Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s discussion and analysis of financial condition and results of operations is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and related notes. This section provides additional information regarding our businesses, current developments, results of operations, cash flows and financial condition. Additional context can also be found in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

BUSINESS OVERVIEW

On April 8, 2022, Discovery, Inc., a global media company that provides content across multiple distribution platforms including linear, free-to-air and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer (“DTC”) subscription products, completed its merger (the “Merger”) with the WarnerMedia business (the “WarnerMedia Business”, “WM Business”, or “WM”) of AT&T Inc. (“AT&T”) and changed its name from “Discovery, Inc.” to “Warner Bros. Discovery, Inc.” (“Warner Bros. Discovery”, “WBD”, the “Company”, “we”, “us”, or “our”). On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market (the “Nasdaq”) under the trading symbol WBD. (See Note 2 and Note 3 to the accompanying consolidated financial statements.)

Warner Bros. Discovery is a leading global media and entertainment company that creates and distributes the world’s most differentiated and complete portfolio of content and brands across television, film and streaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through its iconic brands and products including: Discovery Channel, discovery+, CNN, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTV and others.

In connection with the Merger, the Company has announced and has taken actions to implement projects to achieve cost synergies for the Company. The Company finalized the framework supporting its ongoing restructuring and transformation initiatives during the three months ended September 30, 2022, which will include, among other things, strategic content programming assessments, organization restructuring, facility consolidation activities, and other contract termination costs. The Company expects that it will incur approximately $3.2 - $4.3 billion in pre-tax restructuring charges. Of the total expected pre-tax restructuring charges, the Company expects total cash expenditures will be $1.0 - $1.5 billion. The Company incurred $1.5 billion and $2.6 billion of pre-tax restructuring charges for the three and nine months ended September 30, 2022, respectively. While the Company’s restructuring efforts are ongoing, including the strategic analysis of content programming, the restructuring program is expected to be substantially completed by the end of 2024.

In connection with the Merger, the Company reevaluated and changed its segment presentation and reportable segments for the quarter ending June 30, 2022. As of June 30, 2022, we classified our operations in three reportable segments:

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

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

DTC, consisting primarily of our premium pay TV and digital content services.

Our segment presentation aligned with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments. Prior periods have been recast to conform to the current period presentation.

During the three months ended March 31, 2022, we exited our operations in Russia and removed all of our channels and services from the market. We do not expect these actions will have a material effect on our consolidated financial statements.

Impact of COVID-19

We continue to closely monitor the ongoing impact of COVID-19 on all aspects of our business and geographies, including the impact on our customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties. Certain key sources of revenue for the Studios segment, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks.

The nature and full extent of COVID-19’s effects on our operations and results are not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future variants or surges of COVID-19, vaccine distribution and efficacy and other actions to contain the virus or treat its impact, among others. Our consolidated financial statements reflect management’s estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.

RESULTS OF OPERATIONS

The discussion below compares our actual and pro forma combined results, as if the Merger occurred on January 1, 2021, for the three and nine months ended September 30, 2022 to the three and nine months ended September 30, 2021. Management believes reviewing our pro forma combined operating results in addition to actual operating results is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance of our businesses. Our combined Studios, Networks, DTC, Corporate, and inter-segment eliminations pro forma information is based on the historical operating results of the respective segments and includes adjustments in accordance with Article 11 of Regulation S-X to illustrate the effects of the Merger as if it had occurred on January 1, 2021. The unaudited pro forma combined results include, where applicable, adjustments for (i) additional costs of revenues from the fair value step up of film and television library, (ii) additional amortization expense related to acquired intangible assets, (iii) additional depreciation expense from the fair value of property and equipment, (iv) adjustments for transaction costs and other one-time non-recurring costs, (v) changes to align accounting policies, and (vi) adjustments to eliminate intercompany activity.

Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined business. Pro forma amounts are not necessarily indicative of what our results would have been had we operated the combined businesses since January 1, 2021 and should not be taken as indicative of the Company’s future consolidated results of operations.

Actual amounts for the three and nine months ended September 30, 2022 include results of operations for Discovery for the entire period and WM for the period subsequent to the completion of the Merger on April 8, 2022.

Foreign Exchange Impacting Comparability

In addition to the Merger, the impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S. dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis (“ex-FX”), in addition to results reported in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with U.S. GAAP.

The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, which is a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the “2022 Baseline Rate”), and the prior year amounts translated at the same 2022 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities, as well as realized and unrealized foreign currency transaction gains and losses. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies.

Consolidated Results of Operations

The table below presents our consolidated results of operations (in millions).


	Three Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual		Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	2,042	$	—	$	2,042	$	1,453	$	890	$	2,343	41	%	(13)	%	(10)	%
Distribution	4,990		—		4,990		1,328		3,985		5,313		NM		(6)	%	(4)	%
Content	2,531		—		2,531		352		2,756		3,108		NM		(19)	%	(15)	%
Other	260		—		260		17		199		216		NM		20	%	24	%
Total revenues	9,823		—		9,823		3,150		7,830		10,980		NM		(11)	%	(8)	%
Costs of revenues, excluding depreciation and amortization	5,627		(132)		5,495		1,529		4,437		5,966		NM		(8)	%	(4)	%
Selling, general and administrative	2,589		—		2,589		944		2,047		2,991		NM		(13)	%	(11)	%
Depreciation and amortization	2,233		(475)		1,758		341		1,653		1,994		NM		(12)	%	(11)	%

Restructuring and other charges	1,521		—		1,521		7		—		7		NM		NM		NM
Asset impairment and loss (gain) on disposition and disposal groups	43		—		43		—		(223)		(223)		NM		NM		NM
Total costs and expenses	12,013		(607)		11,406		2,821		7,914		10,735		NM		6	%	9	%
Operating (loss) income	(2,190)		607		(1,583)		329		(84)		245		NM		NM		NM
Interest expense, net	(555)						(159)						NM

Loss from equity investees, net	(78)						(9)						NM
Other (expense) income, net	(28)						72						NM
(Loss) income before income taxes	(2,851)						233						NM
Income tax benefit (expense)	566						(36)						NM
Net (loss) income	(2,285)						197						NM
Net income attributable to noncontrolling interests	(21)						(32)						(34)	%
Net income attributable to redeemable noncontrolling interests	(2)						(9)						(78)	%
Net (loss) income available to Warner Bros. Discovery, Inc.	$	(2,308)					$	156					NM

