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, 2015
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 26, 2015:
Series A Common Stock, par value $0.01 per share | 149,505,563 | |
Series B Common Stock, par value $0.01 per share | 6,537,977 | |
Series C Common Stock, par value $0.01 per share | 274,439,399 | |
DISCOVERY COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
Page | |
Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014. | |
Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014. | |
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014. | |
Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014. | |
Consolidated Statements of Equity for the three and nine months ended September 30, 2015 and 2014. | |
3
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements.
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
September 30, 2015 | December 31, 2014 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 262 | $ | 367 | ||||
Receivables, net | 1,556 | 1,433 | ||||||
Content rights, net | 341 | 329 | ||||||
Deferred income taxes | 80 | 87 | ||||||
Income taxes receivable and prepaid income taxes | 153 | 17 | ||||||
Prepaid expenses and other current assets | 327 | 258 | ||||||
Total current assets | 2,719 | 2,491 | ||||||
Noncurrent content rights, net | 2,067 | 1,973 | ||||||
Property and equipment, net | 500 | 554 | ||||||
Goodwill | 8,180 | 8,236 | ||||||
Intangible assets, net | 1,772 | 1,971 | ||||||
Equity method investments | 562 | 644 | ||||||
Other noncurrent assets | 119 | 101 | ||||||
Total assets | $ | 15,919 | $ | 15,970 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 249 | $ | 225 | ||||
Accrued liabilities | 1,506 | 1,094 | ||||||
Deferred revenues | 237 | 178 | ||||||
Current portion of debt | 116 | 1,107 | ||||||
Total current liabilities | 2,108 | 2,604 | ||||||
Noncurrent portion of debt | 6,941 | 6,002 | ||||||
Deferred income taxes | 589 | 588 | ||||||
Other noncurrent liabilities | 395 | 425 | ||||||
Total liabilities | 10,033 | 9,619 | ||||||
Commitments and contingencies (Note 15) | ||||||||
Redeemable noncontrolling interests | 240 | 747 | ||||||
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; 38 and 42 shares issued | 1 | 1 | ||||||
Series A common stock: $0.01 par value; 1,700 shares authorized; 152 and 151 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; 376 and 375 shares issued | 4 | 4 | ||||||
Additional paid-in capital | 6,935 | 6,917 | ||||||
Treasury stock, at cost | (5,086 | ) | (4,763 | ) | ||||
Retained earnings | 4,297 | 3,809 | ||||||
Accumulated other comprehensive loss | (508 | ) | (368 | ) | ||||
Total Discovery Communications, Inc. stockholders’ equity | 5,645 | 5,602 | ||||||
Noncontrolling interests | 1 | 2 | ||||||
Total equity | 5,646 | 5,604 | ||||||
Total liabilities and equity | $ | 15,919 | $ | 15,970 | ||||
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, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues: | ||||||||||||||||
Distribution | $ | 776 | $ | 748 | $ | 2,309 | $ | 2,097 | ||||||||
Advertising | 699 | 725 | 2,200 | 2,258 | ||||||||||||
Other | 82 | 95 | 239 | 234 | ||||||||||||
Total revenues | 1,557 | 1,568 | 4,748 | 4,589 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Costs of revenues, excluding depreciation and amortization | 574 | 529 | 1,703 | 1,526 | ||||||||||||
Selling, general and administrative | 394 | 432 | 1,224 | 1,247 | ||||||||||||
Depreciation and amortization | 80 | 85 | 243 | 243 | ||||||||||||
Restructuring and other charges | 4 | 11 | 37 | 19 | ||||||||||||
Gain on disposition | — | — | (3 | ) | (31 | ) | ||||||||||
Total costs and expenses | 1,052 | 1,057 | 3,204 | 3,004 | ||||||||||||
Operating income | 505 | 511 | 1,544 | 1,585 | ||||||||||||
Interest expense | (82 | ) | (83 | ) | (248 | ) | (247 | ) | ||||||||
(Loss) income from equity investees, net | (10 | ) | 13 | (2 | ) | 34 | ||||||||||
Other income (expense), net | — | 1 | (78 | ) | 11 | |||||||||||
Income before income taxes | 413 | 442 | 1,216 | 1,383 | ||||||||||||
Provision for income taxes | (130 | ) | (155 | ) | (394 | ) | (481 | ) | ||||||||
Net income | 283 | 287 | 822 | 902 | ||||||||||||
Net income attributable to noncontrolling interests | — | — | — | (2 | ) | |||||||||||
Net income attributable to redeemable noncontrolling interests | (4 | ) | (7 | ) | (7 | ) | (11 | ) | ||||||||
Net income available to Discovery Communications, Inc. | $ | 279 | $ | 280 | $ | 815 | $ | 889 | ||||||||
Net income per share available to Discovery Communications, Inc. Series A, B and C common stockholders: | ||||||||||||||||
Basic | $ | 0.43 | $ | 0.41 | $ | 1.25 | $ | 1.29 | ||||||||
Diluted | $ | 0.43 | $ | 0.41 | $ | 1.24 | $ | 1.28 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 432 | 449 | 434 | 458 | ||||||||||||
Diluted | 653 | 682 | 658 | 693 | ||||||||||||
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, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income | $ | 283 | $ | 287 | $ | 822 | $ | 902 | ||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Currency translation adjustments | (46 | ) | (187 | ) | (162 | ) | (219 | ) | ||||||||
Derivative and market value adjustments | 1 | 3 | (1 | ) | (6 | ) | ||||||||||
Comprehensive income | 238 | 103 | 659 | 677 | ||||||||||||
Comprehensive income attributable to noncontrolling interests | — | — | — | (2 | ) | |||||||||||
Comprehensive (income) loss attributable to redeemable noncontrolling interests | (7 | ) | 20 | 16 | 15 | |||||||||||
Comprehensive income attributable to Discovery Communications, Inc. | $ | 231 | $ | 123 | $ | 675 | $ | 690 | ||||||||
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, | |||||||
2015 | 2014 | ||||||
Operating Activities | |||||||
Net income | $ | 822 | $ | 902 | |||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||
Equity-based compensation expense | 16 | 66 | |||||
Depreciation and amortization | 243 | 243 | |||||
Content amortization and impairment expense | 1,243 | 1,083 | |||||
Gain on disposition | (3 | ) | (31 | ) | |||
Remeasurement gain on previously held equity interest | (2 | ) | (29 | ) | |||
Equity in earnings of investee companies, net of cash distributions | 9 | (15 | ) | ||||
Deferred income taxes | 4 | (124 | ) | ||||
Realized loss from derivative instruments | 11 | — | |||||
Other, net | 29 | 35 | |||||
Changes in operating assets and liabilities, net of business combinations: | |||||||
Receivables, net | (133 | ) | 3 | ||||
