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 Discovery, Inc.'s ("Discovery," the
"Company," "we," "us," or "our") businesses, current developments, results of
operations, cash flows and financial condition. Additional context can also be
found in our 2019 Annual Report on Form 10-K.
BUSINESS OVERVIEW
We are a global media company that provides content across multiple distribution
platforms, including linear platforms such as pay-television ("pay-TV"),
free-to-air ("FTA") and broadcast television, authenticated TV Everywhere
("TVE") applications, digital distribution arrangements, content licensing
arrangements and direct-to-consumer ("DTC") subscription products. As one of the
world's largest pay-TV programmers, we provide original and purchased content
and live events to approximately 3.8 billion cumulative subscribers and viewers
worldwide through networks that we wholly or partially own. We distribute
customized content in the U.S. and over 220 other countries and territories in
50 languages. Our global portfolio of networks includes prominent nonfiction
television brands such as Discovery Channel, our most widely distributed global
brand, HGTV, Food Network, TLC, Animal Planet, Investigation Discovery, Travel
Channel, OWN, Science Channel, and MotorTrend (previously known as Velocity
domestically and currently known as Turbo in most international countries).
Among other networks in the U.S., Discovery also features two Spanish-language
services, Discovery en Español and Discovery Familia. Our international
portfolio also includes Eurosport, a leading sports entertainment provider and
broadcaster of the Olympic Games (the "Olympics") across Europe, TVN, a Polish
media company, as well as Discovery Kids, a leading children's entertainment
brand in Latin America. We participate in joint ventures, including the recently
formed multi-platform venture with Chip and Joanna Gaines, which plans to launch
a linear network, SVOD and TV Everywhere ("TVE") products planned for a future
date; and Group Nine Media ("Group Nine"), a digital media holding company home
to top digital brands including NowThis News, the Dodo, Thrillist, PopSugar, and
Seeker. We also operate production studios.
Our objectives are to invest in high-quality content for our networks and brands
to build viewership, optimize distribution revenue, capture advertising sales,
and create or reposition branded channels and business to sustain long-term
growth and occupy a desired content niche with strong consumer appeal. Our
strategy is to maximize the distribution, ratings and profit potential of each
of our branded networks. In addition to growing distribution and advertising
revenues for our branded networks, we have extended content distribution across
new platforms, including brand-aligned websites, online streaming, mobile
devices, video on demand ("VOD") and broadband channels, which provide
promotional platforms for our television content and serve as additional outlets
for advertising and distribution revenue. Audience ratings are a key driver in
generating advertising revenue and creating demand on the part of cable
television operators, direct-to-home ("DTH") satellite operators,
telecommunication service providers, and other content distributors who deliver
our content to their customers.
Our content spans genres including survival, natural history, exploration,
sports, general entertainment, home, food and travel, heroes, adventure, crime
and investigation, health and kids. We have an extensive library of content and
own most rights to our content and footage, which enables us to leverage our
library to quickly launch brands and services into new markets and on new
platforms. Our content can be re-edited and updated in a cost-effective manner
to provide topical versions of subject matter that can be utilized around the
world on a variety of platforms.
Although the Company utilizes certain brands and content globally, we classify
our operations in two reportable segments: U.S. Networks, consisting principally
of domestic television networks and digital content services, and International
Networks, consisting primarily of international television networks and digital
content services. Our segment presentation aligns 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.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared the current novel
coronavirus ("COVID-19") outbreak to be a global pandemic. COVID-19 continues to
spread throughout the world, and the duration and severity of its effects and
economic disruption are currently unknown. In response to this declaration and
the rapid spread of COVID-19, the United States and other countries throughout
the world have imposed varying degrees of restrictions on social and commercial
activity in an effort to slow the spread of the illness. These measures have
had, and are expected to continue to have, a significant adverse impact upon
many sectors of the economy, including the media industry. We are closely
monitoring the impact of COVID-19 on all aspects of our business and
geographies, including how it will impact our customers, employees, suppliers,
vendors, distribution and advertising partners, production facilities, and
various third parties.