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

NM - Not meaningful


	Nine Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual		Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	6,239	$	1,412	$	7,651	$	4,496	$	3,332	$	7,828	39	%	(2)	%	—	%
Distribution	11,180		4,339		15,519		3,898		11,767		15,665		NM		(1)	%	1	%
Content	4,918		3,297		8,215		564		8,321		8,885		NM		(8)	%	(5)	%
Other	472		230		702		46		489		535		NM		31	%	33	%
Total revenues	22,809		9,278		32,087		9,004		23,909		32,913		NM		(3)	%	—	%
Costs of revenues, excluding depreciation and amortization	13,488		5,869		19,357		3,553		15,349		18,902		NM		2	%	5	%
Selling, general and administrative	7,167		1,733		8,900		2,947		6,551		9,498		NM		(6)	%	(5)	%
Depreciation and amortization	5,024		512		5,536		1,043		5,175		6,218		NM		(11)	%	(10)	%

Restructuring and other charges	2,559		(90)		2,469		29		91		120		NM		NM		NM
Asset impairment and loss (gain) on disposition and disposal groups	47		—		47		(72)		(223)		(295)		NM		NM		NM
Total costs and expenses	28,285		8,024		36,309		7,500		26,943		34,443		NM		5	%	7	%
Operating (loss) income	(5,476)		1,254		(4,222)		1,504		(3,034)		(1,530)		NM		NM		NM
Interest expense, net	(1,219)						(479)						NM

Loss from equity investees, net	(135)						(20)						NM
Other income (expense), net	411						245						68	%
(Loss) Income before income taxes	(6,419)						1,250						NM
Income tax benefit (expense)	1,201						(144)						NM
Net (loss) income	(5,218)						1,106						NM
Net income attributable to noncontrolling interests	(44)						(116)						(62)	%
Net income attributable to redeemable noncontrolling interests	(8)						(22)						(64)	%
Net (loss) income available to Warner Bros. Discovery, Inc.	$	(5,270)					$	968					NM

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

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

Revenues

Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, market demand, the mix in sales of commercial time between the upfront and scatter markets, and economic conditions. These factors impact the pricing and volume of our advertising inventory.

Advertising revenue decreased 10% and was flat for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to declines in general entertainment, news, and sports in the U.S. and the prior year Olympics in Europe at Networks, partially offset by subscriber growth on our DTC ad-supported tiers. For the nine months ended September 30, 2022, subscriber growth on our DTC ad-supported tiers was offset by lower news and general entertainment in the U.S.

Distribution revenue consists principally of fees from affiliates for distributing our linear networks and DTC subscription services.

Distribution revenue decreased 4% and increased 1% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to a decline in wholesale revenues primarily due to the Amazon Channels expiration in September 2021, a decline in linear subscribers in the U.S., and lower contractual affiliate rates in some European markets, partially offset by global retail subscriber gains on our DTC platforms, higher contractual affiliate rates in the U.S. and premium sports packages in Latin America. The increase for the nine months ended September 30, 2022 was primarily attributable to global retail subscriber gains on our DTC platforms, an increase in contractual affiliate rates in the U.S., and premium sports packages in Latin America, partially offset by a decline in wholesale revenues primarily due to the Amazon Channels expiration in September 2021.

Content revenue consists primarily of licensing feature films for initial theatrical exhibition, licensing television programs for initial television broadcast or streaming, and licensing of sports rights; additionally, film and television content is licensed through distribution channels including international free-to-air, basic and premium pay television, television syndication, and further streaming services. Content revenue also includes home entertainment sales and rentals of film and television products (physical and digital, including premium video-on-demand, transactional video-on-demand and electronic sell-through), interactive entertainment sales (physical and digital) across various platforms, and consumer products and themed experience licensing.

Content revenue decreased 15% and 5% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to third party licensing of sports rights internationally, mainly related to Olympic sports rights to broadcast networks throughout Europe in 2021 and lower home entertainment and TV licensing revenues. The decrease for the nine months ended September 30, 2022 was primarily attributable to the proportion of inter-segment licensing increasing as a percentage of total content revenue.

Other revenue increased 24% and 33% for the three and nine months ended September 30, 2022, respectively, primarily attributable to the reopening of Warner Bros. Studio Tour London and Warner Bros. Studio Tour Hollywood. In addition, the nine months ended September 30, 2022 was favorably impacted by the opening of the Harry Potter flagship store in New York in June 2021.

Costs of Revenues

The Company’s principal component of costs of revenues is content expense. Content expense includes television series, television specials, films, sporting events, and digital products. The costs of producing a content asset and bringing that asset to market consist of production costs, participation costs, and exploitation costs.

Cost of revenues decreased 4% and increased 5% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to lower sports rights related to the broadcast of the Olympics in Europe in 2021 and lower content expense for theatrical and television products, partially offset by increased DTC programming expenses and the impact of measurement period adjustments to the fair value of content assets acquired during the Merger. (See Note 3 to the accompanying consolidated financial statements.) The increase for the nine months ended September 30, 2022 was primarily attributable to increased DTC programming expenses, the impact of measurement period adjustments to the fair value of content assets acquired during the Merger, higher sports rights in the U.S., and increased expenses at CNN, partially offset by lower sports rights related to the broadcast of the Olympics in Europe in 2021 and lower content expense for television product due to lower television production revenues.

Selling, General and Administrative

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

Selling, general and administrative expenses decreased 11% and 5% for the three and nine months ended September 30, 2022, respectively, primarily attributable to lower marketing and personnel expenses.

Depreciation and Amortization

Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization decreased 11% and 10%, respectively, primarily attributable to a change in amortization method from the straight-line method to the sum of the years' digits method for some of the WM assets acquired.

Restructuring and Other Charges

In connection with the Merger, the Company has announced and has taken actions to implement projects to achieve cost synergies for the Company. Restructuring and other charges increased $1,540 million and $2,376 million for the three and nine months ended September 30, 2022, respectively, primarily attributable to strategic content programming assessments, organization restructuring, facility consolidation activities, and other contract termination costs. (See Note 5 to the accompanying consolidated financial statements.)

Asset Impairment and Loss (Gain) on Dispositions and Disposals Groups

As reported asset impairment and loss (gain) on disposition and disposal groups was a $43 million loss for the three months ended September 30, 2022 and a $47 million loss for the nine months ended September 30, 2022, primarily attributable to the write-down to the estimated fair value, less costs to sell, of the Ranch Lot and Knoxville office building and land in connection with the classification as assets held for sale. (See Note 17 to the accompanying consolidated financial statements.)

As reported asset impairment and loss (gain) on disposition and disposal groups was a $72 million gain for the nine months ended September 30, 2021, primarily attributable to the sale of our Great American Country network. (See Note 3 to the accompanying consolidated financial statements.)

Interest Expense, net

As reported interest expense, net increased $396 million and $740 million for the three and nine months ended September 30, 2022, respectively, primarily attributable to debt assumed as a result of the Merger. (See Note 10 and Note 12 to the accompanying consolidated financial statements.)

Loss From Equity Investees, net

We reported losses from our equity method investees of $78 million and $135 million for the three and nine months ended September 30, 2022, respectively, as compared to losses of $9 million and $20 million for the three and nine months ended September 30, 2021, respectively. The changes are attributable to our share of earnings and losses from our equity investees. (See Note 9 to the accompanying consolidated financial statements.)

