Document

 
 
 
 
 
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, 2018
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
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12542024&doc=13
Discovery, 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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
o
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 31, 2018:
Series A Common Stock, par value $0.01 per share
156,742,885

Series B Common Stock, par value $0.01 per share
6,512,378

Series C Common Stock, par value $0.01 per share
360,244,964

 
 
 
 
 




DISCOVERY, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
 
 
Page
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017.
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017.
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017.
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017.
 
 
Consolidated Statement of Equity for the nine months ended September 30, 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements.
DISCOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
 
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
531

 
$
7,309

Receivables, net
 
2,578

 
1,838

Content rights, net
 
349

 
410

Prepaid expenses and other current assets
 
456

 
434

Total current assets
 
3,914

 
9,991

Noncurrent content rights, net
 
3,115

 
2,213

Property and equipment, net
 
810

 
597

Goodwill, net
 
13,139

 
7,073

Intangible assets, net
 
10,040

 
1,770

Equity method investments, including note receivable (See Note 3)
 
1,015

 
335

Other noncurrent assets
 
879

 
576

Total assets
 
$
32,912

 
$
22,555

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
280

 
$
277

Accrued liabilities
 
1,623

 
1,309

Deferred revenues
 
304

 
255

Current portion of debt
 
1,653

 
30

Total current liabilities
 
3,860

 
1,871

Noncurrent portion of debt
 
15,829

 
14,755

Deferred income taxes
 
1,901

 
319

Other noncurrent liabilities
 
1,089

 
587

Total liabilities
 
22,679

 
17,532

Commitments and contingencies (See Note 18)
 


 


Redeemable noncontrolling interests
 
414

 
413

Equity:
 
 
 
 
Discovery, Inc. stockholders’ equity:
 
 
 
 
Series A-1 convertible preferred stock: $0.01 par value; 8 authorized; 8 shares issued
 

 

Series C-1 convertible preferred stock: $0.01 par value; 6 authorized; 6 shares issued
 

 

Series A common stock: $0.01 par value; 1,700 shares authorized; 159 and 157 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; 524 and 383 shares issued
 
5

 
4

Additional paid-in capital
 
10,627

 
7,295

Treasury stock, at cost
 
(6,737
)
 
(6,737
)
Retained earnings
 
4,984

 
4,632

Accumulated other comprehensive loss
 
(764
)
 
(585
)
Total Discovery, Inc. stockholders' equity
 
8,116

 
4,610

     Noncontrolling interests
 
1,703

 

Total equity
 
9,819

 
4,610

Total liabilities and equity
 
$
32,912

 
$
22,555

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

4


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


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
Distribution
 
$
1,152

 
$
881

 
$
3,389

 
$
2,593

Advertising
 
1,365

 
705

 
3,940

 
2,197

Other
 
75

 
65

 
415

 
219

Total revenues
 
2,592

 
1,651

 
7,744

 
5,009

Costs and expenses:
 
 
 
 
 
 
 
 
Costs of revenues, excluding depreciation and amortization
 
934

 
670

 
2,989

 
1,911

Selling, general and administrative
 
667

 
457

 
1,963

 
1,261

Depreciation and amortization
 
398

 
80

 
1,001

 
240

Restructuring and other charges
 
224

 
11

 
652

 
43

(Gain) loss on disposition
 

 

 
(84
)
 
4

Total costs and expenses
 
2,223

 
1,218

 
6,521

 
3,459

Operating income
 
369

 
433

 
1,223

 
1,550

Interest expense, net
 
(185
)
 
(136
)
 
(558
)
 
(318
)
Loss on extinguishment of debt
 

 

 

 
(54
)
Income (loss) from equity investees, net
 
9

 
(27
)
 
(53
)
 
(122
)
Other expense, net
 
(15
)
 
(106
)
 
(84
)
 
(143
)
Income before income taxes
 
178

 
164

 
528

 
913

Income tax (expense) benefit
 
(43
)
 
59

 
(146
)
 
(89
)
Net income
 
135

 
223

 
382

 
824

Net income attributable to noncontrolling interests
 
(13
)
 

 
(41
)
 

Net income attributable to redeemable noncontrolling interests
 
(5
)
 
(5
)
 
(16
)
 
(17
)
Net income available to Discovery, Inc.
 
$
117

 
$
218

 
$
325

 
$
807

Net income per share allocated to Discovery, Inc. Series A, B and C common stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.16

 
$
0.38

 
$
0.47

 
$
1.40

Diluted
 
$
0.16

 
$
0.38

 
$
0.47

 
$
1.39

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
523

 
381

 
490

 
385

Diluted
 
713

 
571

 
679

 
581

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

5


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


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
135

 
$
223

 
$
382

 
$
824

Other comprehensive income (loss) adjustments, net of tax:
 
 
 
 
 
 
 
 
     Currency translation
 
34

 
33

 
(169
)
 
192

     Available-for-sale securities
 

 
10

 

 
14

     Derivatives
 
(8
)
 
(12
)
 
16

 
(29
)
Comprehensive income
 
161

 
254

 
229

 
1,001

Comprehensive income attributable to noncontrolling interests
 
(13
)
 

 
(41
)
 

Comprehensive income attributable to redeemable noncontrolling interests
 
(4
)
 
(5
)
 
(15
)
 
(18
)
Comprehensive income attributable to Discovery, Inc.
 
$
144

 
$
249

 
$
173

 
$
983

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

6


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

 
Nine Months Ended September 30,
 
2018
 
2017
Operating Activities
 
 
 
Net income
$
382

 
$
824

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Share-based compensation expense
92

 
22

Depreciation and amortization
1,001

 
240

Content rights amortization and impairment
2,523

 
1,397

(Gain) loss on disposition
(84
)
 
4

Equity in losses of equity method investee companies, net of cash distributions
106

 
130

Deferred income taxes
(140
)
 
(167
)
Loss on extinguishment of debt

 
54

Realized loss from derivative instruments, net

 
98

Other, net
54

 
74

Changes in operating assets and liabilities, net of acquisitions and dispositions:
 
 
 
Receivables, net
(19
)
 
(138
)
Content rights and payables, net
(2,222
)
 
(1,400
)
Accounts payable and accrued liabilities
(123
)
 
23

Income taxes receivable and prepaid income taxes
(53
)
 
11

Foreign currency and other, net
130

 
(5
)
Cash provided by operating activities
1,647

 
1,167

Investing Activities
 
 
 
Business acquisitions, net of cash acquired
(8,565
)
 
(4
)
Payments for investments, net
(56
)
 
(387
)
Proceeds from dispositions, net of cash disposed
107

 
29

Proceeds from sale of assets previously held for sale
68

 

Purchases of property and equipment
(106
)
 
(103
)
Distributions from equity method investees
1

 
38

Payments for derivative instruments, net
(3
)
 
(99
)
Other investing activities, net
5

 
3

Cash used in investing activities
(8,549
)
 
(523
)
Financing Activities
 
 
 
Commercial paper borrowings (repayments), net
293

 
(48
)
Borrowings under revolving credit facility

 
350

Principal repayments of revolving credit facility
(100
)
 
(475
)
Borrowings under term loan facilities
2,000

 

Principal repayments of term loans
(2,000
)
 

Borrowings from debt, net of discount and including premiums

 
7,488

Principal repayments of debt, including discount payment and premiums to par value

 
(650
)
Payments for bridge financing commitment fees

 
(40
)
Principal repayments of capital lease obligations
(37
)
 