Content rights, net | (1,386 | ) | (1,269 | ) | |||
Accounts payable and accrued liabilities | (14 | ) | 92 | ||||
Equity-based compensation liabilities | (25 | ) | (81 | ) | |||
Income taxes receivable and prepaid income taxes | (136 | ) | 53 | ||||
Other, net | (26 | ) | (35 | ) | |||
Cash provided by operating activities | 652 | 893 | |||||
Investing Activities | |||||||
Purchases of property and equipment | (76 | ) | (85 | ) | |||
Business acquisitions, net of cash acquired | (24 | ) | (369 | ) | |||
Payments for derivative instruments | (11 | ) | — | ||||
Proceeds from disposition, net of cash disposed | 61 | 45 | |||||
Distributions from equity method investees | 67 | 58 | |||||
Investments in equity method investees, net | (26 | ) | (174 | ) | |||
Investments in cost method investments | (16 | ) | (3 | ) | |||
Other investing activities, net | (1 | ) | (1 | ) | |||
Cash used in investing activities | (26 | ) | (529 | ) | |||
Financing Activities | |||||||
Commercial paper (repayments) borrowings, net | (140 | ) | 126 | ||||
Borrowings under revolving credit facility | 222 | 585 | |||||
Principal repayments of revolving credit facility | (179 | ) | (440 | ) | |||
Borrowings from debt, net of discount | 936 | 415 | |||||
Principal repayments of debt | (849 | ) | — | ||||
Principal repayments of capital lease obligations | (22 | ) | (13 | ) | |||
Repurchases of stock | (576 | ) | (1,067 | ) | |||
Cash distributions to redeemable noncontrolling interests | (38 | ) | (2 | ) | |||
Equity-based plan (payments) proceeds, net | (9 | ) | 39 | ||||
Hedge of borrowings from debt instruments | (29 | ) | — | ||||
Other financing activities, net | (15 | ) | (12 | ) | |||
Cash used in financing activities | (699 | ) | (369 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (32 | ) | (27 | ) | |||
Net change in cash and cash equivalents | (105 | ) | (32 | ) | |||
Cash and cash equivalents, beginning of period | 367 | 408 | |||||
Cash and cash equivalents, end of period | $ | 262 | $ | 376 | |||
The accompanying notes are an integral part of these consolidated financial statements.
7
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | |||||||||||||||||||||||
Discovery Stockholders | Noncontrolling Interests | Total Equity | Discovery Stockholders | Noncontrolling Interests | Total Equity | |||||||||||||||||||
Beginning balance | $ | 5,485 | $ | 1 | $ | 5,486 | $ | 6,031 | $ | 3 | $ | 6,034 | ||||||||||||
Comprehensive income | 231 | — | 231 | 123 | — | 123 | ||||||||||||||||||
Repurchases of stock | (52 | ) | — | (52 | ) | (298 | ) | — | (298 | ) | ||||||||||||||
Equity-based compensation | 7 | — | 7 | 12 | — | 12 | ||||||||||||||||||
Excess tax benefits from equity-based compensation | 1 | — | 1 | 9 | — | 9 | ||||||||||||||||||
Tax settlements associated with equity-based compensation | (1 | ) | — | (1 | ) | — | — | — | ||||||||||||||||
Issuance of common stock for equity-based plans | 2 | — | 2 | 17 | — | 17 | ||||||||||||||||||
Other adjustments for equity-based compensation plans | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||
Redeemable noncontrolling interest adjustments to redemption value | (28 | ) | — | (28 | ) | (15 | ) | — | (15 | ) | ||||||||||||||
Cash distributions to noncontrolling interests | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||
Purchase of redeemable noncontrolling interest | — | — | — | 5 | — | 5 | ||||||||||||||||||
Ending balance | $ | 5,645 | $ | 1 | $ | 5,646 | $ | 5,883 | $ | 2 | $ | 5,885 | ||||||||||||
Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | |||||||||||||||||||||||
Discovery Stockholders | Noncontrolling Interests | Total Equity | Discovery Stockholders | Noncontrolling Interests | Total Equity | |||||||||||||||||||
Beginning balance | $ | 5,602 | $ | 2 | $ | 5,604 | $ | 6,196 | $ | 1 | $ | 6,197 | ||||||||||||
Comprehensive income | 675 | — | 675 | 690 | 2 | 692 | ||||||||||||||||||
Repurchases of stock | (576 | ) | — | (576 | ) | (1,067 | ) | — | (1,067 | ) | ||||||||||||||
Equity-based compensation | 27 | — | 27 | 39 | — | 39 | ||||||||||||||||||
Excess tax benefits from equity-based compensation | 6 | — | 6 | 30 | — | 30 | ||||||||||||||||||
Tax settlements associated with equity-based compensation | (27 | ) | — | (27 | ) | (27 | ) | — | (27 | ) | ||||||||||||||
Issuance of common stock for equity-based plans | 12 | — | 12 | 36 | — | 36 | ||||||||||||||||||
Other adjustments for equity-based compensation plans | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||
Redeemable noncontrolling interest adjustments to redemption value | (74 | ) | — | (74 | ) | (16 | ) | — | (16 | ) | ||||||||||||||
Noncontrolling interests of disposed businesses | — | (1 | ) | (1 | ) | — | — | — | ||||||||||||||||
Cash distributions to noncontrolling interests | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||
Purchase of redeemable noncontrolling interest | — | — | — | 5 | — | 5 | ||||||||||||||||||
Other adjustments to stockholders' equity | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||
Ending balance | $ | 5,645 | $ | 1 | $ | 5,646 | $ | 5,883 | $ | 2 | $ | 5,885 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
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 pay-TV, free-to-air and broadcast television networks, websites, digital distribution arrangements and content licensing agreements. The Company also develops and sells curriculum-based education products and services and operates production studios. The Company classifies its operations in two reportable segments: U.S. Networks, consisting principally of domestic television networks and websites, and International Networks, consisting principally of international television networks and websites; and two combined operating segments referred to as Education and Other, consisting principally of curriculum-based product and service offerings and production studios. 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. For each non-wholly owned subsidiary, the Company evaluates its ownership and other interests to determine whether it should consolidate the entity or account for its ownership interest as an investment. As part of its evaluation, the Company makes judgments in determining whether the entity is a variable interest entity ("VIE") and, if so, whether it is the primary beneficiary of the VIE and is thus required to consolidate the entity. (See Note 3.) Inter-company accounts and transactions between consolidated entities have been eliminated in consolidation.