Other (Expense) Income, net

The table below presents the details of other (expense) income, net (in millions).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Foreign currency (losses) gains, net	$	(36)	$	26	$	(106)	$	73
(Losses) gains on derivative instruments, net	(19)		88		454		67

Change in the value of investments with readily determinable fair value	(16)		(31)		(106)		15
Gain on sale of equity method investments	8		—		141		4
Change in fair value of equity investments without readily determinable fair value	—		(7)		—		74



Other income (expense), net	35		(4)		28		12
Total other (expense) income, net	$	(28)	$	72	$	411	$	245

Income Tax Benefit (Expense)

The income tax balances as of September 30, 2022 are inclusive of the WM Business as a result of the Merger. Income tax benefit was $566 million and $1,201 million for the three and nine months ended September 30, 2022, respectively, and income tax expense was $36 million and $144 million for the three and nine months ended September 30, 2021, respectively. The decrease in the three and nine months ended September 30, 2022 was primarily attributable to a decrease in pre-tax book income, and to a smaller extent, an uncertain tax benefit remeasurement recorded in the three months ended September 30, 2022 as a result of a multi-year tax audit agreement. These decreases are partially offset by an unfavorable tax adjustment related to the 2022 preferred stock conversion transaction expense discussed in Note 2, which was not deductible for tax purposes, and the effect of foreign operations, which included taxation and allocation of income and losses among multiple foreign jurisdictions. The decrease in the nine months ended September 30, 2022 was further offset by a deferred tax benefit of $151 million recorded in the nine months ended September 30, 2021 as a result of the UK Finance Act 2021 that was enacted in June 2021.

Income tax benefit for the three and nine months ended September 30, 2022 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, state and local income taxes, and the non-tax deductible preferred stock conversion transaction expense discussed above.

Segment Results of Operations

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

employee share-based compensation;
depreciation and amortization;
restructuring, facility consolidation, and other charges;
certain impairment charges;
gains and losses on business and asset dispositions;
certain inter-segment eliminations;
third-party transaction and integration costs;
amortization of purchase accounting fair value step-up for content;
amortization of capitalized interest for content; and
other items impacting comparability.

The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. The Company believes Adjusted EBITDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. The Company excludes employee share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and transaction and integration costs from the calculation of Adjusted EBITDA due to their impact on comparability between periods. The Company also excludes the depreciation of fixed assets and amortization of intangible assets, amortization of purchase accounting fair value step-up for content, and amortization of capitalized interest for content, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted EBITDA should be considered in addition to, but not a substitute for, operating income, net income, and other measures of financial performance reported in accordance with U.S. GAAP.

The table below presents our reconciliation of consolidated net income available to Warner Bros. Discovery, Inc. to Adjusted EBITDA and Adjusted EBITDA by segment (in millions).


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change
Net (loss) income available to Warner Bros. Discovery, Inc.	$	(2,308)	$	156	NM		$	(5,270)	$	968	NM
Net income attributable to redeemable noncontrolling interests	2		9		(78)	%	8		22		(64)	%
Net income attributable to noncontrolling interests	21		32		(34)	%	44		116		(62)	%
Income tax (benefit) expense	(566)		36		NM		(1,201)		144		NM
(Loss) income before income taxes	(2,851)		233		NM		(6,419)		1,250		NM
Other expense (income), net	28		(72)		NM		(411)		(245)		68	%
Loss from equity investees, net	78		9		NM		135		20		NM

Interest expense, net	555		159		NM		1,219		479		NM
Operating (loss) income	(2,190)		329		NM		(5,476)		1,504		NM
Asset impairment and loss (gain) on disposition and disposal groups	43		—		NM		47		(72)		NM
Restructuring and other charges	1,521		7		NM		2,559		29		NM

Depreciation and amortization	2,233		341		NM		5,024		1,043		NM
Employee share-based compensation	113		36		NM		317		124		NM
Transaction and integration costs	59		13		NM		1,129		52		NM

Amortization of fair value step-up for content	645		—		NM		1,515		—		NM

Adjusted EBITDA	$	2,424	$	726	NM		$	5,115	$	2,680	91	%


Studios	$	762	$	4	NM		$	1,004	$	8	NM
Networks	2,630		1,093		NM		6,247		4,040		55	%
DTC	(634)		(276)		NM		(1,379)		(1,095)		26	%
Corporate	(340)		(95)		NM		(749)		(273)		NM
Inter-segment eliminations	6		—		NM		(8)		—		NM
Adjusted EBITDA	$	2,424	$	726	NM		$	5,115	$	2,680	91	%

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		% Change		2022		2021		% Change
Revenues:
Studios	$	3,088	$	6	NM		$	5,889	$	13	NM
Networks	5,214		2,889		80	%	13,829		8,393		65	%
DTC	2,317		255		NM		4,823		598		NM
Corporate	(11)		—		NM		2		—		NM
Inter-segment eliminations	(785)		—		NM		(1,734)		—		NM
Total revenues	9,823		3,150		NM		22,809		9,004		NM
Costs of revenues, excluding depreciation and amortization	4,982		1,529		NM		11,973		3,553		NM
Selling, general and administrative (a)	2,417		895		NM		5,721		2,771		NM
Adjusted EBITDA	$	2,424	$	726	NM		$	5,115	$	2,680	91	%

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

Studios Segment

The following tables present, for our Studio segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating income (in millions).


	Three Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual	Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	8	$	—	$	8	$	—	$	35	$	35	NM	(77)	%	(77)	%
Distribution	4		—		4		—		2		2		NM	NM		NM
Content	2,884		—		2,884		6		3,167		3,173		NM	(9)	%	(6)	%
Other	192		—		192		—		143		143		NM	34	%	34	%
Total revenues	3,088		—		3,088		6		3,347		3,353		NM	(8)	%	(5)	%
Costs of revenues, excluding depreciation and amortization	1,756		—		1,756		—		2,050		2,050		NM	(14)	%	(11)	%
Selling, general and administrative	570		—		570		2		745		747		NM	(24)	%	(21)	%
Adjusted EBITDA	762		—		762		4		552		556		NM	37	%	43	%
Depreciation and amortization	174		(38)		136		—		173		173
Employee share-based compensation	1		—		1		—		12		12

Restructuring and other charges	562		—		562		—		—		—
Transaction and integration costs	1		—		1		—		—		—

Asset impairment and loss (gain) on disposition and disposal groups	15		—		15		—		—		—
Amortization of fair value step-up for content	271		(35)		236		—		361		361
Operating (loss) income	$	(262)	$	73	$	(189)	$	4	$	6	$	10

