DISCA-2014.9.30 10Q


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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
(Registrant’s 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  ý    No  o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  ý    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
ý
Accelerated filer
¨
Non-accelerated filer
o  (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  ý
Total number of shares outstanding of each class of the Registrant’s common stock as of October 28, 2014:
Series A Common Stock, par value $0.01 per share
148,491,088

Series B Common Stock, par value $0.01 per share
6,542,457

Series C Common Stock, par value $0.01 per share
287,302,099

 
 
 
 
 




DISCOVERY COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
 
 
Page
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013.
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013.
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013.
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013.
 
 
Consolidated Statements of Equity for the three and nine months ended September 30, 2014 and 2013.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
 
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
376

 
$
408

Receivables, net
 
1,464

 
1,371

Content rights, net
 
379

 
277

Deferred income taxes
 
87

 
73

Prepaid expenses and other current assets
 
278

 
281

Total current assets
 
2,584

 
2,410

Noncurrent content rights, net
 
2,028

 
1,883

Property and equipment, net
 
525

 
514

Goodwill
 
8,320

 
7,341

Intangible assets, net
 
2,091

 
1,565

Equity method investments
 
667

 
1,087

Other noncurrent assets
 
158

 
179

Total assets
 
$
16,373

 
$
14,979

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
209

 
$
141

Accrued liabilities
 
1,040

 
992

Deferred revenues
 
304

 
144

Current portion of debt
 
995

 
17

Total current liabilities
 
2,548

 
1,294

Noncurrent portion of debt
 
6,153

 
6,482

Deferred income taxes
 
692

 
637

Other noncurrent liabilities
 
310

 
333

Total liabilities
 
9,703

 
8,746

Commitments and contingencies (Note 15)
 


 


Redeemable noncontrolling interests
 
785

 
36

Equity:
 
 
 
 
Discovery Communications, Inc. stockholders’ equity:
 
 
 
 
Series A convertible preferred stock: $0.01 par value; 75 shares authorized; 71 shares issued
 
1

 
1

Series C convertible preferred stock: $0.01 par value; 75 shares authorized; 43 and 44 shares issued
 
1

 
1

Series A common stock: $0.01 par value; 1,700 shares authorized; 151 and 150 shares issued
 
1

 
1

Series B convertible common stock: $0.01 par value; 100 shares authorized; 7 shares issued
 

 

Series C common stock: $0.01 par value; 2,000 shares authorized; 375 and 151 shares issued
 
4

 
2

Additional paid-in capital
 
6,905

 
6,826

Treasury stock, at cost
 
(4,488
)
 
(3,531
)
Retained earnings
 
3,654

 
2,892

Accumulated other comprehensive (loss) income
 
(195
)
 
4

Total Discovery Communications, Inc. stockholders’ equity
 
5,883

 
6,196

Noncontrolling interests
 
2

 
1

Total equity
 
5,885

 
6,197

Total liabilities and equity
 
$
16,373

 
$
14,979

The accompanying notes are an integral part of these consolidated financial statements.

4


DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in millions, except per share amounts)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
Distribution
 
$
748

 
$
651

 
$
2,097

 
$
1,896

Advertising
 
725

 
665

 
2,258

 
1,922

Other
 
95

 
59

 
234

 
180

Total revenues
 
1,568

 
1,375

 
4,589

 
3,998

Costs and expenses:
 
 
 
 
 
 
 
 
Costs of revenues, excluding depreciation and amortization
 
529

 
435

 
1,526

 
1,214

Selling, general and administrative
 
432

 
390

 
1,247

 
1,149

Depreciation and amortization
 
85

 
80

 
243

 
190

Restructuring and other charges
 
11

 
1

 
19

 
11

Gain on disposition
 

 
(19
)
 
(31
)
 
(19
)
Total costs and expenses
 
1,057

 
887

 
3,004

 
2,545

Operating income
 
511

 
488

 
1,585

 
1,453

Interest expense
 
(83
)
 
(80
)
 
(247
)
 
(228
)
Income (loss) from equity investees, net
 
13

 

 
34

 
(9
)
Other income, net
 
1

 
11

 
11

 
61

Income from continuing operations before income taxes
 
442

 
419

 
1,383

 
1,277

Provision for income taxes
 
(155
)
 
(163
)
 
(481
)
 
(490
)
Net income
 
287

 
256

 
902

 
787

Net income attributable to noncontrolling interests
 

 
(1
)
 
(2
)
 
(1
)
Net income attributable to redeemable noncontrolling interests
 
(7
)
 

 
(11
)
 

Net income available to Discovery Communications, Inc.
 
$
280

 
$
255

 
$
889

 
$
786

 
 
 
 
 
 
 
 
 
Net income per share available to Discovery Communications, Inc. Series A, B and C common stockholders (Note 12):
 
 
 
 
 
 
 
 
Basic
 
$
0.41

 
$
0.36

 
$
1.29

 
$
1.09

Diluted
 
$
0.41

 
$
0.35

 
$
1.28

 
$
1.08

Weighted average Discovery Communications, Inc. Series A, B and C common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
449

 
483

 
458

 
488

Diluted
 
682

 
719

 
693

 
727

The accompanying notes are an integral part of these consolidated financial statements.

5


DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
287

 
$
256

 
$
902

 
$
787

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Currency translation adjustments
 
(187
)
 
104

 
(219
)
 
(3
)
Derivative and market value adjustments
 
3

 

 
(6
)
 
6

Comprehensive income
 
103

 
360

 
677

 
790

Comprehensive income attributable to noncontrolling interests
 

 
(1
)
 
(2
)
 
(1
)
Comprehensive loss attributable to redeemable noncontrolling interests
 
20

 

 
15

 
1

Comprehensive income attributable to Discovery Communications, Inc.
 
$
123

 
$
359

 
$
690

 
$
790

The accompanying notes are an integral part of these consolidated financial statements.

6


DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)

 
Nine Months Ended September 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
902

 
$
787

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Equity-based compensation expense
66

 
129

Depreciation and amortization
243

 
190

Content amortization and impairment expense
1,083

 
850

Gain on disposition
(31
)
 
(19
)
Remeasurement gain on previously held equity interest
(29
)
 
(92
)
Equity in (earnings) losses of investee companies, net of cash distributions
(15
)
 
15

Deferred income tax (benefit) expense
(124
)
 
144

Launch amortization expense
8

 
14

Loss from hedging instruments, net

 
55

Other, net
27

 
22

Changes in operating assets and liabilities, net of business combinations:
 
 
 
Receivables, net
3

 
(92
)
Content rights
(1,269
)
 
(1,061
)
Accounts payable and accrued liabilities
92

 
41

Equity-based compensation liabilities
(81
)
 
(61
)
Income tax receivable
53

 
50

Other, net
(35
)
 
(42
)
Cash provided by operating activities
893

 
930

Investing Activities
 
 
 
Purchases of property and equipment
(85
)
 
(76
)
Business acquisitions, net of cash acquired
(369
)
 
(1,832
)
Hedging instruments, net

 
(55
)
Proceeds from disposition
45

 
28

Distributions from equity method investees
58

 
23

Investments in equity method investees, net
(174
)
 
(28
)
Other investing activities, net
(4
)
 
(1
)
Cash used in investing activities
(529
)
 
(1,941
)
Financing Activities
 
 
 