(26
)
Repurchases of stock

 
(603
)
Cash settlement of common stock repurchase contracts

 
58

Distributions to noncontrolling interests and redeemable noncontrolling interests
(59
)
 
(22
)
Share-based plan proceeds, net
44

 
15

Borrowings under program financing line of credit
23

 

Other financing activities, net
(16
)
 
(64
)
Cash provided by financing activities
148

 
5,983

Effect of exchange rate changes on cash and cash equivalents
(24
)
 
67

Net change in cash and cash equivalents
(6,778
)
 
6,694

Cash and cash equivalents, beginning of period
7,309

 
300

Cash and cash equivalents, end of period
$
531

 
$
6,994

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

7


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

 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Discovery,
Inc. Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Par Value
Shares
 
Par Value
December 31, 2017
 
14

 
$

 
547

 
$
5

 
$
7,295

 
$
(6,737
)
 
$
4,632

 
$
(585
)
 
$
4,610

 
$

 
$
4,610

Cumulative effect of accounting changes (See Note 1)
 

 

 

 

 

 

 
33

 
(26
)
 
7

 

 
7

Net income available to Discovery, Inc. and attributable to noncontrolling interests
 

 

 

 

 

 

 
325

 

 
325

 
41

 
366

Other comprehensive loss
 

 

 

 

 

 

 

 
(153
)
 
(153
)
 

 
(153
)
Share-based compensation
 

 

 

 

 
71

 

 

 

 
71

 

 
71

Tax settlements associated with share-based compensation
 

 

 

 

 
(18
)
 

 

 

 
(18
)
 

 
(18
)
Issuance of stock and noncontrolling interest in connection with the acquisition of Scripps Networks Interactive, Inc. ("Scripps Networks")
 

 

 
139

 
1

 
3,217

 

 

 

 
3,218

 
1,700

 
4,918

Dividends paid to noncontrolling interests
 

 

 

 

 

 

 

 

 

 
(38
)
 
(38
)
Issuance of stock in connection with share-based plans
 

 

 
4

 

 
62

 

 

 

 
62

 

 
62

Redeemable noncontrolling interest adjustments to redemption value
 

 

 

 

 

 

 
(6
)
 

 
(6
)
 

 
(6
)
September 30, 2018
 
14

 
$

 
690

 
$
6

 
$
10,627

 
$
(6,737
)
 
$
4,984

 
$
(764
)
 
$
8,116

 
$
1,703

 
$
9,819

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

8


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


NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Discovery, Inc. (“Discovery” or the “Company”) is a global media company that provides content across multiple distribution platforms, including pay-television ("pay-TV"), free-to-air ("FTA") and broadcast, various digital distribution platforms and content licensing agreements. The Company also operates a portfolio of digital direct-to-consumer products and a production studio. As further discussed in Note 2, on March 6, 2018, the Company acquired Scripps Networks Interactive, Inc. ("Scripps Networks") and changed its name from "Discovery Communications, Inc." to "Discovery, Inc." The Company presents the following business units: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting principally of international television networks and digital content services; and Education and Other, consisting of a production studio and previously consolidated curriculum-based education business that was sold on April 30, 2018. (See Note 2.) Financial information for Discovery’s reportable segments is discussed in Note 19.
Principles of Consolidation and 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.
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, 2017 (the “2017 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 as actual results may differ materially from those estimates. These estimates are sometimes complex, sensitive to changes in assumptions and may require fair value determinations using Level 3 fair value measurements. Estimates and judgments 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, share-based compensation, defined benefit plans, 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.
Preferred Stock Exchange
Pursuant to the Preferred Share Exchange Agreement (the "Exchange Agreement") with Advance/Newhouse Programming Partnership ("Advance/Newhouse") on July 30, 2017, Discovery agreed to issue newly designated shares of Series A-1 and Series C-1 preferred stock in exchange for all outstanding shares of Discovery's Series A and Series C convertible participating preferred stock (see Note 9). As a result, historical basic and diluted earnings per share available to Series C-1 preferred stockholders, previously Series C preferred stockholders, changed. The transactions contemplated by the Exchange Agreement were completed on August 7, 2017. Prior to the Exchange Agreement, Series C convertible preferred stock was convertible into Series C common stock at a conversion rate of 2.0 shares of Series C common stock for each share of Series C preferred stock. Following the exchange, the Series C-1 preferred stock is convertible into Series C common stock at a conversion rate of 19.3648 shares of Series C common stock for each share of Series C-1 preferred stock. As such, the Company has retrospectively recast basic and diluted earnings per share information for the three and nine months ended September 30, 2017 for Series C preferred stock in order to conform with per share earnings that would have been available consistent with the ratios provided for the Series C-1 preferred

9


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

stock. (See Note 15.) The Exchange Agreement did not impact historical basic and diluted earnings per share attributable to the Company's Series A, B and C common stockholders.    

Accounting and Reporting Pronouncements Adopted
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12, which includes significant amendments that expand the eligibility for hedge accounting to more financial and nonfinancial hedging strategies. The guidance is intended to align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. In addition, the guidance amends the presentation and disclosure requirements and changes how companies assess effectiveness. The updated guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company early adopted the pronouncement on July 1, 2018. As a result, the Company changed the method by which it assesses effectiveness for net investment hedges from the forward-method to the spot-method.
The Company believes the spot method better matches the spot rate changes of the net investment. Previous net losses of $87 million incurred under the forward method related to net investment hedges will remain in other comprehensive loss under the currency translation adjustments component and will be reclassified to earnings when the net investment is sold or liquidated. The adoption of ASU 2017-12 did not result in a material impact to our consolidated results of operations; however, the Company has expanded its disclosures of its derivative activities as more fully described in Note 7.
Recognition and Measurement of Financial Instruments ("ASU 2016-01")
On January 1, 2018, the Company adopted new guidance that enhances the reporting model for financial instruments. The new guidance impacted the financial statements as follows:
Gains and losses on common stock investments with readily determinable fair values are now recorded in other expense, net. Previously, the Company recorded these gains and losses in other comprehensive income ("OCI"). The Company adopted this guidance on a modified retrospective basis and recorded a transition adjustment to reclassify accumulated other comprehensive income to retained earnings of $26 million, net of tax, as of January 1, 2018. The new guidance eliminates the available-for-sale ("AFS") classification for common stock investments. (See Note 3 and Note 9.)
Upon adoption of ASU 2016-01, the Lionsgate Collar, as defined in Note 3, no longer receives the hedge accounting designation. There is no change to the manner in which movements in fair value of these instruments will be reflected in the financial statements, as gains and losses will continue to be recorded as a component of other expense, net on the consolidated statements of operations. (See Note 7.)
For equity interests without readily determinable fair values previously accounted for under the cost method, the Company has elected to apply the "measurement alternative" prospectively. Under this election, investments are recorded at cost, less impairment, adjusted for subsequent observable price changes as of the date that an observable transaction takes place. The Company will recognize observable price changes as adjustments to fair values of these investments as a component of other expense, net. (See Note 3 and Note 4.) In addition, companies are required to perform a qualitative assessment each reporting period to identify impairments under a single-step model. When a qualitative assessment indicates that an impairment exists, the Company will need to estimate the fair value of the investment and recognize in current earnings an impairment loss equal to the difference between the fair value and the carrying amount of the equity investment.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("Topic 606"), which updates numerous requirements in U.S. GAAP, eliminates industry-specific guidance, and provides companies with a single model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance also addresses the accounting for costs incurred as part of obtaining or fulfilling a contract with a customer by adding ASC Subtopic 340-40, Other Assets and Deferred Costs: Contracts with Customers, and requiring that costs of obtaining a contract be recognized as an asset and amortized as goods and services are transferred to the customer, as long as the costs are expected to be recovered.
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Following the modified retrospective approach for the adoption of this accounting guidance, the Company recorded an increase to opening retained earnings of $7 million as of January 1, 2018, due to the cumulative impact of adopting Topic 606. The