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


	Nine Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual	Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	18	$	9	$	27	$	—	$	83	$	83	NM	(67)	%	(67)	%
Distribution	8		6		14		—		10		10		NM	40	%	40	%
Content	5,525		3,898		9,423		13		9,426		9,439		NM	—	%	2	%
Other	338		154		492		—		328		328		NM	50	%	50	%
Total revenues	5,889		4,067		9,956		13		9,847		9,860		NM	1	%	4	%
Costs of revenues, excluding depreciation and amortization	3,763		2,392		6,155		2		6,384		6,386		NM	(4)	%	(2)	%
Selling, general and administrative	1,122		698		1,820		3		2,046		2,049		NM	(11)	%	(9)	%
Adjusted EBITDA	1,004		977		1,981		8		1,417		1,425		NM	39	%	45	%
Depreciation and amortization	332		77		409		—		518		518
Employee share-based compensation	1		26		27		—		73		73

Restructuring and other charges	762		(38)		724		—		38		38
Transaction and integration costs	1		—		1		—		—		—

Asset impairment and loss (gain) on disposition and disposal groups	15		—		15		—		—		—
Amortization of fair value step-up for content	834		(78)		756		—		1,199		1,199
Operating (loss) income	$	(941)	$	990	$	49	$	8	$	(411)	$	(403)

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

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

Revenues

Content revenue decreased 6% and increased 2% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to lower home entertainment and TV licensing revenues. Home entertainment revenue across theatrical and television products was lower due to strong COVID-induced demand in the prior year, as well as fewer new releases of theatrical products. The decrease in TV licensing revenue was primarily due to fewer new release availabilities of theatrical product.

The increase for the nine months ended September 30, 2022 was primarily attributable to higher theatrical film rental revenue and higher games revenue with the release of LEGO Star Wars: The Skywalker Saga, partially offset by lower home entertainment and TV licensing revenue. Theatrical performance was favorably impacted by the performance of The Batman, which was released in the first quarter of 2022, as well as improved audience attendance at movie theaters. Home entertainment revenue across theatrical and television products was lower due to strong COVID-induced demand in the prior year. The decrease in TV licensing revenue was primarily due to lower TV production revenue, partially offset by favorable timing and mix of television availabilities.

Other revenue increased 34% and 50% for the three and nine months ended September 30, 2022, respectively. The increase for the three months ended September 30, 2022 was primarily attributable to the reopening of Warner Bros. Studio Tour London and Warner Bros. Studio Tour Hollywood. In addition, the nine months ended September 30, 2022 was favorably impacted by the opening of the Harry Potter flagship store in New York in June 2021.

Costs of Revenues

Costs of revenues decreased 11% and 2% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to lower content expense for theatrical and television products. The decrease for the nine months ended September 30, 2022 was primarily attributable to lower content expense for television product due to lower television production revenues, partially offset by higher content expense associated with new games and theatrical releases.

Selling, General and Administrative

Selling, general and administrative expenses decreased 21% and 9% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to lower marketing expenses due to fewer theatrical releases. The decrease for the nine months ended September 30, 2022, was primarily attributable to lower marketing expenses due to fewer theatrical releases, partially offset by higher bad debt expense.

Adjusted EBITDA

Adjusted EBITDA increased 43% and 45% for the three and nine months ended September 30, 2022, respectively.

Networks Segment

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


	Three Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual		Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	1,944	$	—	$	1,944	$	1,416	$	852	$	2,268	37	%	(14)	%	(11)	%
Distribution	2,924		—		2,924		1,118		1,947		3,065		NM		(5)	%	(2)	%
Content	277		—		277		339		117		456		(18)	%	(39)	%	(37)	%
Other	69		—		69		16		65		81		NM		(15)	%	(6)	%
Total revenues	5,214		—		5,214		2,889		2,981		5,870		80	%	(11)	%	(8)	%
Costs of revenues, excluding depreciation and amortization	1,906		—		1,906		1,349		1,043		2,392		41	%	(20)	%	(16)	%
Selling, general and administrative	678		—		678		447		319		766		52	%	(11)	%	(8)	%
Adjusted EBITDA	2,630		—		2,630		1,093		1,619		2,712		NM		(3)	%	(2)	%
Depreciation and amortization	1,424		(291)		1,133		260		1,009		1,269
Employee share-based compensation	—		—		—		—		11		11
Restructuring and other charges	354		—		354		6		1		7
Transaction and integration costs	1		—		1		—		—		—
Amortization of fair value step-up for content	2		—		2		—		1		1
Inter-segment eliminations	30		—		30		—		—		—

Operating income	$	819	$	291	$	1,110	$	827	$	597	$	1,424

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


	Nine Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual		Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	5,998	$	1,380	$	7,378	$	4,409	$	3,301	$	7,710	36	%	(4)	%	(2)	%
Distribution	6,885		2,183		9,068		3,399		5,915		9,314		NM		(3)	%	(1)	%
Content	813		220		1,033		541		441		982		50	%	5	%	7	%
Other	133		55		188		44		145		189		NM		(1)	%	3	%
Total revenues	13,829		3,838		17,667		8,393		9,802		18,195		65	%	(3)	%	(1)	%
Costs of revenues, excluding depreciation and amortization	5,728		2,160		7,888		3,040		4,590		7,630		88	%	3	%	6	%
Selling, general and administrative	1,854		352		2,206		1,313		983		2,296		41	%	(4)	%	(1)	%
Adjusted EBITDA	6,247		1,326		7,573		4,040		4,229		8,269		55	%	(8)	%	(8)	%
Depreciation and amortization	3,311		303		3,614		794		3,182		3,976
Employee share-based compensation	—		9		9		—		28		28
Restructuring and other charges	666		(5)		661		27		6		33
Transaction and integration costs	1		—		1		4		—		4
Amortization of fair value step-up for content	3		419		422		—		402		402
Inter-segment eliminations	28		—		28		—		—		—
Asset impairment and loss (gain) on disposition and disposal groups	—		—		—		(72)		—		(72)
Operating income	$	2,238	$	600	$	2,838	$	3,287	$	611	$	3,898

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

Revenues

Advertising revenue decreased 11% and 2% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to declines from general entertainment, news, and sports in the U.S. and the prior year Olympics in Europe. The decrease for the nine months ended September 30, 2022 was primarily attributable to lower news and general entertainment in the U.S., partially offset by increased sports advertising in the U.S. due to the NCAA Men’s Final Four in 2022, addition of the NHL in the fourth quarter of 2021, and a more normalized NBA playoff schedule.

Distribution revenue decreased 2% and 1% for the three and nine months ended September 30, 2022, respectively, primarily attributable to a decline in linear subscribers in the U.S. and lower contractual affiliate rates in some European markets, partially offset by an increase in contractual affiliate rates in the U.S. and premium sports packages in Latin America.

Content revenue decreased 37% and increased 7% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to third party licensing of sports rights internationally, mainly related to Olympic sports rights to broadcast networks throughout Europe in 2021, partially offset by higher inter-segment licensing of content to DTC. The increase for the nine months ended September 30, 2022 was primarily attributable to higher inter-segment licensing of content to DTC, partially offset by overall net lower sub-licensing revenue for the Winter Olympics in 2022 compared to the Summer Olympics in 2021.