Recasting of Certain Prior Period Information
The Company’s reportable segments are determined based on (i) financial information reviewed by its chief operating decision maker (“CODM”), the Chief Executive Officer ("CEO"), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions. As of December 31, 2014, the Company changed its organizational structure and reorganized its production studios into an operating segment. Previously, components of this segment were part of the U.S. Networks and International Networks segments. The Company has recast amounts for the three and nine months ended September 30, 2014 and total assets by segment as of December 31, 2014 to conform to the current structure for internally managing and monitoring segment performance. The segment does not meet the quantitative thresholds of a separate reportable segment and has been combined with the Education operating segment, which also does not meet the quantitative thresholds of a separate reportable segment. The combined results are referred to as Education and Other for financial statement presentation in all periods as a reconciling item to consolidated figures. (See Note 16.)
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, 2014 (the “2014 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 evaluation could change. These estimates are sometimes complex, sensitive to changes in assumptions and require fair value determinations using Level 3 fair value measurements. Actual results may differ materially from those estimates.
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 and contingencies.
9
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accounting and Reporting Pronouncements Adopted
Presentation of Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board ("FASB") issued guidance requiring all debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt instead of being presented as an asset on the balance sheet. The Company retrospectively adopted the new guidance effective April 1, 2015 and reclassified its unamortized debt issuance costs related to the Company's debt from other noncurrent assets to noncurrent portion of debt on the consolidated balance sheets for all periods presented. The balance of unamortized debt issuance costs reclassified as of December 31, 2014 was $44 million. (See Note 6.)
Accounting and Reporting Pronouncements Not Yet Adopted
Business Combinations
In September 2015, the FASB issued new guidance on adjustments to provisional amounts recognized in a business combination, which are currently recognized on a retrospective basis. Under the new requirements, adjustments will be recognized in the reporting period in which the adjustments are determined. The effects of changes in depreciation, amortization, or other income arising from changes to the provisional amounts, if any, are included in earnings of the reporting period in which the adjustments to the provisional amounts are determined. An entity is also required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The new requirements will be effective beginning January 1, 2016, and are required to be implemented on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
Business Consolidation
In February 2015, the FASB issued guidance that amends the analysis that a reporting entity performs to determine whether it should consolidate certain legal entities. The changes in this guidance include how related parties and de facto agents are considered in the primary beneficiary determination and the analysis for determining whether a fee paid to a decision maker or service provider is a variable interest. The new standard is effective for reporting periods beginning after December 15, 2015 and can be adopted either retrospectively or using a modified retrospective approach by recording a cumulative-effect adjustment to stockholders' equity as of the beginning of the fiscal year of adoption. Early adoption is permitted. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
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 is 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 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. In August 2015, the FASB deferred the pronouncement's effective date to annual reporting periods beginning after December 15, 2017. However, reporting entities may choose to adopt the standard as of the original effective date of annual reporting periods beginning after December 15, 2016. The Company is required to apply the new revenue standard beginning in the first interim period within the year of adoption. 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. In the U.S., more than 90% of distribution revenue comes from the Company's top 10 distributors. Outside of the U.S., approximately 45% of distribution revenue comes from the
10
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Company's top 10 distributors. Agreements in place with the major cable and satellite operators in the U.S. expire at various times beginning in 2016 through 2021. Although the Company seeks to renew its agreements with its distributors, a delay in securing a renewal that results in a service disruption, a 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, as viewership is impacted by affiliate subscriber levels.
No individual customer accounted for more than 10% of total consolidated revenues for the three and nine months ended September 30, 2015 or 2014. As of September 30, 2015 and December 31, 2014, the Company’s trade receivables did 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.
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. Additionally, the Company has cash and cash equivalents held by its foreign subsidiaries that would result in U.S. tax consequences should the Company decide it needs to repatriate these funds to the U.S.
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 and that the Company may, at the time of such unavailability to fund, have limited or no access to the commercial paper market. 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. Typically, the Company seeks to manage such risks from its revolving credit facility by contracting with experienced large financial institutions and monitoring the credit quality of its lenders. As of September 30, 2015, the Company did not anticipate nonperformance by any of its counterparties.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Eurosport
On December 21, 2012, the Company acquired a 20% equity method investment in Eurosport, which includes both Eurosport International and Eurosport France. On May 30, 2014, the Company acquired an additional 31% equity in Eurosport International to obtain a controlling interest in Eurosport International for €259 million ($351 million) and committed to acquire a similar controlling interest in Eurosport France upon resolution of certain regulatory matters. The outstanding regulatory matters in France were subsequently resolved, and the Company completed its acquisition of an additional 31% interest in Eurosport France for €38 million ($40 million) on March 31, 2015. These transactions gave the Company a 51% controlling stake in Eurosport. The Company recognized gains of $29 million and $2 million during the three months ended June 30, 2014 and March 31, 2015, respectively, to account for the difference between the carrying value and the fair value of the previously held 20% equity method investments in Eurosport International and Eurosport France, respectively. The gains were included in other income (expense), net in the Company's consolidated statements of operations. (See Note 13.) On July 22, 2015, TF1 announced its intent to exercise its right to put the entirety of its remaining 49% noncontrolling interest in Eurosport to the Company. On October 1, 2015, the Company acquired the remaining 49% of Eurosport for €491 million ($548 million). (See Note 8.)
Eurosport is a leading pan-European sports media platform. 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 acquisitions are intended to increase the growth of Eurosport and enhance the Company's pay-TV offerings in Europe.
11
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company used discounted cash flow ("DCF") analyses, which represent Level 3 fair value measurements, to assess certain components of the Eurosport purchase price allocations. The fair value of the assets acquired, liabilities assumed, noncontrolling interests recognized and the remeasurement gains recorded on the previously held equity interests is presented in the table below (in millions). The Company's process of identifying the assets acquired and the liabilities assumed and determining their fair values for Eurosport France is not complete as of the date of this filing, principally with respect to liabilities assumed.
Eurosport France (Provisional) | Eurosport International | |||||||
March 31, 2015 | May 30, 2014 | |||||||
Goodwill | $ | 69 | $ | 785 | ||||
Intangible assets | 40 | 467 | ||||||
Other assets acquired | 27 | 169 | ||||||
Cash | 35 | 47 | ||||||
Removal of TF1 put right | 2 | 27 | ||||||
Currency translation adjustment | (6 | ) | 7 | |||||
Remeasurement gain on previously held equity interest | (2 | ) | (29 | ) | ||||
Liabilities assumed | (30 | ) | (169 | ) | ||||
Deferred tax liabilities | (14 | ) | (164 | ) | ||||
Redeemable noncontrolling interest (Note 8) | (60 | ) | (558 | ) | ||||
Carrying value of previously held equity interest | (21 | ) | (231 | ) | ||||
Net assets acquired | $ | 40 | $ | 351 | ||||
The goodwill reflects the workforce and synergies expected from increased pan-European market penetration as the operations of Eurosport and the Company are combined. The goodwill recorded as part of these acquisitions is assigned to the Eurosport reporting unit, which is a component of the Company's International Networks segment and 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.