Borrowings from debt, net of discount and issuance costs
409

 
1,186

Borrowings under revolving credit facility
145

 

Commercial paper, net
126

 

Principal repayments of capital lease obligations
(13
)
 
(21
)
Repurchases of stock
(1,067
)
 
(969
)
Cash proceeds from equity-based plans, net
39

 
61

Other financing activities, net
(8
)
 
(3
)
Cash (used in) provided by financing activities
(369
)
 
254

Effect of exchange rate changes on cash and cash equivalents
(27
)
 
(5
)
Net change in cash and cash equivalents
(32
)
 
(762
)
Cash and cash equivalents, beginning of period
408

 
1,201

Cash and cash equivalents, end of period
$
376

 
$
439


7


DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)

 
Nine Months Ended September 30,
 
2014
 
2013
Supplemental Cash Flow Information
 
 
 
Cash paid for taxes, net
$
(500
)
 
$
(273
)
Cash paid for interest, net
$
(180
)
 
$
(158
)
Noncash Investing and Financing Transactions
 
 
 
Assets acquired under capital lease arrangements
$
14

 
$
86

Accrued purchases of property and equipment
$
5

 
$
4

The accompanying notes are an integral part of these consolidated financial statements.

8


DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)

 
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
 
Discovery
Stockholders
 
Noncontrolling
Interests
 
Total Equity
 
Discovery
Stockholders
 
Noncontrolling
Interests
 
Total Equity
Beginning balance
 
$
6,031

 
$
3

 
$
6,034

 
$
6,269

 
$
4

 
$
6,273

Comprehensive income
 
123

 

 
123

 
359

 
1

 
360

Equity-based compensation
 
12

 

 
12

 
14

 

 
14

Issuance of common stock for equity-based plans
 
17

 

 
17

 
12

 

 
12

Excess tax benefits from equity-based compensation
 
9

 

 
9

 
14

 

 
14

Other adjustments for equity-based plans
 
(1
)
 

 
(1
)
 

 

 

Repurchases of stock
 
(298
)
 

 
(298
)
 
(448
)
 

 
(448
)
Redeemable noncontrolling interest adjustments to redemption value
 
(15
)
 

 
(15
)
 

 

 

Cash distributions to noncontrolling interests
 

 
(1
)
 
(1
)
 

 

 

Purchase of redeemable noncontrolling interest
 
5

 

 
5

 

 

 

Ending balance
 
$
5,883

 
$
2

 
$
5,885

 
$
6,220

 
$
5

 
$
6,225

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
Discovery
Stockholders
 
Noncontrolling
Interests
 
Total Equity
 
Discovery
Stockholders
 
Noncontrolling
Interests
 
Total Equity
Beginning balance
 
$
6,196

 
$
1

 
$
6,197

 
$
6,291

 
$
2

 
$
6,293

Comprehensive income
 
690

 
2

 
692

 
790

 
1

 
791

Equity-based compensation
 
39

 

 
39

 
48

 

 
48

Issuance of common stock for equity-based plans
 
36

 

 
36

 
43

 

 
43

Excess tax benefits from equity-based compensation
 
30

 

 
30

 
40

 

 
40

Tax settlements associated with equity-based compensation
 
(27
)
 

 
(27
)
 
(22
)
 

 
(22
)
Other adjustments for equity-based plans
 
(2
)
 

 
(2
)
 

 

 

Repurchases of stock
 
(1,067
)
 

 
(1,067
)
 
(969
)
 

 
(969
)
Stock dividends declared to preferred interests
 
(1
)
 

 
(1
)
 

 

 

Redeemable noncontrolling interest adjustments to redemption value
 
(16
)
 

 
(16
)
 
(1
)
 

 
(1
)
Noncontrolling interests of acquired businesses
 

 

 

 

 
2

 
2

Cash distributions to noncontrolling interests
 

 
(1
)
 
(1
)
 

 

 

Purchase of redeemable noncontrolling interest
 
5

 

 
5

 

 

 

Ending balance
 
$
5,883

 
$
2

 
$
5,885

 
$
6,220

 
$
5

 
$
6,225

The accompanying notes are an integral part of these consolidated financial statements.

9

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 global media company that provides content across multiple distribution platforms, including television networks, digital distribution arrangements and a portfolio of web-native networks. The Company also develops and sells curriculum-based education products and services. The Company classifies its operations in three segments: U.S. Networks, consisting principally of domestic television networks and websites; International Networks, consisting principally of international television networks, radio stations and websites; and Education, consisting of educational curriculum-based product and service offerings. Financial information for Discovery’s reportable segments is discussed in Note 16.
Basis of Presentation
The consolidated financial statements include the accounts of Discovery and its majority-owned subsidiaries in which a controlling interest is maintained. Inter-company accounts and transactions between consolidated entities have been eliminated in consolidation.
Reclassifications
Transactions denominated in currencies other than subsidiaries' functional currencies are recorded based on exchange rates at the time such transactions arise. Changes in exchange rates with respect to amounts recorded in the consolidated balance sheets related to these items will result in unrealized foreign currency transaction gains and losses based upon period-end exchange rates. The Company also records realized foreign currency transaction gains and losses upon settlement of foreign currency transactions. Beginning January 1, 2014, the Company reclassified foreign currency gains (losses), net as described above from selling, general and administrative expense to other income, net on the consolidated statements of operations for all periods presented. For the three and nine months ended September 30, 2013, foreign currency gains of $11 million and $24 million, respectively, were reclassified from selling, general and administrative expense to other income, net to conform to the current year presentation.
Stock Split Effected in the Form of a Share Dividend
On May 16, 2014, Discovery's Board of Directors approved a stock split effected in the form of a share dividend (the "2014 Share Dividend") of one share of the Company's Series C common stock on each issued and outstanding share of Series A, Series B, and Series C common stock. The stock split did not change the number of treasury shares or the number of outstanding preferred shares but the conversion ratio on the preferred shares doubled (see Note 9). The 2014 Share Dividend resulted in a 2 for 1 stock split on August 6, 2014 to stockholders of record on July 28, 2014. All share and per share data for earnings per share and stock based compensation have been retroactively adjusted to give effect to the 2 for 1 split of the Company’s common stock. The impact on the consolidated balance sheet was an increase of $2 million to common stock and an offsetting reduction in additional paid-in capital, which has been recognized in the current period only.
Unaudited Interim Financial Statements
These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (“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 Discovery’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 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 re-evaluates its estimates, judgments and assumptions, and management’s assessments could change. Actual results may differ materially from those estimates.