Other revenue decreased 6% and increased 3% for the three and nine months ended September 30, 2022, respectively.

Costs of Revenues

Cost of revenues decreased 16% and increased 6% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to lower sports rights related to the broadcast of the Olympics in Europe in 2021 and lower content expense in the U.S. The increase for the nine months ended September 30, 2022 was primarily attributable to higher sports rights in the U.S. and increased expense at CNN, partially offset by lower sports rights related to the broadcast of the Olympics in Europe in 2021.

Selling, General and Administrative

Selling, general and administrative expenses decreased 8% and 1% for the three and nine months ended September 30, 2022, respectively. The decrease for the three months ended September 30, 2022 was primarily attributable to lower personnel and marketing expenses. The decrease for the nine months ended September 30, 2022 was primarily attributable to lower personnel costs, partially offset by higher marketing expenses.

Adjusted EBITDA

Adjusted EBITDA decreased 2% and 8% for the three and nine months ended September 30, 2022, respectively.

DTC Segment

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


	Three Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual	Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	106	$	—	$	106	$	37	$	17	$	54	NM	96	%	NM
Distribution	2,062		—		2,062		210		2,036		2,246		NM	(8)	%	(6)	%
Content	145		—		145		7		187		194		NM	(25)	%	(25)	%
Other	4		—		4		1		2		3		NM	33	%	33	%
Total revenues	2,317		—		2,317		255		2,242		2,497		NM	(7)	%	(6)	%
Costs of revenues, excluding depreciation and amortization	2,118		—		2,118		178		1,590		1,768		NM	20	%	22	%
Selling, general and administrative	833		—		833		353		685		1,038		NM	(20)	%	(18)	%
Adjusted EBITDA	(634)		—		(634)		(276)		(33)		(309)		NM	NM		NM
Depreciation and amortization	543		(117)		426		58		425		483
Employee share-based compensation	(1)		—		(1)		—		6		6

Restructuring and other charges	517		—		517		1		(1)		—

Amortization of fair value step-up for content	191		(97)		94		—		73		73
Inter-segment eliminations	(10)		—		(10)		—		—		—

Operating loss	$	(1,874)	$	214	$	(1,660)	$	(335)	$	(536)	$	(871)

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


	Nine Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual (a)		Pro Forma Adjustments		Pro Forma Combined		Actual		Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)
Revenues:
Advertising	$	248	$	36	$	284	$	87	$	23	$	110	NM		NM		NM
Distribution	4,287		2,150		6,437		499		5,842		6,341		NM		2	%	3	%
Content	279		230		509		10		432		442		NM		15	%	15	%
Other	9		3		12		2		10		12		NM		—	%	—	%
Total revenues	4,823		2,419		7,242		598		6,307		6,905		NM		5	%	6	%
Costs of revenues, excluding depreciation and amortization	4,200		1,977		6,177		513		4,406		4,919		NM		26	%	27	%
Selling, general and administrative	2,002		909		2,911		1,180		1,943		3,123		70	%	(7)	%	(6)	%
Adjusted EBITDA	(1,379)		(467)		(1,846)		(1,095)		(42)		(1,137)		(26)	%	(62)	%	(65)	%
Depreciation and amortization	1,193		150		1,343		179		1,335		1,514
Employee share-based compensation	(1)		—		(1)		—		14		14

Restructuring and other charges	992		(3)		989		2		3		5
Transaction and integration costs	1		—		1		—		—		—
Amortization of fair value step-up for content	256		(21)		235		—		220		220

Asset impairment and loss (gain) on disposition and disposal groups	4		—		4		—		—		—
Operating loss	$	(3,824)	$	(593)	$	(4,417)	$	(1,276)	$	(1,614)	$	(2,890)

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

Revenues

As of September 30, 2022, we had 94.9 million core DTC subscribers.1

Advertising revenue increased $53 million and $176 million for the three and nine months ended September 30, 2022, respectively, primarily attributable to subscriber growth on our DTC ad-supported tiers.

Distribution revenue decreased 6% for the three months ended September 30, 2022 and increased 3% for the nine months ended September 30, 2022. The decrease for the three months ended September 30, 2022 was primarily attributable to a decline in wholesale revenues primarily due to the Amazon Channels expiration in September 2021, partially offset by global retail subscriber gains. The increase for the nine months ended September 30, 2022 was primarily attributable to global retail subscriber gains, partially offset by a decline in wholesale revenues primarily due to the Amazon Channels expiration in September 2021.

Content revenue decreased 25% for the three months ended September 30, 2022 and increased 15% for the nine months ended September 30, 2022. The decrease for the three months ended September 30, 2022 was primarily attributable to third party licensing of HBO content in September 2021. The increase for the nine months ended September 30, 2022 was primarily attributable to higher third party licensing of HBO content.

Costs of Revenues

Costs of revenues increased 22% and 27% for the three and nine months ended September 30, 2022, respectively, primarily attributable to increased programming expenses and the impact of measurement period adjustments to the fair value of content assets acquired during the Merger. (See Note 3 to the accompanying consolidated financial statements.)

Selling, General, and Administrative Expenses

Selling, general and administrative expenses decreased 18% and 6% for the three and nine months ended September 30, 2022, respectively, primarily attributable to more efficient marketing-related spend.

Adjusted EBITDA

Adjusted EBITDA decreased $335 million and $733 million for the three and nine months ended September 30, 2022, respectively.

1 We define a “DTC Subscription” as:

a) a retail subscription to discovery+, HBO or HBO Max for which we have recognized subscription revenue, whether directly or through a third party, from a direct-to-consumer platform; b) a wholesale subscription to discovery+, HBO, or HBO Max for which we have recognized subscription revenue from a fixed-fee arrangement with a third party and where the individual user has activated their subscription; and c) a wholesale subscription to discovery+, HBO or HBO Max for which we have recognized subscription revenue on a per subscriber basis.

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

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

a) individuals who subscribe to DTC products, other than discovery+, HBO and HBO Max, that may be offered by us or by certain joint venture partners or affiliated parties from time to time; b) a limited number of international discovery+ subscribers that are part of non-strategic partnerships or short-term arrangements as may be identified by the Company from time to time; c) domestic, and international Cinemax subscribers, and international basic HBO subscribers; and d) users on free trials.