Discovery Family (formerly known as the Hub Network)
On September 23, 2014, the Company acquired an additional 10% ownership interest in Discovery Family from Hasbro, Inc. ("Hasbro") for $64 million and obtained control of the joint venture. Discovery Family is a pay-TV network in the U.S. that provides entertainment for children and families. The purchase increased the Company's ownership interest from 50% to 60%. As a result of acquiring a controlling interest, the Company changed its accounting for Discovery Family from an equity method investment to a consolidated subsidiary. There was no gain or loss recorded at the time of acquisition as the fair value of the Company's previously held equity method investment in Discovery Family was equal to the carrying amount as of the acquisition date. The acquisition of Discovery Family supports the Company's strategic priority of broadening the scope of the network to increase viewership. The Company rebranded the network to Discovery Family on October 13, 2014.
The Company used DCF analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. The fair value of the assets acquired, liabilities assumed and noncontrolling interest recognized is presented in the table below (in millions).
September 23, 2014 | ||||
Goodwill | $ | 310 | ||
Intangible assets | 301 | |||
Other assets acquired | 96 | |||
Cash | 33 | |||
Liabilities assumed | (125 | ) | ||
Redeemable noncontrolling interest (Note 8) | (238 | ) | ||
Carrying value of previously held equity interest | (313 | ) | ||
Net assets acquired | $ | 64 | ||
12
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The goodwill reflects the workforce and synergies expected from combining the operations of Discovery Family with the Company's existing U.S. networks. The goodwill recorded as part of this acquisition is assigned to the U.S. Networks reporting segment. It is not amortizable for tax purposes. Intangible assets primarily consist of distribution customer relationships with an estimated useful life of 25 years, based on three renewals.
Other
In 2015, the Company acquired several other unrelated businesses for total cash and contingent consideration of $32 million, net of cash acquired. Total consideration, net of cash acquired, includes contingent consideration of $9 million and cash not yet paid of $3 million. The Company provisionally recorded $19 million and $18 million of goodwill and intangible assets, respectively, in connection with these acquisitions. The acquisitions included a free-to-air network in Italy, cable networks in Denmark and a pay-TV sports channel in Asia. The goodwill reflects the synergies and regional market penetration from combining the operations of these acquisitions with the Company's operations.
In 2014, the Company acquired several other unrelated businesses for total consideration of $40 million, net of cash acquired. The Company recorded $37 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's operations.
Pro Forma Financial Information
The following table presents the unaudited pro forma results of the Company as though all of the business combinations from 2014 had been made on January 1, 2013. These pro forma results do not necessarily represent what would have occurred if 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: (i) the Company converted historical financial statements to GAAP, (ii) the Company applied its accounting policies, (iii) the Company adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2013, (iv) the Company removed the gains recognized upon the consolidation of previously held equity interests in 2014 and reclassified them to 2013, (v) the Company adjusted amounts for the mark-to-market of the TF1 put liabilities recognized in connection with previously held equity interests and reclassified them to 2013, and (vii) the Company included adjustments for income taxes associated with these pro forma adjustments. The Company's 2015 business combinations are not material individually or in aggregate and have not been included in the pro forma table.
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 (in millions).
September 30, 2014 | ||||||||
Three Months Ended | Nine Months Ended | |||||||
Revenue | $ | 1,590 | $ | 4,883 | ||||
Net income | 298 | 904 | ||||||
13
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Impact of Business Combinations
The operations of each of the business combinations in 2015 and 2014 discussed above were included in the consolidated financial statements as of each of their respective acquisition dates. The following table presents their revenue and earnings as reported within the consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 (in millions).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenues: | ||||||||||||||||
Distribution | $ | 115 | $ | 89 | $ | 328 | $ | 119 | ||||||||
Advertising | 50 | 31 | 111 | 52 | ||||||||||||
Other | 30 | 35 | 75 | 44 | ||||||||||||
Total revenues | $ | 195 | $ | 155 | $ | 514 | $ | 215 | ||||||||
Net income | $ | 15 | $ | 8 | $ | 33 | $ | 9 | ||||||||
Dispositions
Russia
On October 7, 2015, Discovery contributed its Russian business to a joint venture with a Russian media company, National Media Group ("NMG"), to comply with changes in Russian legislation limiting foreign ownership. No cash consideration was exchanged in the transaction. NMG contributed a FTA license which enables advertising on certain joint venture channels. Discovery obtained a 20% ownership in the joint venture and will account for the joint venture under the equity method of accounting following the contribution date and will no longer consolidate the Russian business, which was a component of its International Networks operating segment. Discovery will provide brands and content to the joint venture under a long-term licensing arrangement.
Radio
On June 30, 2015, Discovery sold its radio businesses in Northern Europe to Bauer Media Group ("Bauer") for total consideration, net of cash disposed of €74 million ($84 million), which includes €54 million ($61 million) of net cash received at closing, €3 million ($4 million) of expected working capital adjustments, and €17 million ($19 million) for the fair value of contingent consideration. Discovery recorded a pretax gain of $3 million upon completion of the sale. The fair value of the contingent consideration was determined in accordance with the sale agreement using revenue and earnings projections of the radio business through the earn-out period ending December 31, 2015. The contingent consideration payable to Discovery is subject to change based on actual performance. Subsequent changes in fair value of the contingent consideration will be recognized as a component of the gain or loss recorded on sale.
The Company determined that the disposal did not meet the definition of a discontinued operation because it does not represent a strategic shift that has a significant impact on the Company's operations and consolidated financial results. The Company's radio businesses had no income before income taxes for the nine months ended September 30, 2015. The impact to income before income taxes for the Company's radio businesses was a loss of $2 million and $6 million for each of the three and nine months ended September 30, 2014, respectively. The Company's radio businesses were part of the International Networks operating segment.
HowStuffWorks, LLC
On May 30, 2014, Discovery sold HowStuffWorks, LLC ("HSW"), 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. HSW was part of the U.S. Networks operating segment. The Company determined that the disposal did not meet the definition of a discontinued operations due to the migration of sales to its remaining digital business.
14
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3. INVESTMENTS
The Company’s investments consisted of the following (in millions).
Category | Balance Sheet Location | September 30, 2015 | December 31, 2014 | |||||||
Trading securities - mutual funds | Prepaid expenses and other current assets | $ | 144 | $ | 147 | |||||
Equity method investments | Equity method investments | 562 | 644 | |||||||
Cost method investments | Other noncurrent assets | 43 | 29 | |||||||
Total investments | $ | 749 | $ | 820 | ||||||
Trading Securities
Trading securities include investments in mutual funds held in a separate trust which are owned as part of the Company’s supplemental retirement plan. (See Note 4.)
