsidiaries are currently under examination for the 2006 and 2007 tax years. The Company has not been advised of any material adjustments.
19
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 10. NET INCOME PER SHARE
The following table presents a reconciliation of income and weighted average number of shares outstanding between basic and diluted income per share (in millions, except per share amounts).
Three
Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Income from continuing operations, net of taxes |
$ | 238 | $ | 164 | $ | 797 | $ | 447 | ||||||||
Less: |
||||||||||||||||
Net income attributable to noncontrolling interests |
| (3 | ) | | (10 | ) | ||||||||||
Stock dividends to preferred interests |
| | | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations available to Discovery Communications, Inc. stockholders |
238 | 161 | 797 | 436 | ||||||||||||
(Loss) income from discontinued operations, available to Discovery Communications, Inc. stockholders |
(1 | ) | 25 | (1 | ) | 25 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income available to Discovery Communications, Inc. stockholders |
$ | 237 | $ | 186 | $ | 796 | $ | 461 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator: |
||||||||||||||||
Weighted average shares outstanding basic |
398 | 426 | 404 | 425 | ||||||||||||
Weighted average dilutive effect of equity awards |
3 | 5 | 4 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding diluted |
401 | 431 | 408 | 431 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (Loss) Per Share:: |
||||||||||||||||
Income per share from continuing operations available to Discovery Communications, Inc. stockholders: |
||||||||||||||||
Basic |
$ | 0.60 | $ | 0.38 | $ | 1.97 | $ | 1.03 | ||||||||
Diluted |
$ | 0.59 | $ | 0.37 | $ | 1.95 | $ | 1.01 | ||||||||
(Loss) income per share from discontinued operations available to Discovery Communications, Inc. stockholders: |
||||||||||||||||
Basic |
$ | | $ | 0.06 | $ | | $ | 0.06 | ||||||||
Diluted |
$ | | $ | 0.06 | $ | | $ | 0.06 | ||||||||
Net income per share available to Discovery Communications, Inc. stockholders: |
||||||||||||||||
Basic |
$ | 0.60 | $ | 0.44 | $ | 1.97 | $ | 1.08 | ||||||||
Diluted |
$ | 0.59 | $ | 0.43 | $ | 1.95 | $ | 1.07 |
Income per share amounts are calculated by dividing the applicable income available to Discovery Communications, Inc. stockholders by the weighted average number of shares outstanding. Diluted income per share adjusts basic income per share for the dilutive effect for the assumed exercise of outstanding stock options and stock-settled SARs and the vesting of outstanding service based RSUs, using the treasury stock method. Diluted income per share also adjusts basic income per share for the dilutive effect for the assumed vesting of outstanding PRSUs or other contingently issuable shares that would be issued under the respective arrangements assuming the last day of the most recent fiscal period was the end of the contingency period.
The weighted average number of shares outstanding for the three and nine months ended September 30, 2011 and 2010 included the Companys outstanding Series A, Series B, and Series C common stock, as well as its outstanding Series A and Series C convertible preferred stock. All series of the Companys common and preferred stock were included in the weighted average number of shares outstanding when calculating both basic and diluted income per share as the holder of each common and preferred series legally participates equally in any per share distributions.
20
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the three and nine months ended September 30, 2011, the computation of diluted income per share excluded 3 million and 2 million options, respectively, because their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2011, the computation of diluted income per share excluded 2 million and 1 million PRSUs, respectively, because their performance targets were not achieved. Additionally for the three and nine months ended September 30, 2011, the computation of diluted income per share excluded 1 million contingently issuable preferred shares for which specific release criteria were not met.
For the three and nine months ended September 30, 2010, the computation of diluted income per share excluded 2 million and 3 million options, respectively, because their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2010, the computation of diluted income per share excluded 1 million PRSUs for both periods, because their performance targets were not achieved. Additionally for the three and nine months ended September 30, 2010, the computation of diluted income per share excluded 1 million contingently issuable preferred shares for which specific release criteria were not met.
Employee Stock Purchase Plan
The Company has authorized 5.0 million shares of the Companys common stock to be issued under the DESPP as discussed in Note 8. The initial offering period for the DESPP had not begun as of September 30, 2011. In future periods, the Company will include expected shares issued under the DESPP in diluted EPS using the treasury stock method.
NOTE 11. SUPPLEMENTAL DISCLOSURES
Other Expense, Net
Other expense, net consisted of the following (in millions).