Corporate

The following tables present Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (in millions):


	Three Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual		Pro Forma Adjustments		Pro Forma Combined		Actual	Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)



Adjusted EBITDA	$	(340)	$	—	$	(340)	$	(95)	$	(231)	$	(326)	NM	(4)	%	(7)	%
Employee share-based compensation	113		—		113		36		21		57
Depreciation and amortization	92		(29)		63		23		46		69
Restructuring and other charges	93		—		93		—		—		—
Transaction and integration costs	57		—		57		13		111		124
Asset impairment and loss (gain) on disposition and disposal groups	28		—		28		—		(223)		(223)


Inter-segment eliminations	(20)		—		(20)		—		—		—
Operating loss	$	(703)	$	29	$	(674)	$	(167)	$	(186)	$	(353)


	Nine Months Ended September 30,
	2022						2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined		Actual		Pro Forma Adjustments		Pro Forma Combined		Actual	Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)



Adjusted EBITDA	$	(749)	$	(353)	$	(1,102)	$	(273)	$	(672)	$	(945)	NM	(17)	%	(19)	%
Employee share-based compensation	317		(11)		306		124		159		283
Depreciation and amortization	188		(18)		170		70		140		210
Restructuring and other charges	162		(44)		118		—		44		44
Transaction and integration costs	1,126		(564)		562		48		901		949
Asset impairment and loss (gain) on disposition and disposal groups	28		—		28		—		(223)		(223)


Inter-segment eliminations	(28)		—		(28)		—		—		—
Operating loss	$	(2,542)	$	284	$	(2,258)	$	(515)	$	(1,693)	$	(2,208)

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

Selling, general and administrative expense was $358 million and $234 million for the three months ended September 30, 2022 and 2021, respectively, and $1,091 million and $692 million for the nine months ended September 30, 2022 and 2021, respectively. Adjusted EBITDA decreased 7% and 19% for the three and nine months ended September 30, 2022, respectively. The decreases were primarily attributable to increased securitization costs from higher interest rates, partially offset by lower personnel costs.

As reported transaction and integration costs for the nine months ended September 30, 2022 included the impact of the issuance of additional shares of common stock to Advance/Newhouse Programming Partnership of $789 million upon the closing of the Merger. (See Note 2 to the accompanying consolidated financial statements.)

Inter-segment Eliminations

The following tables present our inter-segment eliminations, by revenue and expense (in millions):


	Three Months Ended September 30,
	2022							2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined			Actual		Pro Forma Adjustments		Pro Forma Combined		Actual	Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)

Inter-segment revenue eliminations	$	(785)	$	—	$	(785)		$	—	$	(751)	$	(751)	NM	(5)	%	(5)	%
Inter-segment expense eliminations	(791)		—		(791)			—		(786)		(786)		NM	(1)	%	(1)	%
Adjusted EBITDA	6		—		6		—	—		35		35		NM	(83)	%	(83)	%
Restructuring and other charges	(5)		—		(5)			—		—		—
Amortization of fair value step-up for content	181		—		181			—		—		—

Operating income (loss)	$	(170)	$	—	$	(170)		$	—	$	35	$	35


	Nine Months Ended September 30,
	2022							2021						% Change
	Actual		Pro Forma Adjustments		Pro Forma Combined			Actual		Pro Forma Adjustments		Pro Forma Combined		Actual	Pro Forma Combined (Actual)		Pro Forma Combined (ex-FX)

Inter-segment revenue eliminations	$	(1,734)	$	(1,065)	$	(2,799)		$	—	$	(2,074)	$	(2,074)	NM	(35)	%	(35)	%
Inter-segment expense eliminations	(1,726)		(1,038)		(2,764)			—		(2,147)		(2,147)		NM	(29)	%	(29)	%
Adjusted EBITDA	(8)		(27)		(35)		—	—		73		73		NM	NM		NM
Restructuring and other charges	(23)		—		(23)			—		—		—
Amortization of fair value step-up for content	422		—		422			—		—		—

Operating income (loss)	$	(407)	$	(27)	$	(434)		$	—	$	73	$	73

Inter-segment revenue and expense eliminations primarily represent inter-segment content transactions and marketing and promotion activity between reportable segments. In our current segment structure, in certain instances, production and distribution activities are in different segments. Inter-segment content transactions are presented “gross” (i.e. the segment producing and/or licensing the content reports revenue and profit from inter-segment transactions in a manner similar to the reporting of third-party transactions, and the required eliminations are reported on the separate “Eliminations” line when presenting our summary of segment results). Generally, timing of revenue recognition is similar to the reporting of third-party transactions. The segment distributing the content, e.g. via our DTC or linear services, capitalizes the cost of inter-segment content transactions, including “mark-ups” and amortizes the costs over the shorter of the license term, if applicable, or the expected period of use. The content amortization expense related to the inter-segment profit is also eliminated on the separate “Eliminations” line when presenting our summary of segment results.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Sources of Cash

Historically, we have generated a significant amount of cash from operations. During the nine months ended September 30, 2022, we funded our working capital needs primarily through cash flows from operations. As of September 30, 2022, we had $2.4 billion of cash and cash equivalents on hand. We are a well-known seasoned issuer and have the ability to conduct registered offerings of securities, including debt securities, common stock, and preferred stock, on short notice, subject to market conditions. Access to sufficient capital from the public market is not assured. As of September 30, 2022, we also have a $6.0 billion revolving credit facility and a $1.5 billion commercial paper program, as described below. In connection with the Merger, we incurred a substantial amount of additional third-party indebtedness, which has significantly increased our future financial commitments, including aggregate interest payments.

*•*Debt

Revolving Credit Facility and Commercial Paper

In June 2021, Discovery Communications, LLC (“DCL”) entered into a multicurrency revolving credit agreement (the “Revolving Credit Agreement”), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. DCL has the capacity to borrow up to $6.0 billion under the Revolving Credit Agreement (the “Credit Facility”). The Revolving Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. DCL may also request additional commitments up to $1.0 billion from the lenders upon satisfaction of certain conditions. Obligations under the Revolving Credit Agreement are unsecured and are fully and unconditionally guaranteed by the Company, Scripps Networks Interactive, Inc. (“Scripps Networks”), and WarnerMedia Holdings, Inc. The Credit Facility will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders’ consent. The Revolving Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of September 30, 2022, DCL was in compliance with all covenants and there were no events of default under the Revolving Credit Agreement.

Additionally, our commercial paper program is supported by the Credit Facility. Under the commercial paper program, we may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is effectively reduced by any outstanding borrowings under the commercial paper program.

During the nine months ended September 30, 2022, we borrowed and repaid $885 million under our commercial paper program. As of September 30, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program.

*•*Derivatives

We received investing proceeds of $722 million during the nine months ended September 30, 2022 from the unwind and settlement of derivative instruments. (See Note 12 to the accompanying consolidated financial statements.)

*•*Investments and Business Combinations

During the nine months ended September 30, 2022, we completed the sale of our minority interest in Discovery Education and other investments and received cash of $162 million.

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

Uses of Cash

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

Content Acquisition

We plan to continue to invest significantly in the creation and acquisition of new content. Subsequent to the Merger, contractual commitments to acquire content have increased significantly compared to our commitments as set forth in “Material Cash Requirements from Known Contractual and Other Obligations” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. (See Note 19 to the accompanying consolidated financial statements.)