10

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



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, equity-based compensation, income taxes, other financial instruments, contingencies, and the determination of whether the Company is the primary beneficiary of entities in which it holds variable interests.
Accounting and Reporting Pronouncements Adopted
Reporting Discontinued Operations
In April 2014, the Financial Accounting Standards Board ("FASB") issued guidance that changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations and disposals of components of an entity that do not qualify for discontinued operations reporting. Under the new pronouncement, disposal of a component of an entity representing a strategic shift with major effect on its operations and financial results is a discontinued operation. The Company prospectively adopted the new guidance effective July 1, 2014. The Company will assess future dispositions under the new guidance.
Presentation of Unrecognized Tax Benefits
In July 2013, the FASB issued guidance stating that a liability related to an unrecognized tax benefit should be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carry forward to the extent such deferred tax asset is available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position. The Company prospectively adopted the new guidance effective January 1, 2014. Liabilities of $12 million related to unrecognized tax benefits are reducing deferred tax assets that are reflected in net noncurrent deferred income tax liabilities on the consolidated balance sheet as of September 30, 2014.
Accounting and Reporting Pronouncements Not Yet Adopted
Presentation of Financial Statements - Going Concern
In August 2014, the FASB issued guidance requiring management to perform interim and annual assessments regarding conditions or events that raise substantial doubt about the Company's ability to continue as a going concern and to provide related disclosures, if applicable. The new standard will be effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this standard is not expected to have a material effect on the Company's consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued an accounting pronouncement related to revenue recognition, which applies a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles with respect to the measurement of revenue and timing of recognition. The Company will recognize revenue to reflect the transfer of goods or services to customers at an amount that it expects to be entitled to receive in exchange for those goods or services. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
Concentrations Risk
Customers
The Company has long-term contracts with distributors around the world, including the largest distributors in the U.S. and major international distributors. In the U.S., approximately 90% of distribution revenues come from the top 10 distributors. Outside of the U.S., approximately 50% of distribution revenue comes from the top 10 distributors. Agreements in place with the major cable and satellite operators in the U.S. expire at various times beginning in 2014 through 2020. Failure to secure a renewal or a renewal on less favorable terms may have a material adverse effect on the Company’s financial condition and results of operations. Not only could the Company experience a reduction in distribution revenue, but it could also experience a reduction in advertising revenue, which is impacted by affiliate subscriber levels and viewership.
No individual customer accounted for more than 10% of total consolidated revenues for the three and nine months ended September 30, 2014 or 2013. As of September 30, 2014 and December 31, 2013, the Company’s trade receivables do not represent a significant concentration of credit risk as the customers and markets in which the Company operates are varied and dispersed across many geographic areas.

11

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Financial Institutions
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
Lender Counterparties
There is a risk that the counterparties associated with the Company’s revolving credit facility will not be available to fund as obligated under the terms of the facility. If funding under the revolving credit facility is unavailable, the Company may have to acquire a replacement credit facility from different counterparties at a higher cost or may be unable to find a suitable replacement and may have limited or no access to the commercial paper market. 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, 2014, the Company did not anticipate nonperformance by any of its counterparties.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Hub Television Networks LLC
On September 23, 2014, the Company acquired an additional 10% ownership interest in the Hub Network from Hasbro, Inc. ("Hasbro") for $64 million. The Hub Network is a pay television network that provides children's and family entertainment and educational programming. The purchase increased the Company's ownership interest from 50% to 60%. As a result, the Company changed its accounting for the Hub Network from an equity method investment to a consolidated subsidiary (see Note 3). The acquisition of the Hub Network supports the Company's strategic priority of broadening the scope of the network to increase viewership, and the network was rebranded as the Discovery Family Channel on October 13, 2014.
The Company used discounted cash flow ("DCF") analyses, which represent Level 3 fair value measurements, to preliminarily assess certain components of its purchase price allocation. The table below presents the fair value of the assets acquired, liabilities assumed and noncontrolling interest as presented in the table below (in millions).
 
 
September 23, 2014
Goodwill
 
$
309

Intangible assets
 
301

Other assets acquired
 
97

Cash
 
33

Liabilities assumed
 
(125
)
Redeemable noncontrolling interest
 
(238
)
Carrying value of previously held equity interest
 
(313
)
Net assets acquired
 
$
64

There was no gain or loss recorded at the time of acquisition as the fair value was equal to the carrying amount of the Company's previously held equity interest in the Hub Network as of the acquisition date.
Hasbro has the right to put the entirety of its remaining 40% non-controlling interest to the Company for one year after December 31, 2021. As Hasbro's put right is outside the control of the Company, Hasbro's 40% noncontrolling interest is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet (see Note 8). Embedded in the redeemable noncontrolling interest is the value of a Discovery call right exercisable for one year after December 31, 2021. Upon the exercise of the put or call options, the price to be paid for the interest being purchased is generally a function of the then fair market value of the interest, to which certain discounts and floor values may apply in specified situations, depending upon the party exercising the put or call, the basis for the exercise of the put or call, and the determined fair market value of the network at the time of exercise.
The goodwill reflects the workforce and synergies expected from combining the operations of the Hub Network and the Company's existing U.S. Networks. The goodwill recorded as part of this acquisition will be assigned to the U.S. Networks reporting unit. It is not amortizable for tax purposes. Intangible assets primarily consist of distribution customer relationships with an estimated useful life of 30 years and a weighted-average contractual renewal period of 3 years. The purchase price allocation

12

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



presented above is preliminary as the Company is currently in the process of completing fair value estimates for intangible assets and income taxes.
Eurosport
On May 30, 2014, the Company acquired from TF1 a controlling interest in and began consolidating Eurosport International ("Eurosport"), a leading pan-European sports media platform, by increasing Discovery’s ownership stake from 20% to 51% for cash of approximately €257 million ($349 million) and recognized a gain of $29 million to account for the difference between the carrying value and the fair value of the previously held 20% equity interest. The gain is included in other income, net in the Company's consolidated statements of operations (see Note 13). Due to regulatory constraints, the acquisition initially excludes Eurosport France, formerly a subsidiary of Eurosport. The Company will retain a 20% equity interest in Eurosport France and has a conditional commitment to acquire another 31% ownership interest beginning in 2015 for approximately €35 million ($48 million), contingent upon resolution of all regulatory matters. The flagship Eurosport network focuses on regionally popular sports, such as tennis, skiing, cycling and motor sports. Eurosport’s brands and platforms also include Eurosport HD (high definition simulcast), Eurosport 2, Eurosport 2 HD (high definition simulcast), Eurosport Asia-Pacific, and Eurosportnews. The acquisition is intended to increase the growth of Eurosport and enhance the Company's pay television offerings in Europe.
The Company used DCF analyses, which represent Level 3 fair value measurements, to preliminarily assess certain components of its purchase price allocation. The fair value of the assets acquired, liabilities assumed and noncontrolling interest acquired and calculation of the remeasurement gain on previously held equity interest is presented in the table below (in millions).
 
 
May 30, 2014
Goodwill
 
$
775

Intangible assets
 
467

Other assets acquired
 
165

Cash
 
47

Removal of TF1 put right
 
27

Currency translation adjustment
 
7

Remeasurement gain on previously held equity interest
 
(29
)
Liabilities assumed
 
(154
)
Deferred tax liabilities
 
(167
)
Redeemable noncontrolling interest
 
(558
)
Carrying value of previously held equity interest
 
(231
)
Net assets acquired
 
$
349

TF1 has the right to put the entirety of its remaining 49% non-controlling interest to the Company during two 90-day windows in the two and a half years after May 30, 2014. If the put right is exercised during the first 90-day window beginning July 1, 2015, it has a floor value equal to the fair value per share of Eurosport on May 30, 2014. If the put right is exercised during the second 90-day window beginning July 1, 2016, it will be priced at the then-current fair value per share of Eurosport, or as may be agreed between the Company and TF1. As TF1's put right is outside the control of the Company, TF1's 49% noncontrolling interest is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet (see Note 8).
The goodwill reflects the workforce, synergies and increased pan-European market penetration expected from combining the operations of Eurosport and the Company as a component of the Company's international networks segment. The Company continues to evaluate the reporting unit determination for this acquisition. The goodwill recorded as part of this acquisition is not amortizable for tax purposes. Intangible assets primarily consist of distribution and advertising customer relationships, advertiser backlog and trademarks with a weighted average estimated useful life of 10 years. The purchase price allocation presented above is preliminary as the Company is currently in the process of completing fair value estimates for intangible assets, certain liabilities and income taxes.
SBS Nordic
On April 9, 2013, the Company acquired the general entertainment television and radio business operations ("SBS Nordic") of Prosiebensat.1 Media AG for cash of approximately €1.4 billion ($1.8 billion) including closing purchase price adjustments. SBS Nordic has operations in Sweden, Norway, Denmark, Finland and England. The acquisition of SBS Nordic supports the