10


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

impact relates to the capitalization of sales commissions for long-term education-based services for the Education Business, which was disposed of as of April 30, 2018. (See Note 2.) For the nine months ended September 30, 2018, the total amortization of capitalized sales commissions recorded as a component of cost of revenues was immaterial. Since the Education Business was disposed of as of April 30, 2018, no commissions amortization expense was recorded for the three months ended September 30, 2018. The impact to revenue and costs of revenue as a result of applying Topic 606 was immaterial for the three and nine months ended September 30, 2018. (See Note 11.)
Income Taxes
In October 2016, the FASB issued guidance that simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new guidance includes requirements to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, and therefore eliminates the exception for an intra-entity transfer of an asset other than inventory. The Company adopted the new standard effective January 1, 2018, and there was no material impact on the consolidated financial statements upon adoption.
Clarifying the Definition of a Business
On January 1, 2018, the Company adopted new FASB guidance that amends the definition of a business and provides a threshold which must be considered to determine whether a transaction is an acquisition (or disposal) of an asset or a business. Under the previous accounting guidance, the minimum inputs and processes required for a “set” of assets and activities to meet the definition of a business was not specified. That lack of clarity led to broad interpretations of the definition of a business. Under the new guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. This guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in the revenue recognition guidance.
Compensation - Retirement Benefits
In March 2017, the FASB issued new accounting guidance related to the presentation of net periodic pension costs and net periodic postretirement benefit costs, which requires employers sponsoring postretirement benefit plans to disaggregate the service cost component from the other components of net benefit cost. The standard also provides explicit guidance on how to present the service cost and other components of net benefit cost in the statement of operations and allows only the service cost component of net benefit cost to be eligible for capitalization. In conjunction with the acquisition of Scripps Networks, the Company evaluated the accounting for the Scripps Networks qualified defined benefit pension plan ("Pension Plan") and the Scripps Networks non-qualified unfunded Supplemental Executive Retirement Plan ("SERP"). As the Pension Plan was frozen effective December 31, 2009 and the Plan sponsor no longer grants credits to participants for service costs, the updated guidance on service costs is not applicable. The presentation as required by this guidance is reflected within the employee benefit plans footnote disclosures. (See Note 13.)
Accounting and Reporting Pronouncements Not Yet Adopted
SEC's Disclosure Update and Simplification
In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. Among the amendments is the requirement to present the changes in stockholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. The amendments are effective for all filings made on or after November 5, 2018. However, registrants may begin providing the new interim reconciliations of stockholders' equity in the Form 10-Q for the interim period beginning after the effective date. The Company plans to implement the changes required by these amendments to its Statements of Equity in its Form 10-Q filing for the period ended March 31, 2019.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued updated guidance which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act ("TCJA") to retained earnings for each period in which the effect of the change is recorded. The update also requires entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.

11


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

Goodwill
Under the current accounting guidance, the quantitative goodwill impairment test is performed using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the quantitative impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative goodwill impairment test is required to be performed to measure the amount of impairment loss, if any. The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit’s identifiable net assets excluding goodwill is compared to the fair value of the reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill. The new guidance eliminates Step 2 from the goodwill impairment test and eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Therefore, an entity will recognize impairment charges for the amount by which the carrying amount exceeds the reporting unit's fair value, and the same impairment assessment applies to all reporting units. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this update must be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
Financial Instruments - Credit Losses
In June 2016, the FASB issued guidance on measurement of credit losses on financial instruments that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and that requires entities to use a new, forward-looking “expected loss” model that is expected to generally result in the earlier recognition of allowances for losses. The guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, but early adoption is permitted. The Company is evaluating the effect that the pronouncement will have on the Company's consolidated financial statements.
Leases
In February 2016, the FASB issued guidance on leases that will require lessees to recognize almost all of their leases on the balance sheet by recording a right-of-use asset and liability. The guidance also requires improved disclosures to help users of the financial statements better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard will be effective for reporting periods beginning after December 15, 2018, and the new accounting guidance may be applied at the beginning of the earliest comparative period presented in the year of adoption or at the effective date without applying the provisions of the new guidance to comparative periods presented. During the three months ended September 30, 2018, the Company determined a number of adoption elections. The Company will elect to apply the guidance at the effective date without recasting the comparative periods presented. Additionally, the Company will elect to apply practical expedients that will allow it to not reassess 1) whether any expired or existing contracts are, or contain, leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. The Company will also elect to not separate lease components from non-lease components across all lease categories. Instead, each separate lease component and non-lease component will be accounted for as a single lease component. The Company will not elect to apply the practical expedient to use hindsight in determining the lease term and in assessing the right-of-use assets for impairment. Additionally, the Company will not elect to apply the short-term lease scope exemption. The Company continues to evaluate the impact that the pronouncement will have on the Company's consolidated financial statements. It is expected that assets and liabilities will increase materially when operating leases are recorded under the new standard and the pattern of expense recognition within the consolidated statements of operations will not change significantly. The adoption is not expected to have an impact on the Company's ability to meet its financial covenants.
Concentrations Risk
Customers
The Company has long-term contracts with distributors around the world. For the U.S. Networks segment, approximately 97% of distribution revenue comes from the Company's largest 10 distributors in the U.S. For the International Networks segment, approximately 41% of distribution revenue comes from the Company's largest 10 distributors outside of the U.S. Agreements in place with the 10 largest cable and satellite operators in the U.S. Networks and International Networks expire at various times from 2018 through 2023. Although the Company seeks to renew its agreements with its distributors prior to expiration of a contract, a

12


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

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, 2018 or 2017. As of September 30, 2018 and December 31, 2017, 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. The Company performs periodic evaluations of the relative credit standing of the financial institutions and attempts to limit exposure with any one institution. Additionally, the Company has cash and cash equivalents held by its foreign subsidiaries. Under the TCJA, the Company is subject to U.S. taxes for the deemed repatriation of certain cash balances held by foreign corporations. The Company intends to continue to permanently reinvest these funds outside of the U.S., and current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
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, 2018, the Company did not anticipate nonperformance by any of its counterparties.
Counterparty Credit Risk
The Company is exposed to the risk that the counterparties to outstanding derivative financial instruments will default on their obligations. The Company manages these credit risks by evaluating and monitoring the creditworthiness of, and concentration of risk with, the respective counterparties. In this regard, credit risk associated with outstanding derivative financial instruments is spread across a relatively broad counterparty base of banks and financial institutions. In connection with the Company's economic hedge of certain investments classified as common stock investments with readily determinable fair value, the Company has pledged shares as collateral to the derivative counterparty. (See Note 3.) The Company also has a limited number of arrangements where collateral is required to be posted in the instance that certain fair value thresholds are exceeded. As of September 30, 2018, $8 million of collateral has been posted by the Company under these arrangements and classified as other noncurrent assets in the consolidated balance sheets. As of September 30, 2018, our exposure to counterparty credit risk included derivative assets with an aggregate fair value of $51 million. (See Note 4.)