*•*Debt

Term Loan

During the nine months ended September 30, 2022, the Company repaid $6.0 billion of aggregate principal amount outstanding of its term loans prior to the due dates of October 2023 and April 2025.

Senior Notes

During the nine months ended September 30, 2022, we repaid in full at maturity $327 million aggregate principal amount outstanding of our 2.375% Euro Denominated Senior Notes due March 2022. In addition, we have $106 million, $796 million, $192 million, and $159 million of senior notes coming due in February, March, April, and September 2023, respectively.

In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly a wholly owned subsidiary of AT&T, entered into a $10.0 billion term loan credit agreement (the “Term Loan Credit Agreement”) and issued $30.0 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the Merger and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan Credit Agreement or the Revolving Credit Agreement, and will rank equally with all of the Company’s other unsecured senior debt.

On a consolidated basis, we also assumed an additional $1.5 billion of senior notes (at par value) issued by the WarnerMedia Business that existed prior to the Merger.

*•*Capital Expenditures and Investments in Next Generation Initiatives

We effected capital expenditures of $623 million during the nine months ended September 30, 2022, including amounts capitalized to support our next generation platforms, such as HBO Max and discovery+. In addition, we expect to continue to incur significant costs to develop and market HBO Max and discovery+ streaming products in the future.

*•*Investments and Business Combinations

Our uses of cash have included investments in equity method investments and equity investments without readily determinable fair value. (See Note 9 to the accompanying consolidated financial statements.) We also provide funding to our investees from time to time. During the nine months ended September 30, 2022, we contributed $137 million for investments in and advances to our investees.

We expect to incur significant, one-time transaction and integration costs during the first year following the Merger. (See Note 3 to the accompanying consolidated financial statements.)

*•*Redeemable Noncontrolling Interest and Noncontrolling Interest

Due to business combinations, we have redeemable equity balances of $318 million at September 30, 2022, which may require the use of cash in the event holders of noncontrolling interests put their interests to us. Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $286 million and $231 million for the nine months ended September 30, 2022 and 2021, respectively.

Common Stock Repurchases

Historically, we have funded our stock repurchases through a combination of cash on hand, cash generated by operations, and the issuance of debt. In February 2020, our Board of Directors authorized additional stock repurchases of up to $2.0 billion upon completion of our existing $1.0 billion repurchase authorization announced in May 2019. Under the new stock repurchase authorization, management is authorized to purchase shares from time to time through open market purchases at prevailing prices or privately negotiated purchases subject to market conditions and other factors. During the nine months ended September 30, 2022, we did not repurchase any of our common stock.

*•*Income Taxes and Interest

We expect to continue to make payments for income taxes and interest on our outstanding senior notes. During the nine months ended September 30, 2022, we made cash payments of $859 million and $1,305 million for income taxes and interest on our outstanding debt, respectively. We expect cash required for interest payments to increase significantly as a result of the Merger.

Cash Flows

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


	Nine Months Ended September 30,
	2022		2021
Cash, cash equivalents, and restricted cash, beginning of period	$	3,905	$	2,122
Cash provided by operating activities	1,458		1,914
Cash provided by (used in) investing activities	3,742		(30)
Cash used in financing activities	(6,470)		(811)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(122)		(69)
Net change in cash, cash equivalents, and restricted cash	(1,392)		1,004
Cash, cash equivalents, and restricted cash, end of period	$	2,513	$	3,126

Operating Activities

Cash provided by operating activities was $1,458 million and $1,914 million during the nine months ended September 30, 2022 and 2021, respectively. The decrease in cash provided by operating activities was primarily attributable to a negative fluctuation in working capital activity, partially offset an increase in net income excluding non-cash items.

Investing Activities

Cash provided by (used in) investing activities was $3,742 million and $30 million during the nine months ended September 30, 2022 and 2021, respectively. The increase in cash provided by investing activities was primarily attributable to proceeds received from cash acquired during the Merger and the post-closing working capital settlement process and from the unwind and settlement of derivative instruments, partially offset by a reduction in cash received from the sales and maturities of investments and increased purchases of property and equipment during the nine months ended September 30, 2022.

Financing Activities

Cash used in financing activities was $6,470 million and $811 million during the nine months ended September 30, 2022 and 2021, respectively. The increase in cash used in financing activities was primarily attributable to principal repayments made on our term loans and senior notes and an increase in distributions to noncontrolling interests and redeemable noncontrolling interests, partially offset by securitization receivables collected but not remitted during the nine months ended September 30, 2022.

Capital Resources

As of September 30, 2022, capital resources were comprised of the following (in millions).


	September 30, 2022
	Total Capacity		Outstanding Indebtedness		Unused Capacity
Cash and cash equivalents	$	2,422	$	—	$	2,422
Revolving credit facility and commercial paper program	6,000		—		6,000
Term loans	4,000		4,000		—
Senior notes (a)	46,144		46,144		—
Total	$	58,566	$	50,144	$	8,422

(a) Interest on the senior notes is paid annually or semi-annually. Our senior notes outstanding as of September 30, 2022 had interest rates that ranged from 1.90% to 9.15% and will mature between 2023 and 2062.

We expect that our cash balance, cash generated from operations and availability under the Credit Facility will be sufficient to fund our cash needs for both the short-term and the long-term. Our borrowing costs and access to capital markets can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in part, on our performance as measured by credit metrics such as interest coverage and leverage ratios.

As of September 30, 2022, we held $2.2 billion of our $2.4 billion of cash and cash equivalents in our foreign subsidiaries. The Tax Cuts and Jobs Act of 2017 features a participation exemption regime with current taxation of certain foreign income and imposes a mandatory repatriation toll tax on unremitted foreign earnings. Notwithstanding the U.S. taxation of these amounts, we intend to continue to reinvest these funds outside of the U.S. Our current plans do not demonstrate a need to repatriate them to the U.S. However, if these funds are needed in the U.S., we would be required to accrue and pay non-U.S. taxes to repatriate them. The determination of the amount of unrecognized deferred income tax liability with respect to these undistributed foreign earnings is not practicable.

Summarized Guarantor Financial Information

Basis of Presentation

As of September 30, 2022 and December 31, 2021, all of the Company’s outstanding $14.6 billion registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company, and guaranteed by the Company, Scripps Networks, and WarnerMedia Holdings, Inc. As of September 30, 2022, the Company also has outstanding $30.0 billion of senior notes issued by WarnerMedia Holdings, Inc. and guaranteed by the Company, Scripps and DCL; $1.5 billion of senior notes issued by the legacy WarnerMedia Business (not guaranteed); and approximately $23 million of un-exchanged senior notes issued by Scripps Networks (not guaranteed). (See Note 10 to the accompanying consolidated financial statements.) DCL primarily includes the Discovery Channel and TLC networks in the U.S. DCL is a wholly owned subsidiary of the Company. Scripps Networks is also 100% owned by the Company.