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While we did not incur significant disruptions during the three months ended
March 31, 2020, we have taken certain steps to mitigate the risks to our
business in light of the pandemic. We are unable to predict the full impact that
COVID-19 will have on our financial position, operating results, and cash flows
due to numerous uncertainties and the speed with which the COVID-19 situation is
developing. The extent to which COVID-19 impacts our results will depend on
future developments, which are highly uncertain and cannot be predicted,
including new information that may emerge concerning the severity of COVID-19
and the actions to contain the virus or treat its impact, among others. Our
consolidated financial statements presented herein reflect the latest estimates
and assumptions made by management 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. We assessed goodwill, other intangibles, deferred tax
assets, programming assets, and accounts receivable for recoverability based
upon latest estimates and judgments with respect to expected future operating
results, ultimate usage of content and latest expectations with respect to
collectability. No asset impairments were recorded as of March 31, 2020, as the
fair value of such assets exceeded their carrying value. However, due to
significant uncertainty surrounding the situation, management's judgment
regarding this could change in the future.
The effects of the pandemic may negatively impact the Company's financial
position, results of operations, and cash flows. In particular, our advertising
revenues, which represented 54% of our consolidated revenues in 2019, may
decrease significantly throughout the remainder of 2020 if our advertising
partners in certain sectors (such as travel) reduce their advertising spending
or if we are limited in our ability to create and air new content due to
prolonged production shutdowns and delays. The Company generally relies on
third-party production partners to produce its content, and these third-party
production partners were forced to shut down during the first quarter of 2020
due to COVID-19. The Company continues to monitor customer and consumer demands
by employing innovative production and programming strategies, including content
filmed by our on-air talent and seeking viewer feedback on which content to air.
We intend to continue to adapt our plans as needed to drive our business and
meet our obligations during the COVID-19 situation. However, the current level
of uncertainty over the economic and operational impacts of COVID-19 means the
related financial impact cannot be reasonably and fully estimated at this time.
In response to the COVID-19 pandemic, during the first quarter of 2020, the
Company pursued a number of cost savings initiatives that it believes will
offset a portion of potential revenue losses and deferrals due to the impact of
COVID-19, through the implementation of travel, marketing, production and other
operating cost reductions. The Company also implemented remote work arrangements
effective mid-March 2020 and to date, these arrangements have not materially
affected our ability to maintain our business operations. Additionally, certain
sporting events that the Company has rights to have been cancelled or postponed,
thereby eliminating or deferring the related revenues and expenses. For example,
on March 24, 2020, the International Olympic Committee and the Tokyo 2020
Organizing Committee agreed to postpone the Olympic Games to 2021. The Company
expects that the postponement of the Olympic Games will shift Olympic-related
revenues and defer significant expenses from fiscal year 2020 to fiscal year
2021.
In addition, we have implemented several measures that we believe will preserve
sufficient liquidity in the near term. As described further in Liquidity and
Capital Resources, during March 2020, we drew down $500 million under our $2.5
billion revolving credit facility to increase our cash position and maximize
flexibility in light of the current uncertainty surrounding the impact of
COVID-19. We have upcoming corporate debt maturities in June 2020 of $600
million and in June 2021 of $640 million.
Finally, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act")
was enacted on March 27, 2020 in the United States. The CARES Act provides
numerous tax provisions and other stimulus measures, including temporary changes
regarding the prior and future utilization of net operating losses, temporary
changes to the prior and future limitations on interest deductions, temporary
suspension of certain payment requirements for the employer portion of Social
Security taxes, technical corrections from prior tax legislation for tax
depreciation of certain qualified improvement property, and the creation of
certain refundable employee retention credits. As of March 31, 2020, we do not
expect the CARES Act to have a material effect on our financial position and
results of operations. We continue to monitor other relief measures taken by the
U.S. and other governments around the world.
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