13


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

NOTE 2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Scripps Networks
On March 6, 2018, Discovery acquired Scripps Networks pursuant to the Agreement and Plan of Merger (the "Merger Agreement") by and among Discovery, Scripps Networks and Skylight Merger Sub, Inc. dated July 30, 2017 (the "acquisition of Scripps Networks"). The acquisition of Scripps Networks allows the Company to offer complementary brands with an extensive library of original programming to consumers and to create a scale player with the ability to compete for audiences and advertising revenue. The acquisition is intended to extend Scripps Networks' content to a broader international audience through Discovery's global distribution infrastructure. Finally, the acquisition of Scripps Networks is expected to create cost synergies for the Company.
The consideration paid for the acquisition of Scripps Networks consisted of (i) for Scripps Networks shareholders that did not make an election or elected to receive the mixed consideration, $65.82 in cash and 1.0584 shares of Discovery Series C common stock for each Scripps Networks share, (ii) for Scripps Networks shareholders that elected to receive the cash consideration, $90.00 in cash for each Scripps Networks share, (iii) for Scripps Networks shareholders that elected to receive the stock consideration, 3.9392 shares of Discovery Series C common stock for each Scripps Networks share, subject to the terms and conditions set forth in the Merger Agreement and (iv) transaction costs that Discovery paid for costs incurred by Scripps Networks in conjunction with the acquisition. The following table summarizes the components of the aggregate consideration paid for the acquisition of Scripps Networks (in millions of dollars and shares, except for per share amounts, share conversion ratio and stock option conversion ratio) as of March 6, 2018.
Scripps Networks equity
 
 
Scripps Networks shares outstanding
 
131

Cash consideration per Scripps Networks share
 
$
65.82

Cash portion of consideration
 
$
8,590

 
 
 
Scripps Networks shares outstanding
 
131

Share conversion ratio per Scripps Networks share
 
1.0584

Discovery Series C common stock
 
138

Discovery Series C common stock price per share
 
$
23.01

Equity portion of consideration
 
$
3,179

 
 
 
Shares awarded under Scripps Networks share-based compensation programs
 
3

Scripps Networks share-based compensation awards converting to cash
 
2

Average cash consideration per share awarded less applicable exercise price
 
$
46.90

Cash portion of consideration
 
$
88

 
 
 
Scripps Networks share-based compensation awards
 
1

Share-based compensation conversion ratio (based on intrinsic value per award)
 
3

Discovery Series C common stock issued (1) or share-based compensation converted (2)
 
3

Average equity value (intrinsic value of Discovery Series C common stock or options to be issued)
 
$
15.19

Share-based compensation equity value
 
$
51

Less: post-combination compensation expense
 
(12
)
Equity portion of consideration
 
39

 
 
 
Scripps Networks transaction costs paid by Discovery
 
117

 
 
 
Total consideration paid
 
$
12,013

Balances reflect rounding of dollar and share amounts to millions, which may result in differences for recalculated standalone amounts compared with the amounts presented above.

14


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

The Company applied the acquisition method of accounting to Scripps Networks' business, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce and synergies expected from cost savings, operations and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of this acquisition has been provisionally allocated to the U.S. Networks and International Networks reportable segments in the amounts of $5.6 billion and $600 million, respectively, and is not amortizable for tax purposes.
The preliminary opening balance sheet is subject to adjustment based on final assessment of the fair values of certain acquired assets, principally intangibles, equity method investments, contingent liabilities and income taxes. The Company used discounted cash flow ("DCF") analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. The fair value of equity interests previously held by Scripps Networks was determined using the discounted cash flow and market value methods. The fair value of trade-names and trademarks was determined using an income approach based on the relief from royalty method; the remaining intangibles were determined using an income approach based on the excess earnings method. The fair value of interest-bearing debt was determined using publicly-traded prices. For the fair value estimates, the Company used: (i) projected discounted cash flows, (ii) historical and projected financial information, (iii) synergies including cost savings and (iv) attrition rates, as relevant, that market participants would consider when estimating fair values. As the Company continues to finalize the fair value of assets acquired and liabilities assumed, purchase price adjustments have been recorded and additional purchase price adjustments may be recorded during the measurement period. The Company reflects measurement period adjustments in the period in which the adjustments occur. The adjustments for the nine months ended September 30, 2018 resulted from the receipt of additional financial projections associated with certain equity method investments, contingent liability estimates and true-ups for estimated working capital balances. These adjustments did not impact the Company's statements of operations. The preliminary fair value of assets acquired and liabilities assumed, measurement period adjustments, as well as a reconciliation to consideration paid is presented in the table below (in millions).
 
 
Preliminary
March 6, 2018
 
Measurement Period Adjustments
 
Updated Preliminary
March 6, 2018
Accounts receivable
 
$
783

 
$

 
$
783

Other current assets
 
421

 
(24
)
 
397

Content rights
 
1,088

 

 
1,088

Property and equipment
 
315

 

 
315

Goodwill
 
6,003

 
213

 
6,216

Intangible assets
 
9,175

 

 
9,175

Equity method investments, including note receivable
 
870

 
(132
)
 
738

Other noncurrent assets
 
111

 
3

 
114

Current liabilities assumed
 
(494
)
 
(133
)
 
(627
)
Debt assumed
 
(2,481
)
 

 
(2,481
)
Deferred income taxes
 
(1,695
)
 
8

 
(1,687
)
Other noncurrent liabilities
 
(383
)
 
65

 
(318
)
Noncontrolling interests
 
(1,700
)
 

 
(1,700
)
Total consideration paid
 
$
12,013

 
$

 
$
12,013


The table below presents a summary of intangible assets acquired and weighted average estimated useful life of these assets.
 
 
Fair Value
 
Weighted Average Useful Life in Years
Trademarks and trade names
 
$
1,225

 
10
Advertiser relationships
 
4,995

 
10
Advertising backlog
 
280

 
1
Affiliate relationships
 
2,455

 
12
Broadcast licenses
 
220

 
6
Total intangible assets acquired
 
$
9,175

 
 

15


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


OWN
On November 30, 2017, the Company acquired from Harpo, Inc. ("Harpo") a controlling interest in the Oprah Winfrey Network ("OWN"), increasing Discovery’s ownership from 49.50% to 73.75%. OWN is a pay-TV network and website that provides adult lifestyle and entertainment content, which is focused on African American viewers. Discovery paid $70 million in cash and recognized a gain of $33 million to account for the difference between the carrying value and the fair value of the previously held 49.50% equity method investment. The fair value of the equity interest in the network is subject to the impact of the note payable to Discovery. Discovery consolidated OWN under the VIE consolidation model upon closing of the transaction. Following the acquisition of the incremental equity interest and change to governance provisions, the Company has determined that it is now the primary beneficiary of OWN as Discovery obtained control of the Board of Directors and operational rights that significantly impact the economic performance of the business such as programming and marketing, and selection of key personnel. As a result, the accounting for OWN was changed from an equity method investment to a consolidated subsidiary. As the primary beneficiary, Discovery includes OWN's assets, liabilities and results of operations in the Company's consolidated financial statements. As of September 30, 2018, the carrying amounts of assets and liabilities of the consolidated VIE were $707 million and $271 million, respectively.
The Company applied the acquisition method of accounting to OWN’s business, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocated to goodwill. The goodwill reflects the workforce and synergies expected from broader exposure to the self-discovery and self-improvement entertainment sector. The goodwill recorded as part of this acquisition is included in the U.S. Network reportable segment and is not amortizable for tax purposes. Intangible assets consist of advertiser backlog, advertiser relationships and affiliate relationships with a weighted average estimated useful life of 9 years.
The preliminary opening balance sheet is subject to adjustment based on final assessment of the fair values of contingent liabilities. 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 intangibles was determined using an income approach based on the excess earnings method. For the fair value estimates, the Company used: (i) projected discounted cash flows, (ii) historical and projected financial information, (iii) synergies including cost savings and (iv) attrition rates, as relevant, that market participants would consider when estimating fair values. The Company will reflect measurement period adjustments, if any, in the period in which the adjustment occurs. The preliminary fair value of assets acquired and liabilities assumed, as well as a reconciliation to cash consideration transferred is presented in the table below (in millions).
 