Three
Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Unrealized (losses) gains on derivative instruments, net |
$ | (1 | ) | $ | 3 | $ | 1 | $ | 8 | |||||||
Realized losses on derivative instruments, net |
| (4 | ) | (2 | ) | (37 | ) | |||||||||
Losses from equity investees, net |
(4 | ) | (12 | ) | (12 | ) | (29 | ) | ||||||||
Other, net |
| (3 | ) | 3 | 1 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expense, net |
$ | (5 | ) | $ | (16 | ) | $ | (10 | ) | $ | (57 | ) | ||||
|
|
|
|
|
|
|
|
NOTE 12. RELATED PARTY TRANSACTIONS
The following is a description of the Companys related parties.
DIRECTV, Liberty Global, Inc., Liberty Interactive Corporation, Liberty Media Corporation, and Ascent Capital Group, Inc.
The Companys Board of Directors includes two members who served as directors of DIRECTV through June 16, 2010, including John C. Malone, the former Chairman of the Board of DIRECTV. Prior to June 16, 2010, Dr. Malone owned approximately 24% of the aggregate voting power of DIRECTV. Effective June 16, 2010, Dr. Malone converted his DIRECTV Class B common stock into DIRECTV Class A common stock, which reduced his voting interest to 3% of DIRECTV, and Dr. Malone and the other member of the Companys Board of Directors who served as a DIRECTV director resigned from the DIRECTV Board. Through June 16, 2010, transactions with DIRECTV are reported as related party transactions. Related party revenues from transactions with DIRECTV were $104 million, or 4%, of total revenues, for the nine months ended September 30, 2010. There were no related party revenues with DIRECTV during the three months ended September 30, 2010. Expenses from transactions with DIRECTV were not material for the three and nine months ended September 30, 2010.
Discoverys Board also includes three members who serve as directors of Liberty Global, Inc. (Liberty Global), including Dr. Malone, who is Chairman of the Board of Liberty Global. Dr. Malone beneficially owns approximately 42% of the aggregate voting power of Liberty Global.
21
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On September 23, 2011 Liberty Interactive Corporation (Liberty Interactive formerly known as Liberty Media Corporation) completed the split-off of Liberty Media Corporation (Liberty Media formerly known as Liberty CapStarz, Inc.), which became a separate publicly traded company. Three members of the Companys Board of Directors also serve as directors of Liberty Interactive and two members of the Companys Board of Directors serve as directors of Liberty Media. Dr. Malone is the Chairman of the Board of both Liberty Interactive and Liberty Media and beneficially owns shares representing approximately 33% and 39% of the aggregate voting power of each company, respectively.
Revenues from transactions with Liberty Global, Liberty Interactive, and Liberty Media (the Liberty Group) totaled $9 million, or 1% of total revenues, and $5 million, or 1% of total revenues, for the three months ended September 30, 2011 and 2010, respectively. Revenues from transactions with the Liberty Group totaled $27 million, or 1% of total revenues, and $19 million, or 1% of total revenues, for the nine months ended September 30, 2011 and 2010, respectively. Expenses from transactions with the Liberty Group for the three and nine months ended September 30, 2011 and 2010 were not material. The Companys receivables, net balances included insignificant amounts due from the Liberty Group as of September 30, 2011 and December 31, 2010.
Effective January 25, 2010, Dr. Malone joined the Board of Directors of ACG. Dr. Malone owns 1% of ACGs Series A common stock and 94% of ACGs Series B common stock, effectively providing him approximately 32% of the voting power with respect to the general election of ACG directors.
Beginning January 25, 2010, transactions with ACG are reported as related party transactions as a result of Dr. Malone joining ACGs board. Operating expenses from transactions with ACG were $4 million, or 1% of total operating expenses, and $5 million, or 1% of total operating expenses, for the three months ended September 30, 2011 and 2010, respectively. Operating expenses from transactions with ACG were $12 million, or 1% of total operating expenses, and $19 million, or 1% of total operating expenses for the nine months ended September 30, 2011 and 2010, respectively. Payable balances as of September 30, 2011 and December 31, 2010 and revenues for the three and nine months ended September 30, 2011 and 2010 from transactions with ACG were not material.
Dr. Malone serves as a director on Discoverys board and owns shares representing approximately 23% of the aggregate general voting power of Discoverys outstanding stock. At this time, Dr. Malone also controls approximately 31% of the Companys aggregate voting power relating to the election of the eight common stock directors, as the preferred stock held by the Advance/Newhouse Programming Partnership has not been converted into shares of Discoverys common stock.