Equity Method Investments
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. All equity method investees are privately owned. The carrying values of the Company’s equity method investments are consistent with its ownership in the underlying net assets of the investees, except for OWN because the Company has recorded losses in excess of its ownership interest. Certain of the Company's equity method investments are VIEs, for which the Company is not the primary beneficiary. As of September 30, 2015, the Company’s estimated risk of loss for all its VIEs including the investment carrying values, unfunded contractual commitments, and guarantees made on behalf of VIEs was approximately $449 million. The Company's estimated risk of loss excludes the non-contractual future funding of VIEs.
OWN
OWN is a pay-TV 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 content licenses and services, such as distribution, sales and administrative support, for a fee and has provided OWN funding. (See Note 14.)
The Company's combined advances to and note receivable from OWN, including accrued interest, were $394 million and $457 million as of September 30, 2015 and December 31, 2014, respectively. On April 30, 2015, Oprah Winfrey agreed to extend her exclusivity agreement with OWN and the note receivable agreement was modified to reduce its interest rate, compounded annually, from 7.5% to 5.0%, retroactive to January 1, 2014. During the nine months ended September 30, 2015, the Company received net repayments of $67 million from OWN, accrued interest on the note receivable of $18 million and reduced the note receivable by $14 million for the change in interest rate. 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.
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. 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 to the extent they occur resulting from OWN's operations as long as Discovery has provided all funding to OWN and OWN’s accumulated losses
15
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
continue to exceed the equity contributed. All of OWN's net income has been and will continue to 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 $389 million and $424 million as of September 30, 2015 and December 31, 2014, 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 Company's 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. There has been no impairment of the OWN note receivable.
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 fair value put right was zero as of September 30, 2015 and December 31, 2014.
Other Equity Method Investments
Other equity method investments include equity ownership interests in unconsolidated entities, including VIEs other than OWN.
On March 31, 2015 and May 30, 2014, the Company acquired from TF1 a controlling interest in each of its Eurosport France and Eurosport International equity method investments, respectively, by increasing its ownership stake from 20% to 51%. As a result, the Company changed its accounting for Eurosport France and Eurosport International from equity method investments to consolidated subsidiaries as of their respective acquisition dates. (See Note 2.)
On September 23, 2014, the Company acquired an additional 10% ownership interest in Discovery Family and obtained a controlling financial interest. The purchase increased the Company's interest from 50% to 60%. As a result, the Company changed its accounting for Discovery Family from an equity method investment to a consolidated subsidiary. (See Note 2.)
On September 23, 2014, the Company acquired a 50% equity method ownership interest in All3Media, a production studio company, for a cash payment of £90 million ($147 million) and with an enterprise value of £556 million ($912 million). All3Media recapitalized its debt structure to effect the transaction. All3Media is not a VIE.
Cost Method Investments
Cost method investments include ownership rights in entities that do not provide the Company with control or significant influence in these investments and that have no readily determinable fair values. The Company's cost method investments primarily include an educational website for $25 million and newly acquired Formula E racing for $16 million.
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. |
16
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, 2015 | ||||||||||||||||||
Category | Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||||
Trading securities - mutual funds | Prepaid expenses and other current assets | $ | 144 | $ | — | $ | — | $ | 144 | |||||||||
Derivatives: | ||||||||||||||||||
Foreign exchange | Prepaid expenses and other current assets | — | 32 | — | 32 | |||||||||||||
Foreign exchange | Other noncurrent assets | — | 4 | — | 4 | |||||||||||||
Total | $ | 144 | $ | 36 | $ | — | $ | 180 | ||||||||||
Liabilities: | ||||||||||||||||||
Deferred compensation plan | Accrued liabilities | $ | 144 | $ | — | $ | — | $ | 144 | |||||||||
Derivatives: | ||||||||||||||||||
Foreign exchange | Accrued liabilities | — | 8 | — | 8 | |||||||||||||
Foreign exchange | Other noncurrent liabilities | — | 1 | — | 1 | |||||||||||||
Total | $ | 144 | $ | 9 | $ | — | $ | 153 | ||||||||||
December 31, 2014 | ||||||||||||||||||
Category | Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||||
Trading securities - mutual funds | Prepaid expenses and other current assets | $ | 147 | $ | — | $ | — | $ | 147 | |||||||||
Derivatives: | ||||||||||||||||||
Foreign exchange | Prepaid expenses and other current assets | — | 17 | — | 17 | |||||||||||||
Foreign exchange | Other noncurrent assets | — | 7 | — | 7 | |||||||||||||
Total | $ | 147 | $ | 24 | $ | — | $ | 171 | ||||||||||
Liabilities: | ||||||||||||||||||
Deferred compensation plan | Accrued liabilities | $ | 147 | $ | — | $ | — | $ | 147 | |||||||||
Derivatives: | ||||||||||||||||||
Foreign exchange | Accrued liabilities | — | 1 | — | 1 | |||||||||||||
Interest rate | Accrued liabilities | — | 28 | — | 28 | |||||||||||||
TF1 Eurosport France put right | Accrued liabilities | — | — | 4 | 4 | |||||||||||||
Total | $ | 147 | $ | 29 | $ | 4 | $ | 180 | ||||||||||
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 deferred compensation plan liability was determined based on the fair value of the related investments elected by employees.
Derivative financial instruments are comprised of foreign exchange contracts used by the Company to modify its exposure to market risks from foreign exchange rates and interest rate contracts used to modify exposure to market risks from interest rates for forecasted issuances of debt. The fair value of Level 2 derivative financial instruments was determined using a market-based approach.
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 the senior notes, each approximated their fair values as of September 30, 2015. The estimated fair value of the Company’s outstanding senior notes using quoted prices from over the counter markets, considered Level 2 inputs, was $6.9 billion and $7.2 billion as of September 30, 2015 and December 31, 2014, respectively.
17
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5. CONTENT RIGHTS
The table below presents the components of content rights (in millions).
September 30, 2015 | December 31, 2014 | |||||||
Produced content rights: | ||||||||
Completed | $ | 3,583 | $ | 3,242 | ||||
In-production | 408 | 377 | ||||||
Coproduced content rights: | ||||||||
Completed | 716 | 696 | ||||||
In-production | 66 | 83 | ||||||
Licensed content rights: | ||||||||
Acquired | 1,048 | 949 | ||||||
Prepaid | 111 | 82 | ||||||
Content rights, at cost | 5,932 | 5,429 | ||||||
Accumulated amortization | (3,524 | ) | (3,127 | ) | ||||
Total content rights, net | 2,408 | 2,302 | ||||||
Current portion | (341 | ) | (329 | ) | ||||
Noncurrent portion | $ | 2,067 | $ | 1,973 | ||||
Content expense is included in costs of revenues on the consolidated statements of operations and consisted of the following (in millions).