13

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Company’s strategic priority of increasing its presence in key international markets and is a component of the Company's International Networks segment.
The Company used DCF analyses, which represent Level 3 fair value measurements, to assess the components of its purchase price allocation. The table below presents the fair value allocation of the purchase price to the assets and liabilities acquired (in millions).
 
 
April 9, 2013
Goodwill
 
$
779

Intangible assets
 
1,001

Content
 
248

Other assets acquired
 
212

Cash
 
106

Liabilities assumed
 
(278
)
Deferred tax liabilities
 
(243
)
Redeemable noncontrolling interest
 
(6
)
Net assets acquired
 
$
1,819

The goodwill reflects the workforce, synergies and increased Nordic region market penetration expected from combining the operations of SBS Nordic and the Company. The goodwill recorded as part of this acquisition is not amortizable for tax purposes. Intangible assets primarily consist of broadcast licenses, distribution and advertising customer relationships, advertiser backlog and trademarks with a weighted average estimated useful life of 8 years.
Discovery Japan
On January 10, 2013, the Company purchased an additional 30% of Discovery Japan for $53 million. Discovery Japan operates Discovery Channel and Animal Planet in Japan. As of December 31, 2012, Discovery and Jupiter Telecommunications Co., Ltd ("J:COM") each owned a 50% interest in Discovery Japan, and Discovery accounted for its 50% interest using the equity method of accounting. Discovery consolidated Discovery Japan on January 10, 2013 and recognized a gain of $92 million to account for the difference between the carrying value and the fair value of the previously held 50% equity interest. The gain is included in other income, net in the Company's consolidated statements of operations (see Note 13).
The Company used a combination of a DCF analysis and market-based valuation methodologies, which represent Level 3 fair value measurements, to measure the fair value of Discovery Japan and to perform its purchase price allocation. The table below presents the allocation of the purchase price to the assets and liabilities acquired and calculation of a remeasurement gain on previously held equity interest (in millions).
 
 
January 10, 2013
Goodwill
 
$
103

Intangible assets
 
100

Other assets acquired
 
25

Currency translation adjustment
 
6

Cash
 
4

Remeasurement gain on previously held equity interest
 
(92
)
Liabilities assumed
 
(55
)
Redeemable noncontrolling interest
 
(35
)
Carrying value of previously held equity interest
 
(3
)
Net assets acquired
 
$
53

The terms of the agreement provide J:COM with a right to put its 20% noncontrolling interest to Discovery for cash at any time and Discovery with the right to call J:COM's 20% noncontrolling interest beginning in January 2018. As J:COM's put right is outside the control of the Company, J:COM's 20% noncontrolling interest is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet (see Note 8).

14

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



The goodwill reflects the synergies and increased regional flexibility expected from controlling the operations of Discovery Japan and is included in the International Networks segment. The goodwill recorded as part of this acquisition is not amortizable for tax purposes. Intangible assets are primarily distribution customer relationships.
Other
In 2014, the Company acquired other unrelated businesses for total consideration of $40 million, net of cash acquired. The Company recorded $34 million and $10 million of goodwill and intangible assets, respectively, in connection with these acquisitions. The acquisitions included a factual entertainment production company in the U.K. and cable networks in New Zealand. The goodwill reflects the synergies and market expansion from combining the operations of these acquisitions with the Company.
In 2013, the Company acquired several other unrelated businesses for total consideration of $88 million, net of cash acquired. The Company recorded $67 million and $24 million of goodwill and intangible assets, respectively, in connection with these acquisitions. The acquisitions included a television station in Sweden and an education business in the U.K. The goodwill reflects the synergies and market expansion expected from combining the operations of these acquisitions with the Company.
Consolidation of Business Combinations
The operations of each of the business combinations discussed above were included in the consolidated financial statements as of the respective acquisition dates. The following table presents the revenue and earnings of the businesses acquired as reported within the consolidated financial statements for the three and nine months ended September 30, 2014 and 2013 (in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Distribution
 
$
146

 
$
59

 
$
294

 
$
127

Advertising
 
162

 
126

 
499

 
266

Other
 
45

 
4

 
78

 
9

Total revenues
 
$
353

 
$
189

 
$
871

 
$
402

Net income
 
$
12

 
$
12

 
$
42

 
$
37

Pro Forma Financial Information
The following table presents the unaudited pro forma results of the Company as though all of the 2013 and 2014 business combinations discussed above had been made on January 1, 2013 (in millions). These pro forma results do not necessarily represent what would have occurred if all the business combinations above had taken place on January 1, 2013, nor do they represent the results that may occur in the future. This pro forma financial information includes the historical financial statement amounts of Discovery and its business combinations with the following adjustments: the Company converted the historical financial statements of its acquirees to GAAP, applied the Company's accounting policies, and the Company adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2013 including the $29 million gain recognized upon the consolidation of Eurosport. The pro forma adjustments were based on available information and upon assumptions that the Company believes are reasonable to reflect the impact of these acquisitions on the Company's historical financial information on a supplemental pro forma basis.
 
 
Pro forma
 
Pro forma
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenue
 
$
1,590

 
$
1,560

 
$
4,883

 
$
4,709

Net income
 
$
298

 
$
264

 
$
916

 
$
797

Equity Method Investment
On September 23, 2014, the Company acquired 50% equity ownership interest in All3Media, a production company, for a cash payment of approximately £90 million ($147 million).