As a result of this common directorship and ownership, transactions with the Liberty Group, ACG, their respective subsidiaries and equity method investees, and with DIRECTV through June 2010, are related party transactions. The majority of the revenues under contractual arrangements with DIRECTV and the Liberty Group relates to multi-year network distribution arrangements. Revenues under these arrangements include annual rate increases and are based on the number of subscribers receiving the related programming. ACG provides services, such as satellite uplink, systems integration, origination, and postproduction to Discovery.
Other Related Parties
Other related parties primarily include unconsolidated equity method investees, including unconsolidated VIEs described in Note 3. The Company provides equity method investees with content licensing arrangements and services such as distribution, sales, and administrative support. Revenues from other related parties were $21 million, or 2% of total revenues, and $20 million, or 2% of total revenues, for the three months ended September 30, 2011 and 2010, respectively. Revenues from other related parties were $66 million, or 2% of total revenues, and $45 million, or 2% of total revenues, for the nine months ended September 30, 2011 and 2010, respectively. Operating expenses for services acquired from other related parties were $2 million, or less than 1% of total operating expenses, and $4 million, or 1% of operating expenses, for the three months ended September 30, 2011 and 2010, respectively. Operating expenses for services acquired from other related parties were $9 million, or 1% of total operating expenses, and $10 million, or 1% of total operating expenses, for the nine months ended September 30, 2011 and 2010, respectively. The Companys receivables, net balances include $14 million and $9 million due from the Companys other related parties as of September 30, 2011 and December 31, 2010, respectively.
The Companys investments balance includes notes receivable, net of earnings and losses absorbed from equity method investees as described in Note 3. The Company records interest earnings from loans to joint ventures as a component of losses from equity investees, net which is a component of other expense, net. Interest earnings from related parties recorded by the Company totaled $4 million and $2 million for the three months ended September 30, 2011 and 2010, respectively. Interest earnings from related parties recorded by the Company totaled $12 million and $4 million for the nine months ended September 30, 2011 and 2010, respectively.
22
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 13. COMMITMENTS, CONTINGENCIES, AND GUARANTEES
Commitments
In the normal course of business, the Company enters into various commitments, which primarily include programming and talent arrangements, operating and capital leases, employment contracts, sponsorship commitments, arrangements to purchase various goods and services, future funding commitments to joint ventures as described in Note 3, and the obligation to issue additional preferred shares under the anti-dilution provisions of its outstanding preferred stock.
Contingencies
Put Right
Harpo has the right to require the Company to purchase its interest in OWN for fair value at various dates as described in Note 3. No amounts have been recorded for put right obligations.
Legal Matters
In the normal course of business, the Company experiences routine claims and legal proceedings. It is the opinion of the Companys management, based on information available at this time, that none of the current claims and proceedings will have a material adverse effect on the Companys consolidated financial position, results of operations, or cash flows.
Guarantees
The Company has guaranteed a certain level of operating performance for The Hub joint venture as described in Note 3 and payment under certain joint venture contracts. There were no material amounts recorded for guarantees to joint ventures as of September 30, 2011 and December 31, 2010.
The Company may provide or receive indemnities intended to allocate certain business transaction risks. Similarly, the Company may remain contingently liable for certain obligations of a divested business in the event that a third party does not fulfill its obligations under an indemnification obligation. The Company records a liability for its indemnification obligations and other contingent liabilities when probable and estimable. There were no material amounts for indemnifications or other contingencies recorded as of September 30, 2011 and December 31, 2010.
NOTE 14. REPORTABLE SEGMENTS
The Companys reportable segments are determined based on (i) financial information reviewed by its chief operating decision maker (CODM), the Chief Executive Officer, (ii) internal management and related reporting structure, and (iii) the basis upon which the CODM makes resource allocation decisions. The accounting policies of the reportable segments are the same as the Companys, except that certain inter-segment transactions that are eliminated at the consolidated level are not eliminated at the segment.
The Company evaluates the operating performance of its segments based on financial measures such as revenues and adjusted operating income before depreciation and amortization (Adjusted OIBDA). Adjusted OIBDA is defined as revenues less costs of revenues and selling, general and administrative expenses excluding: (i) mark-to-market stock-based compensation, (ii) depreciation and amortization, (iii) amortization of deferred launch incentives, (iv) exit and restructuring charges, (v) certain impairment charges, and (vi) gains (losses) on business and asset dispositions. The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. The Company believes Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. The Company excludes mark-to-market stock-based compensation, exit and restructuring charges, certain impairment charges, and gains (losses) on business and asset dispositions from the calculation of Adjusted OIBDA due to their volatility. The Company also excludes depreciation of fixed assets and amortization of intangible assets and deferred launch incentives as these amounts do not represent cash payments in the current reporting period. 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 GAAP.