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Content amortization | $ | 414 | $ | 372 | $ | 1,210 | $ | 1,061 | ||||||||
Other production charges | 54 | 41 | 163 | 108 | ||||||||||||
Content impairments(a) | 3 | 6 | 33 | 22 | ||||||||||||
Total content expense | $ | 471 | $ | 419 | $ | 1,406 | $ | 1,191 | ||||||||
(a) Content impairments are generally recorded as a component of costs of revenue. However, during the nine months ended September 30, 2015, $21 million in content impairments were reflected as a component of restructuring and other charges. These charges resulted from the cancellation of certain high profile series due to legal circumstances pertaining to the associated talent. There were no content impairments reflected as a component of restructuring and other charges for the three months ended September 30, 2015 and the three and nine months ended September 30, 2014.
18
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6. DEBT
The table below presents the components of outstanding debt (in millions).
September 30, 2015 | December 31, 2014 | |||||||
3.70% Senior Notes, semi-annual interest, due June 2015 | $ | — | $ | 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 | 337 | 365 | ||||||
3.30% Senior Notes, semi-annual interest, due May 2022 | 500 | 500 | ||||||
3.25% Senior Notes, semi-annual interest, due April 2023 | 350 | 350 | ||||||
3.45% Senior Notes, semi-annual interest, due March 2025 | 300 | — | ||||||
1.90% Senior Notes, euro denominated, annual interest, due March 2027 | 674 | — | ||||||
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 | 80 | 38 | ||||||
Commercial paper | 89 | 229 | ||||||
Capital lease obligations | 145 | 187 | ||||||
Total debt | 7,125 | 7,169 | ||||||
Unamortized discount and debt issuance costs | (68 | ) | (60 | ) | ||||
Debt, net | 7,057 | 7,109 | ||||||
Current portion of debt | (116 | ) | (1,107 | ) | ||||
Noncurrent portion of debt | $ | 6,941 | $ | 6,002 | ||||
Senior Notes
On March 19, 2015, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, issued €600 million principal amount ($637 million, at issuance based on the exchange rate of $1.06 per euro at March 19, 2015) of 1.90% Senior Notes due March 19, 2027 (the "2015 Euro Notes"). The proceeds received by DCL from the offering were net of a $1 million issuance discount and $5 million of debt issuance costs. Interest on the 2015 Euro Notes is payable annually on March 19 of each year. The 2015 Euro Notes are denominated in euro and expose Discovery to fluctuations in foreign exchange rates in that currency. The current balance of the 2015 Euro Notes reflects changes in exchange rates; there have been no other changes to the balance. Discovery has reported the change in remeasurement for these 2015 Euro Notes as a component of other income (expense), net in the consolidated statements of operations.
On March 2, 2015, DCL issued $300 million principal amount of 3.45% Senior Notes due March 15, 2025 (the "2015 USD Notes"). The proceeds received by DCL from the offering were net of an immaterial discount and $2 million of debt issuance costs. Interest on the 2015 USD Notes is payable semi-annually on March 15 and September 15 of each year. In contemplation of the issuance of the 2015 USD Notes, the Company terminated and settled all interest rate forward contracts with its counterparties, which were designated as cash flow hedges used to hedge the pricing of the 2015 USD Notes. (See Note 7.)
DCL has the option to redeem some or all of the 2015 Euro Notes and 2015 USD Notes at any time prior to their maturity by paying a make-whole premium, if the redemption date is prior to three months from the maturity date or by paying their principal amount on or after such date, plus, in each case, accrued and unpaid interest, if any, through the date of repurchase. The 2015 Euro Notes and 2015 USD 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 DCL's outstanding senior notes, and there were no events of default as of September 30, 2015.
On March 31, 2015, the Company redeemed $850 million aggregate principal amount of its 3.70% Senior Notes that had an original maturity of June 1, 2015. The repayment included a payment of $1 million for the original issue discount on the 3.70% Senior Notes and resulted in a pretax loss on extinguishment of debt of $5 million for make-whole premiums. The loss on extinguishment of debt was reflected as a component of interest expense in the consolidated statements of operations.
19
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revolving Credit Facility
DCL's revolving credit facility allows 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 swingline 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.
As of September 30, 2015, the Company had outstanding borrowings under the revolving credit facility of $80 million at a weighted average interest rate of 1.37%, of which $20 million was denominated in foreign currencies. As of December 31, 2014, the Company had outstanding borrowings under the revolving credit facility of $38 million at a weighted average interest rate of 1.98%. The interest rate on borrowings under the revolving credit facility is variable based on DCL's then-current credit ratings for its publicly traded debt and changes in financial index rates. For dollar-denominated borrowings, the interest rate is based, at the Company's option, on either adjusted LIBOR plus a margin, or an alternate base rate plus a margin. For borrowings denominated in foreign currencies, the interest rate is based on adjusted LIBOR, 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 Company borrowed an additional $525 million under the revolving credit facility on October 1, 2015 to facilitate the purchase of the remaining 49% noncontrolling interest in Eurosport from TF1. (See Note 8.)
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, 2015, 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
The Company's commercial paper program is supported by the revolving credit facility described above. Outstanding commercial paper borrowings were $89 million with a weighted average interest rate of approximately 0.41% as of September 30, 2015 and $229 million with a weighted average interest rate of approximately 0.60% as of December 31, 2014. The Company's outstanding commercial paper borrowings as of September 30, 2015 and December 31, 2014 had maturities of less than 90 days.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to modify its exposure to market risks from changes in foreign currency exchange rates and interest rates. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.
The Company designates foreign currency forward contracts as cash flow hedges to mitigate foreign currency risk arising from third-party revenue and inter-company licensing agreements. The Company also designates 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 on the consolidated balance sheets and reclassified into the statements of operations in the same line item in which the hedged item is recorded in the same period as the hedged item affects earnings. If it becomes probable that a forecasted transaction will not occur, any related gains and losses recorded in accumulated other comprehensive loss on the consolidated balance sheets are reclassified to other income (expense), net on the consolidated statements of operations in that period.