15

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Dispositions
HSW
On May 30, 2014, Discovery sold HowStuffWorks, LLC, a commercial website which uses various media to explain complex concepts, terminology and mechanisms, to Blucora, Inc. (“Blucora”). Blucora paid Discovery $45 million, and Discovery recorded a pretax gain of $31 million upon completion of the sale. HowStuffWorks, LLC was part of the U.S. Networks operating segment.
Petfinder
On July 15, 2013, the Company sold the domain name and business operations of the Petfinder.com website ("Petfinder"). The sale of Petfinder resulted in a $19 million pretax gain which has been reflected in gain on disposition in the consolidated statements of operations.
NOTE 3. VARIABLE INTEREST ENTITIES
In the normal course of business, the Company makes investments that support its underlying business strategy and enable it to enter new markets and develop programming. In certain instances, an investment may qualify as a variable interest entity (“VIE”). As of September 30, 2014, the Company’s VIEs primarily consisted of OWN LLC. As of December 31, 2013, the Company’s VIEs primarily consisted of Hub Television Networks LLC and OWN LLC. Both OWN LLC and the Hub Television Networks LLC operate pay television networks in the U.S.
The Company accounted for its interests in VIEs using the equity method, as the Company is not the primary beneficiary of these entities. The aggregate carrying values of these VIE equity method investments were $457 million and $789 million as of September 30, 2014 and December 31, 2013, respectively. The Company recognized $13 million and $37 million in income during the three and nine months ended September 30, 2014, respectively, and zero and $13 million in losses during the three and nine months ended September 30, 2013, respectively, for its portion of net income and losses generated by VIEs.
As of September 30, 2014, the Company’s estimated risk of loss for investment carrying values, unfunded contractual commitments and guarantees made on behalf of VIEs was approximately $488 million. The estimated risk of loss excludes the Company’s expected non-contractual future funding of OWN, which is discussed below.
OWN LLC
OWN LLC operates OWN, which is a pay television network and website that provides adult lifestyle content, which is focused on self-discovery, self-improvement and entertainment. Since the initial equity was not sufficient to fund OWN's activities without additional subordinated financial support in the form of a note receivable held by the Company, OWN is a VIE. While the Company and Harpo, Inc. ("Harpo") are partners who share equally in voting control, power is not shared because Harpo holds operational rights related to programming and marketing, as well as selection and retention of key management personnel that significantly impact OWN’s economic performance. Accordingly, the Company has determined that it is not the primary beneficiary of OWN and accounts for its investment in OWN using the equity method. However, the Company provides OWN funding, content licenses, and services, such as distribution, sales and administrative support, for a fee (see Note 14).
The Company's combined advances to and note receivable from OWN, including accrued interest, were $452 million and $483 million as of September 30, 2014 and December 31, 2013, respectively. During the nine months ended September 30, 2014, the Company received net repayments of $56 million from OWN and accrued interest on the note receivable of $25 million. During the nine months ended September 30, 2013, the Company received net repayments of $11 million from OWN and accrued interest on the note receivable of $27 million. The note receivable is secured by the net assets of OWN. While the Company has no further funding commitments, the Company will provide additional funding to OWN, if necessary, and 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. Following such repayment, OWN’s subsequent cash distributions will be shared equally between the Company and Harpo. OWN began repaying amounts owed to the Company during 2013.
In accordance with the venture agreement, losses generated by OWN are generally allocated to both investors based on their proportionate ownership interests. However, the Company has recorded its portion of OWN’s losses based upon accounting policies for equity method investments. Prior to the contribution of the Discovery Health network to OWN at its launch, the Company had recognized $104 million or 100% of OWN’s net losses. During the three months ended March 31, 2012, accumulated operating losses at OWN exceeded the equity contributed to OWN, and Discovery began again to record 100% of OWN’s net losses. Although OWN has become profitable, the Company will record 100% of any net losses resulting

16

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



from OWN's operations as long as Discovery has provided all funding to OWN and OWN’s accumulated losses continue to exceed the equity contributed. All of OWN's future net income will initially be recorded by the Company until the Company recovers losses absorbed in excess of the Company's equity ownership interest.
The carrying value of the Company’s investment in OWN of $420 million and $449 million as of September 30, 2014 and December 31, 2013, respectively, includes the Company's note receivable and accumulated investment losses. There is a possibility that the results of OWN’s future operations will fall below the long-term projections. The Company monitors the financial results of OWN along with other relevant business information to assess the recoverability of the OWN note receivable. No impairment was recorded during the nine months ended September 30, 2014.
Harpo has the right to require the Company to purchase all or part of Harpo’s interest in OWN at fair market value up to a maximum put amount every two and a half years commencing January 1, 2016. The maximum put amount ranges from $100 million on the first put exercise date up to a cumulative cap of $400 million on the fourth put exercise date. The Company has not recorded amounts for the put right because the fair value of this put right was zero as of September 30, 2014 and December 31, 2013.
Hub Television Networks LLC
Prior to September 23, 2014, the Hub Network was a VIE because the the initial equity was not sufficient to fund the Hub Network's activities without additional subordinated financial support in the form of a funding commitment. Discovery and Hasbro shared equally in voting control and jointly consented to decisions about programming and marketing strategy and thereby jointly directed the activities of the Hub Network that most significantly impacted its economic performance. Accordingly, the Company determined that it was not the primary beneficiary of the Hub Network and accounted for its investment in the Hub Network using the equity method.
On September 23, 2014, the Company acquired 10% of Hasbro’s ownership in the Hub Network for $64 million. This was a reconsideration event, requiring a reassessment of the Hub Network as a VIE. As of the reconsideration date, the Hub Network is not expected to require additional subordinated financial support to fund its ongoing activities. Accordingly, the Hub Network is no longer considered to be a VIE. Since the transaction provided Discovery with control over the voting rights and operating activities of the Hub Network, the Company consolidated the Hub Network as of the acquisition date (see Note 2).
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 techniques in which one or more significant inputs are unobservable.

17

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



The tables below present assets and liabilities measured at fair value on a recurring basis (in millions).
 
 
 
 
September 30, 2014
Category
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
Mutual funds
 
Prepaid expenses and other current assets
 
$
142

 
$

 
$

 
$
142

Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Prepaid expenses and other current assets
 

 
9

 

 
9

Foreign exchange
 
Other noncurrent assets
 

 
7

 

 
7

Total
 
 
 
$
142

 
$
16

 
$

 
$
158

Liabilities:
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
142

 
$

 
$

 
$
142

Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
1

 

 
1

Interest rate
 
Accrued liabilities
 

 
10

 

 
10

TF1 put right
 
Accrued liabilities
 

 

 
4

 
4

Total
 
 
 
$
142

 
$
11

 
$
4

 
$
157

 
 
 
 
December 31, 2013
Category
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
Mutual funds
 
Prepaid expenses and other current assets
 
$
129

 
$

 
$

 
$
129

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
Common stock
 
Other noncurrent assets
 
4

 

 

 
4

Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Prepaid expenses and other current assets
 

 
4

 

 
4

Foreign exchange
 
Other noncurrent assets
 

 
9

 

 
9

Total
 
 
 
$
133

 
$
13

 
$

 
$
146

Liabilities:
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
129

 
$

 
$

 
$
129

Derivatives:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
1

 

 
1

TF1 put right
 
Accrued liabilities
 

 

 
20

 
20

Total
 
 
 
$
129

 
$
1

 
$
20

 
$
150

Trading securities are comprised of investments in mutual funds held in a separate trust which are owned as part of the Company’s 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 equity investments in highly liquid instruments. 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.
Derivative financial instruments are comprised of foreign exchange and interest rate contracts used by the Company to modify its exposure to market risks from foreign exchange rates and interest rates. The fair value of Level 2 derivative financial instruments was determined using a market-based approach.