23
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following tables present summarized financial information for each of the Companys reportable segments (in millions).
Revenues by Segment
Three Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. Networks |
$ | 695 | $ | 585 | $ | 1,942 | $ | 1,751 | ||||||||
International Networks |
363 | 304 | 1,054 | 893 | ||||||||||||
Education and Other |
37 | 38 | 117 | 108 | ||||||||||||
Corporate and inter-segment eliminations |
| (1 | ) | | 6 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
$ | 1,095 | $ | 926 | $ | 3,113 | $ | 2,758 | ||||||||
|
|
|
|
|
|
|
|
Adjusted OIBDA by Segment
Three Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. Networks |
$ | 378 | $ | 346 | $ | 1,107 | $ | 1,018 | ||||||||
International Networks |
156 | 130 | 473 | 384 | ||||||||||||
Education and Other |
3 | 1 | 16 | 7 | ||||||||||||
Corporate and inter-segment eliminations |
(58 | ) | (59 | ) | (180 | ) | (171 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Adjusted OIBDA |
$ | 479 | $ | 418 | $ | 1,416 | $ | 1,238 | ||||||||
|
|
|
|
|
|
|
|
Reconciliation of Total Adjusted OIBDA to Consolidated Operating Income
Three Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total Adjusted OIBDA |
$ | 479 | $ | 418 | $ | 1,416 | $ | 1,238 | ||||||||
Amortization of deferred launch incentives |
(13 | ) | (11 | ) | (39 | ) | (32 | ) | ||||||||
Mark-to-market stock-based compensation |
(8 | ) | (48 | ) | (31 | ) | (124 | ) | ||||||||
Depreciation and amortization |
(30 | ) | (32 | ) | (90 | ) | (98 | ) | ||||||||
Restructuring and impairment charges |
(2 | ) | (15 | ) | (7 | ) | (18 | ) | ||||||||
Gain on disposition |
| | 129 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating income |
$ | 426 | $ | 312 | $ | 1,378 | $ | 966 | ||||||||
|
|
|
|
|
|
|
|
Total Assets by Segment
September
30, 2011 |
December
31, 2010 |
|||||||
U.S. Networks |
$ | 2,623 | $ | 2,218 | ||||
International Networks |
1,183 | 1,127 | ||||||
Education and Other |
80 | 74 | ||||||
Corporate and inter-segment eliminations |
7,915 | 7,600 | ||||||
|
|
|
|
|||||
Total assets |
$ | 11,801 | $ | 11,019 | ||||
|
|
|
|
Total assets allocated to Corporate in the table above includes certain goodwill balances as the financial information reviewed by the Companys CODM does not include an allocation of goodwill to each reportable segment.
24
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 15. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Overview
As of September 30, 2011 and December 31, 2010, the senior notes outstanding have been issued by DCL, a wholly-owned subsidiary of the Company, pursuant to a Registration Statement on Form S-3 filed with the SEC on June 17, 2009 (the Shelf Registration). See Note 6 for a discussion of the senior notes. The Company fully and unconditionally guarantees the senior notes on an unsecured basis. The Company, DCL, and/or Discovery Communications Holding, LLC (DCH), a wholly-owned subsidiary of the Company (collectively the Issuers), may issue additional debt securities under the Shelf Registration that are fully and unconditionally guaranteed by the other Issuers.
Set forth below are condensed consolidating financial statements presenting the financial position, results of operations, and cash flows of (i) the Company, (ii) DCH, (iii) DCL, (iv) the non-guarantor subsidiaries of DCL on a combined basis, (v) the other non-guarantor subsidiaries of the Company on a combined basis, and (vi) reclassifications and eliminations necessary to arrive at the consolidated financial statement balances for the Company. DCL and the non-guarantor subsidiaries of DCL are the primary operating subsidiaries of the Company. DCL primarily includes the Discovery Channel and TLC networks in the U.S. The non-guarantor subsidiaries of DCL include substantially all of the Companys other U.S. and international networks, education businesses, and most of the Companys websites and other digital media services. The non-guarantor subsidiaries of DCL are wholly-owned subsidiaries of DCL with the exception of certain equity method investments. DCL is a wholly-owned subsidiary of DCH. The Company wholly owns DCH through a 33 1/3% direct ownership interest and a 66 2/3% indirect ownership interest through Discovery Holding Company (DHC), a wholly-owned subsidiary of the Company. DHC is included in the other non-guarantor subsidiaries of the Company.