 
Preliminary
November 30, 2017
Intangible assets
 
$
295

Content rights
 
176

Accounts receivable
 
84

Other assets
 
26

Other liabilities
 
(230
)
Net assets acquired
 
$
351

Goodwill
 
136

Remeasurement gain on previously held equity interest
 
(33
)
Carrying value of previously held equity interest
 
(329
)
Redeemable noncontrolling interest
 
(55
)
Cash consideration transferred
 
$
70

Harpo has the right to require the Company to purchase its remaining noncontrolling interest at fair value during 90-day windows beginning on July 1, 2018 and every two and a half years thereafter through January 1, 2026. As Harpo’s put right is outside the Company's control, Harpo’s noncontrolling interest is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet. (See Note 8.)

16


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

The Enthusiast Network, Inc.
On September 25, 2017, the Company contributed its linear cable network focused on cars and motor sports, Velocity, to a new joint venture Motor Trend Group, LLC ("MTG"), formally VTEN with GoldenTree Asset Management L.P. ("GoldenTree"). GoldenTree's contributions to the joint venture included businesses from The Enthusiast Network, Inc. ("TEN"), primarily MotorTrend.com, the Motor Trend YouTube channel and the Motor Trend OnDemand OTT service. TEN did not contribute its print businesses to the joint venture. The joint venture has a portfolio of digital content, social groups, live events and original content focused on the automotive audience. In exchange for their contributions, Discovery and GoldenTree received 67.5% and 32.5% ownership of the new joint venture, respectively.
Upon the closing of the transaction, Discovery consolidated the joint venture under the voting interest consolidation model. As the Company controlled Velocity and continues to control Velocity after the transaction, the change in the value of the Company's ownership interest was accounted for as an equity transaction and no gain or loss was recognized in the Company's consolidated statements of operations, but was reflected as a component of additional paid-in capital in the consolidated statement of equity. The Company applied the acquisition method of accounting to TEN's contributed businesses, whereby the excess of the fair value of the contributed business over the fair value of identifiable net assets was allocated to goodwill. The goodwill reflects the workforce and synergies expected from broader exposure to the automotive entertainment sector. The goodwill recorded as part of this acquisition is included in the U.S. Network reportable segment and is not amortizable for tax purposes. Intangible assets primarily consist of trade names, licensing agreements and customer relationships with a weighted average estimated useful life of 16 years.
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 and liabilities assumed is presented in the table below (in millions).
 
 
Preliminary
September 25, 2017
 
Measurement Period Adjustments
 
Final
September 25, 2017
Goodwill
 
$
59

 
$
16

 
$
75

Intangible assets
 
71

 
(18
)
 
53

Property plant and equipment, net
 
16

 
1

 
17

Other assets acquired
 
6

 

 
6

Liabilities assumed
 
(8
)
 
1

 
(7
)
Net assets acquired
 
$
144

 
$

 
$
144

Discovery has a fair value call right exercisable during 30-day windows beginning on each of March 25, 2021, September 25, 2022 and March 25, 2024, that requires Discovery to either purchase all of GoldenTree's noncontrolling 32.5% interest in the joint venture at fair value or participate in an initial public offering for the joint venture. GoldenTree's 32.5% noncontrolling interest in the joint venture is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet. The opening balance sheet value of redeemable noncontrolling interest recognized upon closing was $82 million based on GoldenTree's ownership interest in the book value of Velocity and fair value of GoldenTree's contribution. The balance was subsequently increased by $38 million to adjust the redemption value to fair value of $120 million. (See Note 8.)
Other
On March 2, 2018, the Company acquired a sports broadcaster in Turkey for $5 million. On September 1, 2017, the Company exercised its call right for the remaining outstanding equity in an equity method investment in a FTA company in Poland for $4 million. The operations of these entities were consolidated upon their acquisition dates.
Pro Forma Financial Information
The following unaudited pro forma information has been presented as if the acquisition of Scripps Networks occurred on January 1, 2017 and the OWN and MTG transactions occurred on January 1, 2016. The information is based on the historical results of operations of the acquired businesses, adjusted for:
1.
The allocation of purchase price and related adjustments, including adjustments to amortization expense related to the fair value of intangible assets acquired and the recognition of the noncontrolling interests;
2.
Impacts of debt financing, including interest for debt issued and amortization associated with the fair value adjustments of debt assumed;

17


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

3.
The exclusion of acquisition-related costs incurred during the nine months ended September 30, 2018 and allocation of all acquisition-related costs to the nine months ended September 30, 2017 (no adjustments required for the three months ended September 30, 2018).
4.
Associated tax-related impacts of adjustments; and
5.
Changes to align accounting policies
The pro forma results do not necessarily represent what would have occurred if the transactions had taken place on January 1, 2017 for Scripps Networks or January 1, 2016 for OWN or MTG, nor do they represent the results that may occur in the future. 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). The following table presents the Company's pro forma combined revenues and net income (in millions, except per share value).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
$
2,593

 
$
2,582

 
$
8,367

 
$
7,920

Net income available to Discovery, Inc.
 
162

 
232

 
510

 
815

Net income per share - basic
 
0.23

 
0.33

 
0.71

 
1.14

Net income per share - diluted
 
0.23

 
0.33

 
0.71

 
1.13


Impact of Business Combinations
The operations of each of the business combinations 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 (in millions).
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Revenues:
 
 
 
 
    Distribution
 
$
279

 
$
673

      Advertising
 
645

 
1,631

      Other
 
43

 
109

Total revenues
 
$
967

 
$
2,413

Net (loss) income available to Discovery, Inc.
 
$
(16
)
 
$
12

Dispositions
Education Business
On April 30, 2018, the Company sold an 88% controlling equity stake in its Education Business to Francisco Partners for a sale price of $113 million. The Company recorded a gain of $84 million based on net assets disposed of $44 million, including $40 million of goodwill. The impact of the Education Business on the Company's income before income taxes was a loss of $2 million for the nine months ended September 30, 2018. Discovery retained a 12% ownership interest in the Education Business, which is accounted for as an equity method investment. (See Note 3.) Discovery has long-term trade name license agreements with the Education Business that are royalty arrangements at fair value.
Raw and Betty Studios, LLC
On April 28, 2017, the Company sold Raw and Betty to All3Media. All3Media is a U.K. based television, film and digital production and distribution company. The Company owns 50% of All3Media and accounts for its investment in All3Media under the equity method of accounting. The Company recorded a loss of $4 million for the disposition of these businesses for the nine months ended September 30, 2017. The loss on disposition of Raw and Betty resulted from the disposition of net assets of $38 million, including $30 million of goodwill. The impact to the Company's income before income taxes for Raw and Betty through

18


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

the date of sale was a loss of $4 million for the nine months ended September 30, 2017. Raw and Betty were components of the studios operating segment reported with Education and Other.
The Company determined that these disposals did not meet the definition of a discontinued operation because they do not represent a strategic shift that has a significant impact on the Company's operations and consolidated financial results.
NOTE 3. INVESTMENTS
The Company’s investments consisted of the following (in millions).
Category
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
Time deposits
 