During the three months ended March 31, 2015, the Company terminated and settled its interest rate cash flow hedges following the pricing of the 2015 USD Notes. The total notional value of the interest rate forward contracts at the termination date was $490 million, which exceeded the $300 million principal amount of the 2015 USD Notes. (See Note 6.) Of the $40 million pretax loss recorded in accumulated other comprehensive loss at the termination date, $29 million was an effective cash flow hedge that will be amortized as an adjustment to interest expense over the ten year term of the 2015 USD Notes consistent with amortization of the debt discount. The remaining $11 million was reclassified into other income (expense), net on the consolidated statements of operations during the three months ended March 31, 2015, because the forecasted borrowing transaction was no longer probable.
The Company may also enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. During the three months ended September 30, 2015, the Company entered into foreign exchange forward contracts and a zero-cost collar in connection with the purchase of TF1's mandatorily redeemable noncontrolling interest in Eurosport that closed
20
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
on October 1, 2015. (See Note 8.) These derivatives, which economically hedged the Company's exposure to fluctuations in foreign currency exchange rates, did not qualify for hedge accounting. Realized and unrealized gains and losses on contracts that do not qualify for hedge accounting are reflected in other income (expense), net on the consolidated statements of operations.
The Company records all unsettled derivative contracts at their gross fair values on the consolidated balance sheets. (See Note 4.) There were no amounts eligible to be offset under master netting agreements as of September 30, 2015 and December 31, 2014.
The cash flows from the effective portion of derivative instruments used as hedges are classified in the consolidated statements of cash flows in the same section as the cash flows from the hedged item. For example, the cash paid to settle the effective portion of interest rate derivatives intended to hedge the pricing of the 2015 USD Notes during the nine months ended September 30, 2015 is reported as a financing activity in the consolidated statements of cash flows consistent with the classification of cash proceeds from borrowings of debt, net of discount. The cash flows from the ineffective portion of derivative instruments used as hedges and derivative contracts not designated as hedges are reported as investing activities in the consolidated statements of cash flows.
The following table summarizes the notional amount and fair value of the Company's derivative positions (in millions).
September 30, 2015 | December 31, 2014 | |||||||||||||||||
Balance Sheet Location | Notional | Fair Value | Notional | Fair Value | ||||||||||||||
Derivatives designated as hedges: | ||||||||||||||||||
Foreign exchange | Prepaid expenses and other current assets | $ | 357 | $ | 23 | $ | 425 | $ | 17 | |||||||||
Foreign exchange | Other noncurrent assets | 44 | 4 | 20 | 7 | |||||||||||||
Foreign exchange | Accrued liabilities | 273 | 7 | 35 | 1 | |||||||||||||
Interest rate | Accrued liabilities | — | — | 475 | 28 | |||||||||||||
Foreign exchange | Other noncurrent liabilities | 38 | 1 | — | — | |||||||||||||
Derivatives not designated as hedges: | ||||||||||||||||||
Foreign exchange | Prepaid expenses and other current assets | 368 | 9 | 3 | — | |||||||||||||
Foreign exchange | Accrued liabilities | 155 | 1 | — | — | |||||||||||||
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, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Gains (losses) recognized in accumulated other comprehensive loss: | ||||||||||||||||
Foreign exchange | $ | 10 | $ | 7 | $ | 22 | $ | 3 | ||||||||
Interest rate | 1 | (3 | ) | (11 | ) | (10 | ) | |||||||||
Gains (losses) reclassified into income from accumulated other comprehensive loss (effective portion): | ||||||||||||||||
Foreign exchange - distribution revenue | 7 | (1 | ) | 15 | (2 | ) | ||||||||||
Foreign exchange - advertising revenue | — | — | 1 | — | ||||||||||||
Foreign exchange - costs of revenues | 2 | — | 6 | — | ||||||||||||
Foreign exchange - other income (expense), net | 1 | 1 | 2 | 2 | ||||||||||||
Interest rate - interest expense | (1 | ) | — | (1 | ) | — | ||||||||||
Losses reclassified into income from accumulated other comprehensive loss (ineffective portion): | ||||||||||||||||
Interest rate - other income (expense), net | — | — | (11 | ) | — | |||||||||||
21
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
If current fair values as of September 30, 2015 remained static over the next twelve months, the Company would reclassify $12 million of net deferred gains from accumulated other comprehensive loss into income in the next twelve months.
The following table presents the pretax net gains on derivatives not designated as hedges and recognized in other income (expense), net in the consolidated statements of operations (in millions).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Foreign exchange derivatives | $ | 8 | $ | 1 | $ | 8 | $ | 1 | ||||||||
NOTE 8. REDEEMABLE NONCONTROLLING INTERESTS
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. Any adjustment of redemption value to the floor that reflects a redemption in excess of fair value is included as an adjustment to net income available to Discovery Communications, Inc. stockholders in the calculation of earnings per share. There were no current period adjustments to 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).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Beginning balance | $ | 754 | $ | 598 | $ | 747 | $ | 36 | ||||||||
Initial fair value of redeemable noncontrolling interests of acquired businesses | — | 238 | 60 | 796 | ||||||||||||
Reclassification of redeemable equity to current liabilities | (551 | ) | (6 | ) | (551 | ) | (6 | ) | ||||||||
Cash distributions to redeemable noncontrolling interests | (2 | ) | — | (38 | ) | (2 | ) | |||||||||
Comprehensive income adjustments: | ||||||||||||||||
Net income attributable to redeemable noncontrolling interests | 4 | 7 | 7 | 11 | ||||||||||||
Other comprehensive income (loss) attributable to redeemable noncontrolling interests | 3 | (27 | ) | (23 | ) | (26 | ) | |||||||||
Currency translation on redemption values | 4 | (40 | ) | (36 | ) | (40 | ) | |||||||||
Retained earnings adjustments: | ||||||||||||||||
Adjustments of redemption values to the floor | 28 | 15 | 74 | 16 | ||||||||||||
Ending balance | $ | 240 | $ | 785 | $ | 240 | $ | 785 | ||||||||
Redeemable noncontrolling interests consist of the following arrangements:
In connection with the acquisition of a controlling interest in Eurosport France on March 31, 2015 and Eurosport International on May 30, 2014, the Company recognized $60 million and $558 million, respectively, for TF1's 49% redeemable noncontrolling interest. On July 22, 2015, TF1 exercised its right to put the entirety of its remaining 49% noncontrolling interest in Eurosport to the Company for €491 million ($551 million as of September 30, 2015), which includes €25 million ($28 million as of September 30, 2015) of working capital adjustments. The carrying amount of the redeemable noncontrolling interest was adjusted to its fair value of $551 million at the date redemption became mandatory with a corresponding offsetting adjustment to retained earnings. The redeemable noncontrolling interest balance has become mandatorily redeemable and has been reclassified to accrued liabilities as of September 30, 2015. The transaction closed on October 1, 2015 for $548 million.