Basis of Presentation
Solely for purposes of presenting the condensed consolidating financial statements, investments in the Companys subsidiaries have been accounted for by their respective parent company using the equity method. Accordingly, in the following condensed consolidating financial statements the equity method has been applied to (i) the Companys interests in DCH and the other non-guarantor subsidiaries of the Company, (ii) DCHs interest in DCL, and (iii) DCLs interests in the non-guarantor subsidiaries of DCL. Inter-company accounts and transactions have been eliminated to arrive at the consolidated financial statement amounts for the Company. The Companys accounting bases in all subsidiaries, including goodwill and recognized intangible assets, have been pushed-down to the applicable subsidiaries.
All direct and indirect subsidiaries are included in the Companys consolidated U.S. tax return. In the condensed consolidating financial statements, tax expense related to permanent differences has been allocated to the entity that created the difference, while tax expense related to temporary differences has been allocated to each entity based on each entitys pretax income relative to consolidated pretax income. Deferred taxes of the Company, DCL, and the non-guarantor subsidiaries have been allocated based upon the temporary differences between the carrying amounts of the respective assets and liabilities of the applicable entities.
As of September 30, 2011 and December 31, 2010, the cash and cash equivalents of the non-guarantor subsidiaries of DCL included $2 million and $12 million, respectively, of cash related to a consolidated joint venture that is only available for use by the joint venture.
The condensed consolidating financial statements should be read in conjunction with the consolidated financial statements of the Company.
25
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheet
September 30, 2011
(in millions)
Discovery | DCH | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Reclassifications and Eliminations |
Discovery and Subsidiaries |
||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 966 | $ | 65 | $ | 1 | $ | | $ | 1,032 | ||||||||||||||
Receivables, net |
| | 407 | 558 | 13 | (2 | ) | 976 | ||||||||||||||||||||
Content rights, net |
| | 6 | 77 | | | 83 | |||||||||||||||||||||
Prepaid expenses and other current assets |
19 | | 110 | 78 | 1 | | 208 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current assets |
19 | | 1,489 | 778 | 15 | (2 | ) | 2,299 | ||||||||||||||||||||
Investment in and advances to subsidiaries |
8,772 | 6,379 | 4,572 | | 6,631 | (26,354 | ) | | ||||||||||||||||||||
Noncurrent content rights, net |
| | 559 | 734 | | | 1,293 | |||||||||||||||||||||
Goodwill |
| | 3,767 | 2,532 | | | 6,299 | |||||||||||||||||||||
Other noncurrent assets |
| 20 | 849 | 1,054 | 7 | (20 | ) | 1,910 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 8,791 | $ | 6,399 | $ | 11,236 | $ | 5,098 | $ | 6,653 | $ | (26,376 | ) | $ | 11,801 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
LIABILITIES AND EQUITY |
||||||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 22 | $ | 3 | $ | 241 | $ | 216 | $ | 6 | $ | (2 | ) | $ | 486 | |||||||||||||
Current portion of long-term debt |
| | 6 | 14 | | | 20 | |||||||||||||||||||||
Other current liabilities |
| | 75 | 125 | 1 | | 201 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current liabilities |
22 | 3 | 322 | 355 | 7 | (2 | ) | 707 | ||||||||||||||||||||
Long-term debt |
| | 4,155 | 74 | | | 4,229 | |||||||||||||||||||||
Other noncurrent liabilities |
| | 380 | 96 | 6 | (20 | ) | 462 | ||||||||||||||||||||
Inter-company contributions and advances between Discovery Communications, Inc. and subsidiaries |
2,367 | 1,254 | (599 | ) | 4,198 | 746 | (7,966 | ) | | |||||||||||||||||||
Equity attributable to Discovery Communications, Inc. |
6,402 | 5,142 | 6,978 | 375 | 5,894 | (18,389 | ) | 6,402 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Equity and advances attributable to Discovery Communications, Inc. |
8,769 | 6,396 | 6,379 | 4,573 | 6,640 | (26,355 | ) | 6,402 | ||||||||||||||||||||
Noncontrolling interests |
| | | | | 1 | 1 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total equity |
8,769 | 6,396 | 6,379 | 4,573 | 6,640 | (26,354 | ) | 6,403 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and equity |