Cash and cash equivalents
 
$

 
$
1,305

Equity securities:
 
 
 
 
 
 
Money market funds
 
Cash and cash equivalents
 

 
2,707

Mutual funds
 
Prepaid and other current assets
 
40

 
182

Mutual funds
 
Other noncurrent assets
 
199

 

Equity method investments:
 
 
 
 
 
 
Equity investments
 
Equity method investment
 
919

 
335

Note receivable
 
Equity method investment
 
96

 

Equity Investments:
 
 
 
 
 
 
Common stock investments with readily determinable fair values
 
Other noncurrent assets
 
120

 
164

Equity investments without readily determinable fair value
 
Other noncurrent assets
 
379

 
295

Total investments
 
 
 
$
1,753

 
$
4,988

Money Market Funds and Time Deposits
During 2017, the Company issued $6.8 billion in senior notes to fund the March 6, 2018 acquisition of Scripps Networks. (See Note 2 and Note 6.) A portion of the proceeds was invested in various short-term investments prior to the acquisition of Scripps Networks and were classified as cash and cash equivalents on the consolidated balance sheet. As of September 30, 2018, the decrease in these funds is the result of funding the acquisition of Scripps Networks.
Mutual Funds
Equity securities include investments in mutual funds held in separate trusts, which are owned as part of the Company’s supplemental retirement plans. (See Note 4.)
Equity Method Investments
The Company makes investments that support its underlying business strategy and enable it to enter new markets and develop programming. Certain of the Company's equity method investments are VIEs, for which the Company is not the primary beneficiary. As of September 30, 2018, the Company’s maximum exposure for all its unconsolidated VIEs including the investment carrying values, unfunded contractual commitments, and guarantees made on behalf of VIEs was approximately $501 million. The Company's maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $458 million and $181 million as of September 30, 2018 and December 31, 2017, respectively. The Company recognized its portion of VIE operating results with net earnings of $4 million and net losses of $21 million for the three months ended September 30, 2018 and 2017, respectively, and net losses generated by VIEs of $46 million and $99 million for the nine months ended September 30, 2018 and 2017, respectively.
UKTV
In connection with the acquisition of Scripps Networks, the Company acquired a 50% ownership interest in UKTV, a British multi-channel broadcaster jointly owned with BBC Studios (“BBC”). UKTV was formed on March 26, 1992, through a joint venture arrangement between BBC and Virgin Media Inc. ("VMED"). On August 11, 2011, Scripps Networks acquired VMED's 50% equity interest in UKTV along with a note receivable for debt instruments provided by VMED to UKTV. The Company has determined that UKTV is a VIE as the entity is unable to fund its activities without additional subordinated financial support provided by the note receivable. While the Company and BBC have equal voting rights in the management committee, the governing body of UKTV, power is not shared because BBC holds operational rights related to programming and creative

19


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

development that significantly impact UKTV’s economic performance. Therefore, Discovery is not the primary beneficiary. The Company determined that its 50% equity interest in UKTV gives the Company the ability to exercise significant influence over the entity's operating and financial policies. Accordingly, the Company accounts for its investment in UKTV using the equity method. As of September 30, 2018, the Company’s investment in UKTV totaled $400 million, including a note receivable of $96 million.
nC+
In connection with the acquisition of Scripps Networks, the Company acquired a 32% ownership interest in nC+, a Polish satellite distributor of television content. nC+ is controlled by Group Canal+ S.A, a French broadcaster. The Company applies the equity method of accounting to its 32% investment in nC+ ordinary shares, which provide the ability to exercise significant influence over the operating and financial policies of nC+. The Company's investment in nC+ totaled $217 million as of September 30, 2018.
Renewable Energy Investments
During the nine months ended September 30, 2018, the Company invested $17 million in limited liability companies that sponsor renewable energy projects related to solar energy, and during the three and nine months ended September 30, 2017, the Company invested $104 million and $300 million, respectively, in these companies. No investments were made in these companies during the three months ended September 30, 2018. The Company expects these investments to result in tax benefits that reduce the Company's future tax liability, and cash flows from the operations of the investees. These investments are considered VIEs of the Company. The Company accounts for these investments under the equity method of accounting. While the Company possesses rights that allow it to exercise significant influence over the investments, the Company does not have the power to direct the activities that will most significantly impact their economic performance, such as the investee's ability to obtain sufficient customers or control solar panel assets. Once a stipulated return on investment is earned by the Company, the investment allocations to the Company are significantly reduced. Accordingly, the Company applies the Hypothetical Liquidation at Book Value ("HLBV") methodology for allocating earnings, which is a generally accepted method under the equity method of accounting when a substantive profit sharing arrangement exists.
The following table presents renewable energy investments losses and associated tax benefits (in millions).
 
Consolidated Statements of Operations Classification
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Renewable Energy Investments
 
2018
 
2017
 
2018
 
2017
Income (loss) on renewable energy investments
Income (loss) from equity investees, net
 
$
2

 
$
(41
)
 
$
(14
)
 
$
(167
)
 
 
 
 
 
 
 
 
 
 
Tax benefit
 
 
 
 
 
 
 
 
 
Equity passive (income)
loss
Income tax (expense) benefit
 
$
(1
)
 
$
14

 
$
3

 
$
60

Investment tax credits
Income tax benefit
 
3

 
82

 
6

 
148

Total tax benefit
 
 
$
2

 
$
96

 
$
9

 
$
208

The Company accounts for investment tax credits utilizing the flow through method. As of September 30, 2018 and December 31, 2017, the Company's carrying value of renewable energy investments was $91 million and $98 million, respectively. The Company has $4 million of future funding commitments for these investments as of September 30, 2018, which are cancelable under limited circumstances. The Company has concluded that losses incurred on these investments to-date are not indicative of an other-than-temporary impairment due to the nature of these investments. Losses in the early stages of investments in companies that sponsor renewable energy projects are not uncommon, and the Company expects improved performance from these investments in future periods.
Other Equity Method Investments
At September 30, 2018 and December 31, 2017, the Company's other equity method investments included production companies such as All3Media, a Russian cable television business, Mega TV in Chile and certain joint ventures in Canada. Other equity method investments acquired in conjunction with the acquisition of Scripps Networks include joint ventures in Canada, and HGTV and Food Network Magazines. There were no impairment losses recorded during the three months ended September 30, 2018. The Company recorded an impairment loss of $24 million for the nine months ended September 30, 2018 because the carrying amount of certain investments was not recoverable. The impairment loss is reflected as a component of income (loss) from equity investees on the Company's consolidated statement of operations.

20


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

Investor Basis Differential
With the exception of the OWN investment prior to the Company's November 30, 2017 consolidation (see Note 2), UKTV, nC+ and certain investments in renewable energy projects for which the Company uses the HLBV methodology for allocating earnings, the carrying values of the Company’s remaining equity method investments are consistent with its ownership in the underlying net assets of the investees. A portion of the purchase prices associated with these investments was attributed to amortizable intangible assets, which are included in their carrying values. Earnings from our equity investees were reduced by the amortization of these intangibles of $20 million during the period from March 6, 2018 to September 30, 2018. Amortization that reduces the Company's equity in earnings of equity method investees for future periods is expected to be approximately $316 million.
Common Stock Investments with Readily Determinable Fair Value
The Company owns 5 million shares of common stock, or approximately 3%, of Lions Gate Entertainment Corp. ("Lionsgate"), an entertainment company. Lionsgate operates in the motion picture production and distribution, television programming and syndication, home entertainment and digital distribution business. Upon the adoption of ASU 2016-01, the shares are measured at fair value, with realized gains and losses recorded in other expense, net as the shares have a readily determinable fair value and the Company has the intent to retain the investment. The Company recorded a transition adjustment to reclassify accumulated other comprehensive income associated with Lionsgate shares in the amount of $32 million pre-tax ($26 million, net of tax) to retained earnings. Previously, amounts were recorded as a component of other comprehensive income.
The accumulated amounts associated with the components of the Company's common stock investments with readily determinable fair values, which are included in other non-current assets, are summarized in the table below (in millions).
 