18

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



As of September 30, 2014, TF1 had the conditional right to require the Company to purchase its remaining shares in Eurosport France at various dates should Discovery complete its planned acquisition of a controlling interest in Eurosport France. Previously, TF1 had the conditional right to require the Company to purchase its remaining shares in Eurosport, inclusive of Eurosport France. Following the consolidation of Eurosport, excluding Eurosport France, TF1 retained a conditional right to require Discovery to purchase its remaining shares in Eurosport and a right to put a portion of its interest in Eurosport France to Discovery. The option on Eurosport, the value of which is embedded in the noncontrolling interest, has resulted in the classification of the noncontrolling interest in Eurosport as a component of redeemable equity (see Note 8). The separate written put for Eurosport France does not qualify for equity classification and is reported at fair value and subsequently marked to fair value through earnings regardless of associated contingencies. The fair value measurement as of September 30, 2014 of the TF1 put on Eurosport France of $4 million was determined through the use of a Monte Carlo simulation model. The Monte Carlo model simulates the various sources of uncertainty impacting the value of a financial instrument and uses those simulations to develop an estimated fair value for the instrument. The valuation methodology for the TF1 put for Eurosport France is based on unobservable estimates and judgments, and therefore represents a Level 3 fair value measurement. (See Note 2.)
In addition to the financial instruments listed in the tables above, the Company holds other financial instruments, including cash deposits, accounts receivable, accounts payable, commercial paper, borrowings under the revolving credit facility, capital leases and senior notes. The carrying values for such financial instruments, other than borrowings under the revolving credit facility and the senior notes, each approximated their fair values. The estimated fair value of the Company’s outstanding borrowings under the revolving credit facility and senior notes using quoted prices from over the counter markets, considered Level 2 inputs, was $7.4 billion and $6.6 billion as of September 30, 2014 and December 31, 2013, respectively.
NOTE 5. CONTENT RIGHTS
The table below presents the components of content rights (in millions). 
 
 
September 30, 2014
 
December 31, 2013
Produced content rights:
 
 
 
 
Completed
 
$
3,509

 
$
3,566

In-production
 
398

 
334

Coproduced content rights:
 
 
 
 
Completed
 
671

 
637

In-production
 
89

 
84

Licensed content rights:
 
 
 
 
Acquired
 
1,054

 
880

Prepaid
 
101

 
48

Content rights, at cost
 
5,822

 
5,549

Accumulated amortization
 
(3,415
)
 
(3,389
)
Total content rights, net
 
2,407

 
2,160

Current portion
 
(379
)
 
(277
)
Noncurrent portion
 
$
2,028

 
$
1,883

Content expense, which consists of content amortization, impairments and other production charges, is included in costs of revenues on the consolidated statements of operations.

19

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Content expense consisted of the following (in millions).
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Content amortization
 
$
372

 
$
301

 
$
1,061

 
$
831

Other production charges
 
41

 
24

 
108

 
71

Content impairments
 
6

 
7

 
22

 
19

Total content expense
 
$
419

 
$
332

 
$
1,191

 
$
921

NOTE 6. DEBT
The table below presents the components of outstanding debt (in millions).
 
 
September 30, 2014
 
December 31, 2013
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

 
650

2.375% Senior Notes, euro denominated, annual interest, due March 2022
 
380

 

3.30% Senior Notes, semi-annual interest, due May 2022
 
500

 
500

3.25% Senior Notes, semi-annual interest, due April 2023
 
350

 
350

6.35% Senior Notes, semi-annual interest, due June 2040
 
850

 
850

4.95% Senior Notes, semi-annual interest, due May 2042
 
500

 
500

4.875% Senior Notes, semi-annual interest, due April 2043
 
850

 
850

Revolving credit facility
 
145

 

Capital lease obligations
 
163

 
165

Commercial paper
 
126

 

Total debt
 
7,164

 
6,515

Unamortized discount
 
(16
)
 
(16
)
Debt, net
 
7,148

 
6,499

Current portion of debt
 
(995
)
 
(17
)
Noncurrent portion of debt
 
$
6,153

 
$
6,482

Senior Notes
On March 7, 2014, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, issued €300 million principal amount ($417 million, at issuance based on the exchange rate of $1.39 per euro at March 7, 2014) of 2.375% Senior Notes due March 7, 2022 (the "2014 Notes"). The proceeds received by DCL from the offering were net of a $3 million issuance discount and $2 million of deferred financing costs. The current balance reflects changes in exchange rates; there have been no other changes to the balance.
DCL has the option to redeem some or all of the 2014 Notes at any time prior to their maturity by paying a make-whole premium plus accrued and unpaid interest, if any, through the date of repurchase. Interest on the 2014 Notes is payable annually on March 7 of each year. The 2014 Notes are unsecured and rank equally in right of payment with all of DCL's other unsecured senior indebtedness. All of DCL's outstanding senior notes are fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Discovery and contain certain nonfinancial covenants, events of default and other customary provisions. The Company and DCL were in compliance with all covenants and customary provisions under the Senior Notes, and there were no events of default as of September 30, 2014.
The 2014 Notes are denominated in euro and expose Discovery to fluctuations in foreign exchange rates in that currency. Discovery has reported the change in remeasurement for these 2014 Notes as a component of other income, net in the consolidated statements of operations.

20

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Revolving Credit Facilities
On June 20, 2014, DCL revised its $1.0 billion revolving credit facility to allow DCL and certain designated foreign subsidiaries of DCL to borrow up to $1.5 billion, including a $750 million sublimit for multi-currency borrowings, a $100 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swing line loans. Borrowing capacity under this agreement is reduced by the outstanding borrowings under the commercial paper program discussed below. DCL also has the ability to request an increase of the revolving credit facility up to an aggregate additional $1.0 billion, upon the satisfaction of certain conditions. The revolving credit facility agreement provides for a maturity date of June 20, 2019. The Company had outstanding borrowings of $145 million under the revolving credit facility as of September 30, 2014 at an effective interest rate of 1.25%. There were no amounts borrowed under the revolving credit facility as of December 31, 2013. The interest rate on borrowings under the revolving credit facility is variable based on DCL's then-current credit ratings. For dollar-denominated borrowings, the interest rate is based, at the Company's option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margins are 1.10% and 0.10%, respectively, per annum for adjusted LIBOR and alternate base rate borrowings. A monthly facility fee is charged based on the total capacity of the facility, and interest is charged based on the amount borrowed on the facility. The current facility fee rate is 0.15% per annum and subject to change based on DCL's then-current credit ratings. All obligations of DCL and the other borrowers under the revolving credit facility are unsecured and are fully and unconditionally guaranteed by Discovery.
The credit agreement governing the revolving credit facility contains customary representations, warranties and events of default, as well as affirmative and negative covenants. As of September 30, 2014, the Company, DCL and the other borrowers were in compliance with all covenants, and there were no events of default under the revolving credit facility.
Commercial Paper
On May 22, 2014, the Company entered into a commercial paper program. The commercial paper issued under this program is supported by the revolving credit facility described above. Outstanding commercial paper borrowings were $126 million as of September 30, 2014 and had a weighted average interest rate of approximately 0.3% and maturities of less than 90 days.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company may use derivative financial instruments to modify its exposure to market risks from changes in foreign exchange rates and interest rates. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.
During the nine months ended September 30, 2014 and 2013, the Company designated foreign currency forward contracts to hedge anticipated third-party revenue and exposures arising from inter-company licensing agreements as cash flow hedges. The Company also designated interest rate contracts used to hedge the pricing for certain senior notes as cash flow hedges. Gains and losses on the effective portion of designated cash flow hedges are initially recorded in accumulated other comprehensive (loss) income on the consolidated balance sheet and reclassified to the statements of operations when the hedged item is recognized.
During the nine months ended September 30, 2013, the Company acquired foreign currency forward contracts in its business combinations that did not qualify for hedge accounting. During the nine months ended September 30, 2013, the Company entered into foreign exchange contracts in connection with the planned acquisition of SBS Nordic (see Note 2). These derivatives, which economically hedged the Company's exposure to fluctuations in certain foreign currency exchange rates, did not qualify for hedge accounting. There were no unsettled foreign exchange contracts held by the Company in connection with potential business combinations as of September 30, 2014 and December 31, 2013. Realized and unrealized gains and losses on foreign currency forward contracts that do not qualify for hedge accounting are reflected in other income, net on the consolidated statements of operations.
As of December 31, 2013, TF1 had the conditional right to require the Company to purchase its remaining shares in Eurosport. On May 30, 2014, the Company acquired a controlling interest in Eurosport, excluding Eurosport France, and the put right applicable to the acquired business became a component of redeemable equity recorded at fair value on the consolidated balance sheet as of September 30, 2014 (see Note 8). The value of the written put for Eurosport France is not included in noncontrolling interest and does not qualify for equity classification. It is a free-standing financial instrument reported as a fair value liability and subsequently marked to fair value through earnings regardless of associated contingencies (see Note 4).
The Company records all unsettled derivative contracts on the consolidated balance sheet at fair value (see Note 4); derivatives in an asset position are classified as assets, and derivatives in a liability position are classified as liabilities. The