$ | 8,791 | $ | 6,399 | $ | 11,236 | $ | 5,098 | $ | 6,653 | $ | (26,376 | ) | $ | 11,801 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheet
December 31, 2010
(in millions)
Discovery | DCH | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Reclassifications and Eliminations |
Discovery and Subsidiaries |
||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | | $ | 369 | $ | 93 | $ | 4 | $ | | $ | 466 | ||||||||||||||
Receivables, net |
| | 391 | 476 | 13 | | 880 | |||||||||||||||||||||
Content rights, net |
| | 8 | 75 | | | 83 | |||||||||||||||||||||
Prepaid expenses and other current assets |
109 | 3 | 105 | 89 | 1 | (1 | ) | 306 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current assets |
109 | 3 | 873 | 733 | 18 | (1 | ) | 1,735 | ||||||||||||||||||||
Investment in and advances to subsidiaries |
8,530 | 6,091 | 4,129 | | 6,484 | (25,234 | ) | | ||||||||||||||||||||
Noncurrent content rights, net |
| | 557 | 688 | | | 1,245 | |||||||||||||||||||||
Goodwill |
| | 3,876 | 2,558 | | | 6,434 | |||||||||||||||||||||
Other noncurrent assets |
| 12 | 872 | 726 | 7 | (12 | ) | 1,605 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 8,639 | $ | 6,106 | $ | 10,307 | $ | 4,705 | $ | 6,509 | $ | (25,247 | ) | $ | 11,019 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
LIABILITIES AND EQUITY |
||||||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | | $ | | $ | 216 | $ | 260 | $ | 5 | $ | (1 | ) | $ | 480 | |||||||||||||
Current portion of long-term debt |
| | 6 | 14 | | | 20 | |||||||||||||||||||||
Other current liabilities |
| 1 | 121 | 162 | 1 | | 285 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total current liabilities |
| 1 | 343 | 436 | 6 | (1 | ) | 785 | ||||||||||||||||||||
Long-term debt |
| | 3,513 | 85 | | | 3,598 | |||||||||||||||||||||
Other noncurrent liabilities |
| | 360 | 47 | 8 | (12 | ) | 403 | ||||||||||||||||||||
Inter-company contributions and advances between Discovery Communications, Inc. and subsidiaries |
2,414 | 1,777 | (57 | ) | 4,702 | 1,143 | (9,979 | ) | | |||||||||||||||||||
Equity (deficit) attributable to Discovery Communications, Inc. |
6,225 | 4,328 | 6,148 | (565 | ) | 5,352 | (15,263 | ) | 6,225 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Equity and advances attributable to Discovery Communications, Inc. |
8,639 | 6,105 | 6,091 | 4,137 | 6,495 | (25,242 | ) | 6,225 | ||||||||||||||||||||
Noncontrolling interests |
| | | | | 8 | 8 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total equity |
8,639 | 6,105 | 6,091 | 4,137 | 6,495 | (25,234 | ) | 6,233 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total liabilities and equity |
$ | 8,639 | $ | 6,106 | $ | 10,307 | $ | 4,705 | $ | 6,509 | $ | (25,247 | ) | $ | 11,019 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2011
(in millions)
Discovery | DCH | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Reclassifications and Eliminations |
Discovery and Subsidiaries |
||||||||||||||||||||||
Revenues |
$ | | $ | | $ | 431 | $ | 652 | $ | 16 | $ | (4 | ) | $ | 1,095 | |||||||||||||
Costs of revenues, excluding depreciation and amortization |
| | 127 | 203 | 14 | (2 | ) | 342 | ||||||||||||||||||||
Selling, general and administrative |
2 | | 92 | 200 | 3 | (2 | ) | 295 | ||||||||||||||||||||
Depreciation and amortization |
| | 10 | 19 | 1 | | 30 | |||||||||||||||||||||
Restructuring and impairment charges |
| | | 2 | | | 2 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
2 | | 229 | 424 | 18 | (4 | ) | 669 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating (loss) income |
(2 | ) | | 202 | 228 | (2 | ) | | 426 | |||||||||||||||||||
Equity in earnings of subsidiaries |
238 | 239 | 139 | | 159 | (775 | ) | | ||||||||||||||||||||
Interest expense, net |
| | (54 | ) | (2 | ) | | | (56 | ) | ||||||||||||||||||
Other expense, net |
| | | (5 | ) | | | (5 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
236 | 239 | 287 | 221 | 157 | (775 | ) | 365 | ||||||||||||||||||||
Benefit from (provision for) income taxes |
1 | | (48 | ) | (81 | ) | 1 | | (127 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income from continuing operations, net of taxes |
237 | 239 | 239 | 140 | 158 | (775 | ) | 238 | ||||||||||||||||||||
Loss from discontinued operations, net of taxes |