 
September 30, 2018
 
December 31, 2017
Cost
 
$
195

 
$
195

Accumulated change in the value of:
 
 
 
 
Equity securities recognized in other expense, net
 
(45
)
 
(1
)
Unhedged equity securities recorded in other comprehensive income
 

 
32

Reclassification of accumulated other comprehensive income to retained earnings
 
32

 

Other-than-temporary impairment
 
(62
)
 
(62
)
Carrying value
 
$
120

 
$
164

The Company hedged 50% of the Lionsgate shares with an equity collar (the “Lionsgate Collar”) and pledged those shares as collateral to the derivative counterparty. Prior to adoption of ASU 2016-01, when the share price of Lionsgate was within the boundaries of the collar and the hedge had no intrinsic value, the Company recorded the gains or losses on the Lionsgate shares as a component of other comprehensive income (loss). When the share price of the Lionsgate shares was outside the boundaries of the collar and the hedge had intrinsic value, the Company recorded the gains or losses resulting from a change in the fair value of the hedged portion of Lionsgate shares that correspond to the change in intrinsic value of the hedge as a component of other expense, net. Upon adoption of ASU 2016-01, the Lionsgate Collar no longer receives the hedge accounting designation. Although there is a change in the hedging designation, all changes to the fair value of the Lionsgate Collar continue to be reflected in the financial statements as a component of other expense, net on the consolidated statements of operations (See Note 1, Note 4 and Note 7).
In 2016, the Company determined that the decline in value of equity securities related to its investment in Lionsgate was other-than-temporary in nature and, as such, the cost basis was adjusted to fair value. The impairment determination was based on the sustained decline in the stock price of Lionsgate in relation to the purchase price and the prolonged length of time the fair value of the investment had been less than the carrying value. Based on the other-than-temporary impairment determination, unrealized pre-tax losses of $62 million previously recorded as a component of other comprehensive income (loss) were recognized as an impairment charge that was included as a component of other expense, net for the quarter ended September 30, 2016.
Equity investments without readily determinable fair values assessed under the measurement alternative
The Company's equity investments without readily determinable fair values assessed under the measurement alternative as of September 30, 2018 primarily include its 42% minority interest in Group Nine Media recorded at $212 million. Discovery has significant influence through its voting rights in the preferred stock of Group Nine Media, however, this ownership interest has liquidation preferences that do not allow the investment to meet the definition of in-substance common stock. The Company accounts for its ownership interest in Group Nine Media as an equity investment without a readily determinable fair value assessed under the measurement alternative. The Company also has similar investments in an educational website, an electric car racing

21


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

series and certain investments to enhance the Company's digital distribution strategies, such as a $35 million investment in Refinery29. The Company completed its quarterly qualitative assessment and concluded that its other equity investments without readily determinable fair values had no indicators that a change in fair value had taken place as of September 30, 2018.
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.
The tables below present assets and liabilities measured at fair value on a recurring basis (in millions).
 
 
 
 
September 30, 2018
Category
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
Mutual funds
 
Prepaid expenses and other current assets
 
$
40

 
$

 
$

 
$
40

Mutual funds
 
Other noncurrent assets
 
199

 

 

 
199

Equity investments with readily determinable fair value:
 
 
 
 
 
 
 
 
 
 
Common stock
 
Other noncurrent assets
 
120

 

 

 
120

Derivatives:
 
 
 
 
 
 
 
 
 
 
  Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Prepaid expenses and other current assets
 

 
16

 

 
16

Foreign exchange
 
Other noncurrent assets
 

 
2

 

 
2

  Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Other noncurrent assets
 

 
9

 

 
9

No hedging designation:(a)
 
 
 
 
 
 
 
 
 
 
Equity (Lionsgate Collar)
 
Prepaid expenses and other current assets
 

 
8

 

 
8

Equity (Lionsgate Collar)
 
Other noncurrent assets
 

 
16

 

 
16

Total
 
 
 
$
359

 
$
51

 
$

 
$
410

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
41

 
$

 
$

 
$
41

Deferred compensation plan
 
Other noncurrent liabilities
 
202

 

 

 
202

Derivatives:
 
 
 
 
 
 
 
 
 
 
  Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
3

 

 
3

  Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Accrued liabilities
 

 
19

 

 
19

Cross-currency swaps
 
Other noncurrent liabilities
 

 
99

 

 
99

No hedging designation:
 
 
 
 
 
 
 
 
 


Cross-currency swaps
 
Accrued liabilities
 

 
1

 

 
1

Cross-currency swaps
 
Other noncurrent liabilities
 

 
2

 

 
2

Total
 
 
 
$
243

 
$
124

 
$

 
$
367


22


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

 
 
 
 
December 31, 2017
Category
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
Time deposits
 
Cash and cash equivalents
 
$

 
$
1,305

 
$

 
$
1,305

Equity securities:
 
 
 
 
 
 
 
 
 
 
Money market funds
 
Cash and cash equivalents
 
2,707

 

 

 
2,707

Mutual funds
 
Prepaid expenses and other current assets
 
182

 

 

 
182

Equity investments with readily determinable fair value:(a)
 
 
 
 
 
 
 
 
 
 
Common stock
 
Other noncurrent assets
 
82

 

 

 
82

Common stock - pledged
 
Other noncurrent assets
 
82

 

 

 
82

Derivatives:
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Prepaid expenses and other current assets
 

 
7

 

 
7

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Other noncurrent assets
 

 
3

 

 
3

Foreign exchange
 
Prepaid expenses and other current assets
 

 
2

 

 
2

Fair value hedges:(a)
 
 
 
 
 
 
 
 
 
 
Equity (Lionsgate Collar)
 
Other noncurrent assets
 

 
13

 

 
13

Total
 
 
 
$
3,053

 
$
1,330

 
$

 
$
4,383

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
182

 
$

 
$

 
$
182

Derivatives:
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
12

 

 
12

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Accrued liabilities
 

 
13

 

 
13

Cross-currency swaps
 
Other noncurrent liabilities
 

 
98

 

 
98

Foreign exchange
 
Accrued liabilities
 

 
8

 

 
8

No hedging designation:
 
 
 
 
 
 
 
 
 
 
Credit contracts
 
Other noncurrent liabilities
 

 
1

 

 
1

Cross-currency swaps
 
Other noncurrent liabilities
 

 
6

 

 
6

Total
 
 
 
$
182

 
$
138

 
$

 
$
320

(a) Prior to January 1, 2018, and the adoption of ASU 2016-01, the Company applied hedge accounting to the Lionsgate Collar. (See Note 1 and Note 7.)
Cash obtained as a result of the issuance of senior notes to fund a portion of the purchase price of the acquisition of Scripps Networks was invested in money market funds, time deposit accounts and highly liquid short-term instruments that qualify as cash and cash equivalents. Any accrued interest received after maturity was reinvested into additional short-term instruments. (See Note 3.) The Company values cash and cash equivalents using quoted market prices. As of September 30, 2018, following the acquisition of Scripps Networks, the Company no longer holds these investments as these investments were liquidated and utilized in the acquisition of Scripps Networks.
The fair value of Level 1 equity securities was determined by reference to the quoted market price per share in active markets multiplied by the number of shares held without consideration of transaction costs. (See Note 3.) The fair value of the deferred compensation plan liability was determined based on the fair value of the related investments elected by employees. Changes in the fair value of the investments are offset by changes in the fair value of the deferred compensation obligation. (See Note 3.)