21

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Company's master netting agreements allow the Company to settle derivative contracts denominated in the same currency with a single counterparty on the same day on a net basis. There were no amounts eligible to be offset under master netting agreements as of September 30, 2014 and December 31, 2013.
The following table summarizes the notional amount and fair value of the Company's derivative positions (in millions).
 
 
 
 
September 30, 2014
 
December 31, 2013
 
 
Balance Sheet Location
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
Foreign exchange
 
Prepaid expenses and other current assets
 
$
247

 
$
9

 
$
16

 
$
4

Foreign exchange
 
Other noncurrent assets
 
$
98

 
$
7

 
$
36

 
$
9

Foreign exchange
 
Accrued liabilities
 
$
41

 
$
1

 
$

 
$

Interest rate
 
Accrued liabilities
 
$
425

 
$
10

 
$

 
$

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
Foreign exchange
 
Prepaid expenses and other current assets
 
$
4

 
$

 
$

 
$

Foreign exchange
 
Accrued liabilities
 
$
3

 
$

 
$
4

 
$
1

Foreign exchange
 
Other noncurrent liabilities
 
$

 
$

 
$
3

 
$

TF1 put right
 
Accrued liabilities
 
$
76

 
$
4

 
$
574

 
$
20

The following table presents the pretax impact of derivatives designated as cash flow hedges on income and other comprehensive (loss) income (in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Gains (losses) recognized in accumulated other comprehensive (loss) income
 
 
 
 
 
 
 
 
Foreign exchange
 
$
7

 
$
(1
)
 
$
3

 
$
5

Interest rate
 
$
(3
)
 
$

 
$
(10
)
 
$

(Losses) gains reclassified into income from accumulated other comprehensive (loss) income (effective portion)
 
 
 
 
 
 
 
 
Foreign exchange - distribution revenue
 
$
(1
)
 
$

 
$
(2
)
 
$

Foreign exchange - other income, net
 
$
1

 
$
1

 
$
2

 
$
1

The following table presents the pretax gains (losses) on derivatives not designated as hedges and the TF1 put recognized in other income, net in the consolidated statements of operations (in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Foreign exchange derivatives
 
$
1

 
$

 
$
1

 
$
(56
)
TF1 put right
 

 

 
(7
)
 

Total
 
$
1

 
$

 
$
(6
)
 
$
(56
)
NOTE 8. REDEEMABLE NONCONTROLLING INTERESTS
In connection with the acquisition of a controlling interest in the Hub Network on September 23, 2014, the Company recognized $238 million for Hasbro's noncontrolling interest in the Hub Network. Hasbro has the right to put the entirety of its remaining 40% non-controlling interest to the Company for one year after December 31, 2021. Embedded in the redeemable noncontrolling interest is a Discovery call right exercisable for one year after December 31, 2021. Upon the exercise of the put or call options, the price to be paid for the interest being purchased is generally a function of the then fair market value of the interest, to which certain discounts and floor values may apply in specified situations depending upon the party exercising the put or call, the basis for the exercise of the put or call, and the determined fair market value of the network at the time of

22

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



exercise. As Hasbro's put right is outside the control of the Company, Hasbro's 40% noncontrolling interest is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet (see Note 2).
In connection with the acquisition of a controlling interest in Eurosport on May 30, 2014, the Company recognized $558 million for TF1's noncontrolling interest in Eurosport. TF1 has the right to put the entirety of its remaining 49% non-controlling interest to the Company during two 90-day windows in the two and a half years after May 30, 2014. If the put right is exercised during the first 90-day window beginning July 1, 2015, it has a floor value equal to the fair value per share of Eurosport on May 30, 2014. If the put right is exercised during the second 90-day window beginning July 1, 2016, it will be priced at the then-current fair value per share of Eurosport, or as may be agreed between the Company and TF1. As TF1's put right is outside the control of the Company, TF1's 49% noncontrolling interest is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet. (See Note 2.)
In connection with the acquisition of SBS Nordic on April 9, 2013, the Company recognized $6 million for the fair value of a noncontrolling interest in one of its Danish subsidiaries (see Note 2). The noncontrolling interest holder had a conditional right from November 20, 2014 through May 31, 2015 to put its 20% ownership interest to SBS. On September 16, 2014, the Company entered into an agreement with the noncontrolling interest holder to purchase their remaining 20% ownership interest. As the noncontrolling interest is contractually payable, it has been reclassified to accrued liabilities in the consolidated balance sheet as of September 30, 2014. The difference between the consideration transferred and the recorded value of the previous redeemable noncontrolling interest was recorded to additional paid-in capital.
In connection with the acquisition of a controlling interest in Discovery Japan on January 10, 2013, the Company recognized $35 million for the fair value of J:COM's noncontrolling interest (see Note 2). The terms of the agreement provide J:COM with a right to put all, but not less than all, of its 20% noncontrolling interest to Discovery at any time for cash. For the first four years, the redemption value is the January 10, 2013 fair value denominated in Japanese yen; thereafter, the redemption value is the greater of the then-current fair value or the January 10, 2013 fair value denominated in Japanese yen.
Redeemable noncontrolling interests reflected as of the balance sheet date are the greater of the noncontrolling interest balances adjusted for comprehensive income items and distributions or the redemption values remeasured at the period end foreign exchange rates (i.e., the "floor"). Adjustments to the carrying amount of redeemable noncontrolling interests to redemption value as a result of changes in exchange rates are reflected in currency translation adjustments, a component of other comprehensive (loss) income; however, such currency translation adjustments to redemption value are allocated to Discovery stockholders only. Redeemable noncontrolling interest adjustments of redemption value to the floor are reflected in retained earnings. The adjustment of redemption value to the floor that reflects a redemption in excess of fair value is included as an adjustment to income from continuing operations available to Discovery Communications, Inc. stockholders in the calculation of earnings per share. None of the current period adjustments reflect a redemption in excess of fair value. (See Note 12.)
The table below presents the reconciliation of changes in redeemable noncontrolling interests (in millions). 
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
Beginning balance
 