| | | (1 | ) | | | (1 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income |
$ | 237 | $ | 239 | $ | 239 | $ | 139 | $ | 158 | $ | (775 | ) | $ | 237 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2010
(in millions)
Discovery | DCH | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Reclassifications and Eliminations |
Discovery and Subsidiaries |
||||||||||||||||||||||
Revenues |
$ | | $ | | $ | 408 | $ | 503 | $ | 18 | $ | (3 | ) | $ | 926 | |||||||||||||
Costs of revenues, excluding depreciation and amortization |
| | 82 | 165 | 15 | (1 | ) | 261 | ||||||||||||||||||||
Selling, general and administrative |
3 | | 105 | 196 | 3 | (1 | ) | 306 | ||||||||||||||||||||
Depreciation and amortization |
| | 10 | 21 | 1 | | 32 | |||||||||||||||||||||
Restructuring and impairment charges |
| | 1 | 3 | 11 | | 15 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
3 | | 198 | 385 | 30 | (2 | ) | 614 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating (loss) income |
(3 | ) | | 210 | 118 | (12 | ) | (1 | ) | 312 | ||||||||||||||||||
Equity in earnings of subsidiaries |
188 | 184 | 64 | | 123 | (559 | ) | | ||||||||||||||||||||
Interest expense, net |
| | (47 | ) | (2 | ) | | | (49 | ) | ||||||||||||||||||
Other income (expense), net |
| | 6 | (22 | ) | | | (16 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
185 | 184 | 233 | 94 | 111 | (560 | ) | 247 | ||||||||||||||||||||
Benefit from (provision for) income taxes |
1 | 1 | (58 | ) | (31 | ) | 4 | | (83 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income from continuing operations, net of taxes |
186 | 185 | 175 | 63 | 115 | (560 | ) | 164 | ||||||||||||||||||||
Income from discontinued operations, net of taxes |
| | 9 | 4 | 12 | | 25 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income |
186 | 185 | 184 | 67 | 127 | (560 | ) | 189 | ||||||||||||||||||||
Less net income attributable to noncontrolling interests |
| | | (3 | ) | | | (3 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income attributable to Discovery Communications, Inc. |
$ | 186 | $ | 185 | $ | 184 | $ | 64 | $ | 127 | $ | (560 | ) | $ | 186 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2011
(in millions)
Discovery | DCH | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Reclassifications and Eliminations |
Discovery and Subsidiaries |
||||||||||||||||||||||
Revenues |
$ | | $ | | $ | 1,301 | $ | 1,769 | $ | 51 | $ | (8 | ) | $ | 3,113 | |||||||||||||
Costs of revenues, excluding depreciation and amortization |
| | 321 | 545 | 43 | (6 | ) | 903 | ||||||||||||||||||||
Selling, general and administrative |
8 | | 271 | 578 | 9 | (2 | ) | 864 | ||||||||||||||||||||
Depreciation and amortization |
| | 29 | 59 | 2 | | 90 | |||||||||||||||||||||
Restructuring and impairment charges |
| | 4 | 3 | | | 7 | |||||||||||||||||||||
Gain on disposition |
| | | (129 | ) | | | (129 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
8 | | 625 | 1,056 | 54 | (8 | ) | 1,735 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating (loss) income |
(8 | ) | | 676 | 713 | (3 | ) | | 1,378 | |||||||||||||||||||
Equity in earnings of subsidiaries |
801 | 803 | 452 | | 535 | (2,591 | ) | | ||||||||||||||||||||
Interest expense, net |
| | (150 | ) | (4 | ) | | | (154 | ) | ||||||||||||||||||
Other income (expense), net |
| | 3 | (13 | ) | | | (10 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
793 | 803 | 981 | 696 | 532 | (2,591 | ) | 1,214 | ||||||||||||||||||||
Benefit from (provision for) income taxes |
3 | | (178 | ) | (243 | ) | 1 | | (417 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income from continuing operations, net of taxes |
796 | 803 | 803 | 453 | 533 | (2,591 | ) | 797 | ||||||||||||||||||||
Loss from discontinued operations, net of taxes |
| | | (1 | ) | | | (1 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income |
$ | 796 | $ | 803 | $ | 803 | $ | 452 | $ | 533 | $ | (2,591 | ) | $ | 796 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2010
(in millions)
Discovery | DHC | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Reclassifications and Eliminations |
Discovery and Subsidiaries |
||||||||||||||||||||||
Revenues |
$ | | $ | | $ | 1,223 | $ | 1,491 | $ | 50 | $ | (6 | ) | $ | 2,758 | |||||||||||||
Costs of revenues, excluding depreciation and amortization |