23


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

Common stock investments with readily determinable fair values are recorded by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. (See Note 3.) As of January 1, 2018, the Company adopted ASU 2016-01, which eliminates the AFS classification. (See Note 1 and Note 3.)
Derivative financial instruments are comprised of foreign exchange, interest rate, credit and equity contracts. (See Note 7.) 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, borrowings under the revolving credit facility and senior notes. The carrying values for such financial instruments, other than the senior notes, each approximated their fair values as of September 30, 2018 and December 31, 2017. The estimated fair value of the Company’s outstanding senior notes using quoted prices from over the counter markets, considered Level 2 inputs, was $16.6 billion and $14.8 billion as of September 30, 2018 and December 31, 2017, respectively.
NOTE 5. CONTENT RIGHTS
The table below presents the components of content rights (in millions). 
 
 
September 30, 2018
 
December 31, 2017
Produced content rights:
 
 
 
 
Completed
 
$
5,359

 
$
4,355

In-production
 
727

 
442

Coproduced content rights:
 
 
 
 
Completed
 
717

 
745

In-production
 
50

 
27

Licensed content rights:
 
 
 
 
Acquired
 
995

 
1,070

Prepaid(a)
 
155

 
181

Content rights, at cost
 
8,003

 
6,820

Accumulated content rights expense
 
(4,539
)
 
(4,197
)
Total content rights, net
 
3,464

 
2,623

Current portion
 
(349
)
 
(410
)
Noncurrent portion
 
$
3,115

 
$
2,213

(a) Prepaid licensed content rights includes payments for rights to the Olympic games of $67 million that are reflected as noncurrent content rights and $83 million that are reflected as current content rights assets on the consolidated balance sheet as of September 30, 2018 and December 31, 2017, respectively.

Content expense consisted of the following (in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Content amortization
 
$
702

 
$
485

 
$
2,178

 
$
1,386

Other production charges
 
94

 
80

 
366

 
221

Content impairments
 
163

 
2

 
345

 
11

Total content expense
 
$
959

 
$
567

 
$
2,889

 
$
1,618


Content expense is generally a component of costs of revenues on the consolidated statements of operations. Content impairments of $161 million and $338 million for the three and nine months ended September 30, 2018, respectively, were due to the strategic realignment of content following the acquisition of Scripps Networks and are reflected in restructuring and other charges as further described in Note 20. No content impairments were recorded as a component of restructuring and other during the three or nine months ended September 30, 2017.

24


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


NOTE 6. DEBT
The table below presents the components of outstanding debt (in millions).
 
 
September 30, 2018
 
December 31, 2017
5.625% Senior notes, semi-annual interest, due August 2019
 
$
411

 
$
411

2.200% Senior notes, semi-annual interest, due September 2019
 
500

 
500

Floating rate notes, quarterly interest, due September 2019
 
400

 
400

2.750% Senior notes, semi-annual interest, due November 2019
 
500

 

2.800% Senior notes, semi-annual interest, due June 2020
 
600

 

5.050% Senior notes, semi-annual interest, due June 2020
 
789

 
789

4.375% Senior notes, semi-annual interest, due June 2021
 
650

 
650

2.375% Senior notes, euro denominated, annual interest, due March 2022
 
350

 
358

3.300% Senior notes, semi-annual interest, due May 2022
 
500

 
500

3.500% Senior notes, semi-annual interest, due June 2022
 
400

 

2.950% Senior notes, semi-annual interest, due March 2023
 
1,200

 
1,200

3.250% Senior notes, semi-annual interest, due April 2023
 
350

 
350

3.800% Senior notes, semi-annual interest, due March 2024
 
450

 
450

2.500% Senior notes, sterling denominated, annual interest, due September 2024
 
525

 
538

3.900% Senior notes, semi-annual interest, due November 2024
 
500

 

3.450% Senior notes, semi-annual interest, due March 2025
 
300

 
300

3.950% Senior notes, semi-annual interest, due June 2025
 
500

 

4.900% Senior notes, semi-annual interest, due March 2026
 
700

 
700

1.900% Senior notes, euro denominated, annual interest, due March 2027
 
700

 
717

3.950% Senior notes, semi-annual interest, due March 2028
 
1,700

 
1,700

5.000% Senior notes, semi-annual interest, due September 2037
 
1,250

 
1,250

6.350% Senior notes, semi-annual interest, due June 2040
 
850

 
850

4.950% Senior notes, semi-annual interest, due May 2042
 
500

 
500

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

 
850

5.200% Senior notes, semi-annual interest, due September 2047
 
1,250

 
1,250

Revolving credit facility
 
325

 
425

Commercial paper
 
297

 

Program financing line of credit
 
23

 

Capital lease obligations
 
245

 
225

Total debt
 
17,615

 
14,913

Unamortized discount, premium and debt issuance costs, net
 
(133
)
 
(128
)
Debt, net of unamortized discount, premium and debt issuance costs
 
17,482

 
14,785

Current portion of debt
 
(1,653
)
 
(30
)
Noncurrent portion of debt
 
$
15,829

 
$
14,755

Senior Notes
In connection with the acquisition of Scripps Networks on March 6, 2018, the Company assumed $2.5 billion aggregate principal amount of Scripps Networks 2.750% senior notes due 2019, 2.800% senior notes due 2020, 3.500% senior notes due 2022, 3.900% senior notes due 2024 and 3.950% senior notes due 2025 (the "Scripps Networks Senior Notes"). As part of accounting for the acquisition of Scripps Networks, the Scripps Networks Senior Notes were adjusted to fair value using observable trades as of the acquisition date. (See Note 2.) The fair value adjustment resulted in an opening balance sheet carrying

25


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

value that is $19 million less than the face amount of the senior notes. As of September 30, 2018, fair value adjustments of $3 million were amortized to interest expense.
On April 3, 2018, pursuant to the Offering Memorandum and Consent Solicitation Statement to Exchange dated March 5, 2018, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, completed the exchange of $2.3 billion aggregate principal amount of Scripps Networks Senior Notes, for $2.3 billion aggregate principal amount of DCL's 2.750% senior notes due 2019 (the "2019 Notes"), 2.800% senior notes due 2020 (the "2020 Notes"), 3.500% senior notes due 2022 (the "2022 Notes"), 3.900% senior notes due 2024 (the "2024 Notes") and 3.950% senior notes due 2025 (the "2025 Notes"). Interest on the 2019 Notes and the 2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year beginning on May 15, 2018. Interest on the 2020 Notes, the 2022 Notes and the 2025 Notes is payable semi-annually in arrears on June 15 and December 15 of each year commencing on June 15, 2018. The exchange was accounted for as a debt modification and, as a result, third-party issuance costs were expensed as incurred.
On September 21, 2017, DCL issued $500 million principal amount of 2.200% senior notes due 2019, $1.20 billion principal amount of 2.950% senior notes due 2023, $1.70 billion principal amount of 3.950% senior notes due 2028, $1.25 billion principal amount of 5.000% senior notes due 2037