$
36

 
$

Initial fair value of redeemable noncontrolling interests of acquired businesses
 
796

 
35

Purchase of subsidiary shares at fair value
 
(6
)
 

Cash distributions to redeemable noncontrolling interests
 
(2
)
 

Comprehensive income (loss) adjustments:
 
 
 
 
Net income attributable to redeemable noncontrolling interests
 
11

 

Other comprehensive loss attributable to redeemable noncontrolling interests
 
(26
)
 
(1
)
Currency translation on redemption values
 
(40
)
 
(3
)
Retained earnings adjustments:
 
 
 
 
Adjustments to redemption value
 
16

 
1

Ending balance
 
$
785

 
$
32


23

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



NOTE 9. EQUITY
Common Stock Repurchase Program
Under the Company's stock repurchase program, management is authorized to purchase shares of the Company's common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices or pursuant to one or more accelerated stock repurchase agreements or other derivative arrangements as permitted by securities laws and other legal requirements, and subject to stock price, business and market conditions and other factors. The total authorization under the stock repurchase program is $5.5 billion. As of September 30, 2014, the Company had remaining authorization of $1.0 billion for future repurchases under the stock repurchase program, which will expire on February 3, 2016.
Repurchased common stock is recorded in treasury stock on the consolidated balance sheet. The stock split in the form of a share dividend was not applied to the Company's treasury shares (see Note 1). Accordingly, the number of common shares repurchased under the common stock repurchase program has not been retroactively adjusted to give effect to the stock split.
All repurchases during the three and nine months ended September 30, 2014 and 2013 were made through open market transactions and were funded using cash on hand. As of September 30, 2014, the Company had repurchased over the life of the program 2.8 million and 83.4 million shares of Series A and Series C common stock for the aggregate purchase price of $171 million and $4.3 billion, respectively.
The table below presents a summary of stock repurchases (in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Series A Common Stock:
 
 
 
 
 
 
 
 
Shares repurchased
 

 
0.8

 

 
0.8

Purchase price
 
$

 
$
62

 
$

 
$
62

Series C Common Stock:
 
 
 
 
 
 
 
 
Shares repurchased
 
3.3
 
5.2

 
13.4
 
9.0

Purchase price
 
$
188

 
$
386

 
$
957

 
$
651

Total shares repurchased
 
3.3

 
6.0

 
13.4
 
9.8
Total purchase price
 
$
188

 
$
448

 
$
957

 
$
713

Preferred Stock Conversion and Repurchase
The Company has an agreement with Advance/Newhouse Programming Partnership (“Advance/Newhouse”) to repurchase, on a quarterly basis, a number of shares of Series C convertible preferred stock convertible into a number of shares of Series C common stock equal to 3/7 of all shares of Series C common stock purchased under the Company’s stock repurchase program during the then most recently completed fiscal quarter. The price paid per share is calculated as 99% of the average price paid for the Series C common shares repurchased by the Company during the applicable fiscal quarter multiplied by the Series C conversion rate. The Series C conversion rate changed from one to two upon the August 6, 2014 effective date of the stock split in the form of a share dividend (see Note 1). The Advance/Newhouse repurchases are made outside of the Company’s publicly announced stock repurchase program. During the three months ended September 30, 2014, the Company retired 1.5 million shares of its Series C convertible preferred stock under the preferred stock conversion and repurchase arrangement for an aggregate purchase price of $110 million. Based on the number of shares of Series C common stock purchased during the three months ended September 30, 2014, the Company expects Advance/Newhouse to effectively convert and sell to the Company 1.0 million shares of its Series C convertible preferred stock for an aggregate purchase price of $80 million on or about November 6, 2014. The repurchase transactions are recorded as a decrease of par value of preferred stock and retained earnings upon settlement using cash on hand.
On April 5, 2013, the Company repurchased and retired 4 million shares of its Series C convertible preferred stock from Advance/Newhouse for an aggregate purchase price of $256 million, which was recorded as a decrease of par value of preferred stock and retained earnings. The repurchase was made outside of the Company's publicly announced stock repurchase program, using cash on hand.
Common Stock
On February 13, 2014, John C. Malone, a member of Discovery’s Board of Directors, entered into an agreement granting David Zaslav, the Company’s President and Chief Executive Officer, certain voting and purchase rights with respect to the approximately 5.9 million shares of the Company’s Series B common stock owned by Dr. Malone. The agreement gives Mr.

24

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Zaslav the right to vote the Series B shares if Dr. Malone is not otherwise voting or directing the vote of those shares. The agreement also provides that if Dr. Malone proposes to sell the Series B shares, Mr. Zaslav will have the first right to negotiate for the purchase of the shares. If that negotiation is not successful and Dr. Malone proposed to sell the Series B shares to a third party, Mr. Zaslav will have the exclusive right to match that offer. The rights granted under the agreement will remain in effect for as long as Mr. Zaslav is either employed as the principal executive officer of the Company or serving on its Board of Directors.
Other Comprehensive (Loss) Income
The table below presents the tax effects related to each component of other comprehensive (loss) income and reclassifications made in the consolidated statements of operations (in millions).
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 

Pretax
 
Tax Benefit
(Provision)
 

Net-of-tax
 

Pretax
 
Tax Benefit (Provision)
 

Net-of-tax
Currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses) gains
$
(195
)
 
$
8

 
$
(187
)
 
$
117

 
$
(13
)
 
$
104

Derivative and market value adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains
4

 
(1
)
 
3

 
1

 

 
1

Reclassifications to distribution revenue
1

 

 
1

 

 

 

Reclassifications to other income, net
(1
)
 

 
(1
)
 
(1
)
 

 
(1
)
Other comprehensive (loss) income
$
(191
)
 
$
7

 
$
(184
)
 
$
117

 
$
(13
)
 
$
104

 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 

Pretax
 
Tax Benefit
(Provision)
 

Net-of-tax
 

Pretax
 
Tax
Benefit (Provision)
 

Net-of-tax
Currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses) gains
$
(211
)
 
$
(1
)
 
$
(212
)
 
$
3

 
$

 
$
3

Reclassifications to other income, net
(7
)
 

 
(7
)
 
(9
)
 
3

 
(6
)
Derivative and market value adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized (losses) gains
(5
)
 
2

 
(3
)
 
10

 
(3
)
 
7

Reclassifications to distribution revenue
2

 

 
2

 

 

 

Reclassifications to loss on disposition
(5
)
 
2

 
(3
)
 

 

 

Reclassifications to other income, net
(2
)
 

 
(2
)
 
(1
)
 

 
(1
)
Other comprehensive (loss) income
$
(228
)
 
$
3

 
$
(225
)
 
$
3

 
$

 
$
3



25

DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Accumulated Other Comprehensive (Loss) Income
The table below presents the changes in the components of accumulated other comprehensive (loss) income, net of taxes (in millions).
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
Currency Translation Adjustments
 
Derivative
and Market
Value
Adjustments
 
Accumulated
Other
Comprehensive
Loss
 
Currency Translation Adjustments
 
Derivative
and Market
Value
Adjustments
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
$
(41
)
 
$
3

 
$
(38
)
 
$
(106
)
 
$
10

 
$
(96
)
Other comprehensive (loss) income before reclassifications
(187
)
 
3

 
(184
)
 
104

 
1

 
105

Reclassifications from accumulated other comprehensive (loss) income to net income