| | 271 | 471 | 45 | (5 | ) | 782 | ||||||||||||||||||||
Selling, general and administrative |
9 | | 296 | 582 | 8 | (1 | ) | 894 | ||||||||||||||||||||
Depreciation and amortization |
| | 30 | 66 | 2 | | 98 | |||||||||||||||||||||
Restructuring and impairment charges |
| | 1 | 6 | 11 | | 18 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
9 | | 598 | 1,125 | 66 | (6 | ) | 1,792 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating (loss) income |
(9 | ) | | 625 | 366 | (16 | ) | | 966 | |||||||||||||||||||
Equity in earnings of subsidiaries |
468 | 530 | 259 | | 311 | (1,568 | ) | | ||||||||||||||||||||
Interest expense, net |
| (48 | ) | (102 | ) | (5 | ) | | | (155 | ) | |||||||||||||||||
Loss on extinguishment of debt |
| (20 | ) | (116 | ) | | | | (136 | ) | ||||||||||||||||||
Other expense, net |
| (32 | ) | (12 | ) | (13 | ) | | | (57 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income taxes |
459 | 430 | 654 | 348 | 295 | (1,568 | ) | 618 | ||||||||||||||||||||
Benefit from (provision for) income taxes |
3 | 37 | (133 | ) | (83 | ) | 5 | | (171 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income from continuing operations, net of taxes |
462 | 467 | 521 | 265 | 300 | (1,568 | ) | 447 | ||||||||||||||||||||
Income from discontinued operations, net of taxes |
| | 9 | 4 | 12 | | 25 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income |
462 | 467 | 530 | 269 | 312 | (1,568 | ) | 472 | ||||||||||||||||||||
Less net income attributable to noncontrolling interests |
| | | (7 | ) | | (3 | ) | (10 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income attributable to Discovery Communications, Inc. |
462 | 467 | 530 | 262 | 312 | (1,571 | ) | 462 | ||||||||||||||||||||
Stock dividends to preferred interests |
(1 | ) | | | | | | (1 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income available to Discovery Communications, Inc. stockholders |
$ | 461 | $ | 467 | $ | 530 | $ | 262 | $ | 312 | $ | (1,571 | ) | $ | 461 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2011
(in millions)
Discovery | DCH | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Eliminations | Discovery and Subsidiaries |
||||||||||||||||||||||
Operating Activities |
||||||||||||||||||||||||||||
Cash provided by (used in) operating activities |
$ | 108 | $ | (3 | ) | $ | 255 | $ | 401 | $ | (1 | ) | $ | | $ | 760 | ||||||||||||
Investing Activities |
||||||||||||||||||||||||||||
Purchases of property and equipment |
| | (11 | ) | (30 | ) | (1 | ) | | (42 | ) | |||||||||||||||||
Investments in and advances to equity investees |
| | | (93 | ) | | | (93 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Cash used in investing activities |
| | (11 | ) | (123 | ) | (1 | ) | | (135 | ) | |||||||||||||||||
Financing Activities |
||||||||||||||||||||||||||||
Borrowings from long term debt, net of discount and issuance costs |
| | 639 | | | | 639 | |||||||||||||||||||||
Principal repayments of capital lease obligations |
| | (4 | ) | (12 | ) | | | (16 | ) | ||||||||||||||||||
Repurchases of common stock |
(732 | ) | | | | | | (732 | ) | |||||||||||||||||||
Cash distributions to noncontrolling interests |
| | | | | (7 | ) | (7 | ) | |||||||||||||||||||
Proceeds from stock option exercises, including excess tax benefits |
61 | | | | | | 61 | |||||||||||||||||||||
Inter-company contributions and other financing activities, net |
563 | 3 | (282 | ) | (290 | ) | (1 | ) | 7 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Cash (used in) provided by financing activities |
(108 | ) | 3 | 353 | (302 | ) | (1 | ) | | (55 | ) | |||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | | (4 | ) | | | (4 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net change in cash and cash equivalents |
| | 597 | (28 | ) | (3 | ) | | 566 | |||||||||||||||||||
Cash and cash equivalents, beginning of period |
| | 369 | 93 | 4 | | 466 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | | $ | 966 | $ | 65 | $ | 1 | $ | | $ | 1,032 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2010
(in millions)
Discovery | DCH | DCL | Non-Guarantor Subsidiaries of DCL |
Other Non-Guarantor Subsidiaries of Discovery |
Eliminations | Discovery and Subsidiaries |
||||||||||||||||||||||
Operating Activities |
||||||||||||||||||||||||||||
Cash (used in) provided by operating activities |
$ | (26 | ) | $ | (52 |