In connection with the acquisition of a controlling interest in Discovery Family on September 23, 2014, the Company recognized $238 million for Hasbro's redeemable noncontrolling interest in Discovery Family. 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, or in the event a Discovery performance obligation related to Discovery Family is not met. Embedded in the redeemable noncontrolling interest is
22
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
also a Discovery call right that is exercisable for one year after December 31, 2021. Upon the exercise of the put or call options, the price to be paid for the redeemable noncontrolling interest is generally a function of the then-current fair market value of the redeemable noncontrolling interest, to which certain discounts and floor values may apply in specified situations depending upon the party exercising the put or call and the basis for the exercise of the put or call. 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.
In connection with the acquisition of a controlling interest in Discovery Japan on January 10, 2013, Jupiter Telecommunications Co., Ltd ("J:COM") obtained the right to put all, but not less than all, of its 20% noncontrolling interest to Discovery at any time for cash. Through January 10, 2017, 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.
In connection with the acquisition of SBS Nordic on April 9, 2013, the Company recognized $6 million redeemable noncontrolling interest for the fair value of a noncontrolling interest in one of its Danish subsidiaries. On September 16, 2014, the Company entered into an agreement with the noncontrolling interest holder to purchase their remaining 20% ownership interest. As the redeemable noncontrolling interest was contractually payable, it was reclassified to accrued liabilities in the consolidated balance sheet as of September 30, 2014. On November 19, 2014, the Company purchased the noncontrolling interest for $1 million. The difference between the consideration transferred and the recorded value of the redeemable noncontrolling interest was recorded to additional paid-in capital.
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, privately negotiated transactions at prevailing prices, 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. Over the life of the program, authorization under the stock repurchase program prior to October 8, 2015 has totaled $5.5 billion. As of September 30, 2015, the Company had remaining authorization of $416 million for future repurchases under the existing stock repurchase program, which will expire on February 3, 2016. On October 8, 2015, the Company's Board of Directors approved an additional $2.0 billion under the Company's stock repurchase program, which will expire on October 8, 2017.
All common stock repurchases have been made through open market transactions. As of September 30, 2015, the Company had repurchased over the life of the program 2.8 million and 101.6 million shares of Series A and Series C common stock, respectively, for the aggregate purchase price of $171 million and $4.9 billion, respectively. The table below presents a summary of common stock repurchases during the three and nine months ended September 30, 2015 and 2014 (in millions).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Series C Common Stock: | ||||||||||||||||
Shares repurchased | — | 3.3 | 10.3 | 13.4 | ||||||||||||
Purchase price | $ | — | $ | 188 | $ | 323 | $ | 957 | ||||||||
Repurchased common stock is recorded as treasury stock on the consolidated balance sheet. The Company's 2 for 1 stock split in the form of a share dividend distributed on August 6, 2014 was not applied to the Company's treasury shares. 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.
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 the number of shares of Series C common stock purchased under the Company’s common stock repurchase program during the then most recently completed fiscal quarter. The price paid per preferred 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 Advance/Newhouse repurchases are made outside of the Company’s publicly
23
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
announced common stock repurchase program. The repurchase transactions are recorded as a decrease of par value of preferred stock and retained earnings upon settlement as there is no remaining additional paid-in capital for this class of stock.
The table below presents a summary of Series C convertible preferred stock repurchases during the three and nine months ended September 30, 2015 and 2014 (in millions).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Series C Convertible Preferred Stock: | ||||||||||||||||
Shares repurchased | 0.8 | 1.5 | 3.9 | 1.5 | ||||||||||||
Purchase price | $ | 52 | $ | 110 | $ | 253 | $ | 110 | ||||||||
Since no shares of Series C common stock were repurchased during the three months ended September 30, 2015, there will be no Series C convertible preferred shares converted and retired under the preferred stock conversion and repurchase arrangement during the fourth quarter of 2015.
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 CEO, certain voting and purchase rights with respect to the approximately 5.9 million shares of the Company’s Series B common stock owned by Mr. Malone. The agreement gives Mr. Zaslav the right to vote the Series B shares if Mr. Malone is not otherwise voting or directing the vote of those shares. The agreement also provides that if Mr. 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 Mr. Malone proposes 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 into the consolidated statements of operations (in millions).
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | ||||||||||||||||||||||
Pretax | Tax Benefit (Provision) | Net-of-tax | Pretax | Tax Benefit (Provision) | Net-of-tax | ||||||||||||||||||
Currency translation adjustments: | |||||||||||||||||||||||
Unrealized losses | $ | (57 | ) | $ | 11 | $ | (46 | ) | $ | (195 | ) | $ | 8 | $ | (187 | ) | |||||||
Derivative and market value adjustments: | |||||||||||||||||||||||
Unrealized gains | 11 | (4 | ) | 7 | 4 | (1 | ) | 3 | |||||||||||||||
Reclassifications: | |||||||||||||||||||||||
Distribution revenue | (7 | ) | 2 | (5 | ) | 1 | — | 1 | |||||||||||||||
Costs of revenues | (2 | ) | 1 | (1 | ) | — | — | — | |||||||||||||||
Interest expense | 1 | — | 1 | — | — | — | |||||||||||||||||
Other income (expense), net | (1 | ) | — | (1 | ) | (1 | ) | — | (1 | ) | |||||||||||||
Other comprehensive loss | $ | (55 | ) | $ | 10 | $ | (45 | ) | $ | (191 | ) | $ | 7 | $ | (184 | ) | |||||||
24
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | ||||||||||||||||||||||
Pretax | Tax Benefit (Provision) | Net-of-tax | Pretax | Tax Benefit (Provision) | Net-of-tax | ||||||||||||||||||
Currency translation adjustments: | |||||||||||||||||||||||
Unrealized losses | $ | (197 | ) | $ | 6 | $ | (191 | ) | $ | (211 | ) | $ | (1 | ) | $ | (212 | ) | ||||||
Reclassifications: | |||||||||||||||||||||||
Gain on disposition | 23 | — | 23 | — | — | — | |||||||||||||||||
Other income (expense), net | 6 | — | 6 | (7 | ) | — | (7 | ) | |||||||||||||||
Derivative and market value adjustments: | |||||||||||||||||||||||
Unrealized gains (losses) | 11 | (4 | ) | 7 | (5 | ) | 2 | (3 | ) | ||||||||||||||
Reclassifications: | |||||||||||||||||||||||
Distribution revenue | (15 | ) | 5 | (10 | ) | 2 | — | 2 | |||||||||||||||
Advertising revenue | (1 | ) | — | (1 | ) | — | — | — | |||||||||||||||
Costs of revenues | (6 | ) | 2 | (4 | ) | — | — | — | |||||||||||||||
Gain on disposition | — | — | — | ||||||||||||||||||||