The tables below present the summarized financial information as combined for Warner Bros. Discovery, Inc. (the “Parent”), Scripps Networks, DCL, and WarnerMedia Holdings, Inc. (collectively, the “Obligors”). All guarantees of DCL and WarnerMedia Holdings, Inc.'s senior notes (the “Note Guarantees”) are full and unconditional, joint and several and unsecured, and cover all payment obligations arising under the senior notes.

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

Summarized Financial Information

The Company has included the accompanying summarized combined financial information of the Obligors after the elimination of intercompany transactions and balances among the Obligors and the elimination of equity in earnings from and investments in any subsidiary of the Parent that is a non-guarantor (in millions). The summarized balance sheet information as of December 31, 2021 does not include information with respect to WarnerMedia Holdings, Inc., as WarnerMedia Holdings, Inc. was a wholly-owned subsidiary of AT&T with de minimis assets and no operating activities for the year ended December 31, 2021. The summarized income statement information for the nine months ended September 30, 2022 includes information with respect to WarnerMedia Holdings, Inc. beginning subsequent to the close of the Merger.


	September 30, 2022		December 31, 2021
Current assets	$	1,594	$	4,452
Non-guarantor intercompany trade receivables, net	161		85
Noncurrent assets	5,880		5,969
Current liabilities	1,635		1,018
Noncurrent liabilities	48,694		15,778


	Nine Months Ended September 30, 2022
Revenues	$	1,603
Operating income	(623)
Net income	(1,102)
Net income available to Warner Bros. Discovery, Inc.	(1,108)

MATERIAL CASH REQUIREMENTS FROM KNOWN CONTRACTUAL AND OTHER OBLIGATIONS

In the normal course of business, we enter into commitments for the purchase of goods or services that require us to make payments or provide funding in the event certain circumstances occur. Subsequent to the Merger, total contractual commitments, particularly in respect of long-term debt and content purchase obligations, have increased significantly compared to our commitments set forth in “Material Cash Requirements from Known Contractual and Other Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. (See Note 10 and Note 19 to the accompanying consolidated financial statements.)

RELATED PARTY TRANSACTIONS

In the ordinary course of business, we enter into transactions with related parties, primarily the Liberty Group and our equity method investees. (See Note 18 to the accompanying consolidated financial statements.)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Except for updates to accounting policies as a result of the Merger described in Note 1 to the accompanying consolidated financial statements, our critical accounting policies and estimates have not changed since December 31, 2021. For a discussion of each of our critical accounting estimates listed below, including information and analysis of estimates and assumptions involved in their application, see “Critical Accounting Policies and Estimates” included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K:

Uncertain tax positions;
Goodwill and intangible assets;
Content rights;
Consolidation; and
Revenue recognition

NEW ACCOUNTING AND REPORTING PRONOUNCEMENTS

We adopted certain new accounting and reporting standards during the nine months ended September 30, 2022. (See Note 1 to the accompanying consolidated financial statements.)

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, as well as in other public statements we may make, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, anticipated sources and uses of capital and our recently completed acquisition of the WarnerMedia Business. Words such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would,” among other terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:

the effects of our recently completed acquisition of the WarnerMedia Business;
changes in the distribution and viewing of television programming, including the continuing expanded deployment of personal video recorders, subscription video on demand, internet protocol television, mobile personal devices, personal tablets and user-generated content and their impact on television advertising revenue;
continued consolidation of distribution customers and production studios;
a failure to secure affiliate or distribution agreements or the renewal of such agreements or other wholesale subscription or bundled service arrangements on less favorable terms;
rapid technological changes;
the inability of advertisers or affiliates to remit payment to us in a timely manner or at all;
general economic and business conditions, including the impact of the ongoing COVID-19 pandemic;
industry trends, including the timing of, and spending on, feature film, television and television commercial production;
spending on domestic and foreign television advertising;
disagreements with our distributors or other business partners over contract interpretation;
fluctuations in foreign currency exchange rates, political unrest and regulatory changes in international markets, including any proposed or adopted regulatory changes that impact the operations of our international media properties and/or modify the terms under which we offer our services and operate in international markets;
market demand for foreign first-run and existing content libraries;
the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
uncertainties regarding the financial performance of our investments in unconsolidated entities;
our ability to complete, integrate, maintain and obtain the anticipated benefits and synergies from our proposed business combinations and acquisitions, including our recently completed acquisition of the WarnerMedia Business, on a timely basis or at all;
uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies, and the success of our discovery+ and HBO Max streaming products;
realizing direct-to-consumer subscriber goals, including through the activation of subscriptions by subscribers receiving access through bundled services or other wholesale subscription arrangements;
future financial performance, including availability, terms, and deployment of capital;
inherent uncertainties involved in the estimates and assumptions used in the preparation of financial forecasts;
the ability of suppliers and vendors to deliver products, equipment, software, and services;
the outcome of any pending or threatened or potential litigation, including any litigation that has been or may be instituted against us relating to our recently completed acquisition of the WarnerMedia Business;
availability of qualified personnel and recruiting, motivating and retaining talent;
the possibility or duration of an industry-wide strike or other job action affecting a major entertainment industry union or others involved in the development and production of our television programming, feature films and interactive entertainment (e.g., games) who are covered by collective bargaining agreements;
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission and similar authorities internationally and data privacy regulations and adverse outcomes from regulatory proceedings;
changes in income taxes due to regulatory changes or changes in our corporate structure;
changes in the nature of key strategic relationships with partners, distributors and equity method investee partners;
competitor responses to our products and services and the products and services of the entities in which we have interests;
threatened or actual cyber-attacks and cybersecurity breaches;
threatened terrorist attacks and military action, including the intensification or expansion of the conflict in Ukraine;
service disruptions or the failure of communications satellites or transmitter facilities;
theft of our content and unauthorized duplication, distribution and exhibition of such content;
changes in existing U.S. and foreign laws and regulations, as well as possible private rights of action, regarding intellectual property rights protection and privacy, personal data protection and user consent;
potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the Federal Communications Commission could negatively impact our WarnerMedia Business’s ability to deliver pay-TV network feeds of our domestic pay-TV programming networks to our affiliates, and, in some cases, to produce high-value news and entertainment programming on location;
our level of debt, including the significant indebtedness incurred in connection with the acquisition of the WarnerMedia Business, and our future compliance with debt covenants;
reduced access to capital markets or significant increases in costs to borrow, including as a result of higher interest rates and perceived, potential or actual inflation; and
a reduction of advertising revenue associated with unexpected reductions in the number of subscribers.

These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. For additional risk factors, refer to Part I, Item 1A, “Risk Factors,” in our 2021 Form 10-K, Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2022 (the “Q1 10-Q”), and Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the period ended June 30, 2022 (the “Q2 10-Q”). These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

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