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 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 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 coronavirus
disease 2019 ("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
associated economic disruption remain uncertain. Restrictions on social and
commercial activity in an effort to contain the virus have had, and are expected
to continue to have, a significant adverse impact upon many sectors of the U.S.
and global economy, including the media industry. We continue to closely monitor
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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Demand for our advertising products and services has been reduced by the
pandemic, particularly in the second quarter of 2020 when the economic
disruptions from limitations on social and commercial activity increased. Also,
our third-party production partners remained shut down during most of the second
quarter of 2020 due to COVID-19 restrictions. Our advertising revenues, which
represented 54% of our consolidated revenues in 2019, have declined during the
first half of 2020 and may continue to decline significantly throughout the
remainder of 2020 if our advertising partners in certain sectors (such as
travel) reduce or fail to resume their advertising spending or if we continue to
be limited in our ability to create and air new content due to prolonged
production shutdowns and delays. Additionally, certain sporting events that the
Company has rights to have been cancelled or postponed, thereby eliminating or
deferring the related revenues and expenses, including the Tokyo 2020 Olympic
Games which were postponed to 2021. We expect 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 response to these impacts of the pandemic, we continued to employ innovative
production and programming strategies, including producing content filmed by our
on-air talent and seeking viewer feedback on which content to air. We also
pursued a number of cost savings initiatives during the second quarter of 2020
that we believe will offset a portion of anticipated revenue losses and
deferrals, through the implementation of travel, marketing, production and other
operating cost reductions and will continue to do so for the remainder of 2020.
We also implemented remote work arrangements effective mid-March 2020 and to
date, these arrangements have not materially affected our ability to operate our
business. Throughout the second quarter of 2020 and beyond, we began the process
of re-opening office locations across the globe on a case-by-case basis, after
careful consideration of the number of COVID-19 cases in each respective area,
rate of infection growth, recovery and mortality rates, local environment,
governmental restrictions, health recommendations, benchmarking and overall
business need and impact. We are monitoring these locations closely and remain
agile and flexible as needed. We expect to continue this process throughout the
remainder of 2020 and beyond as conditions warrant.
We are unable to predict the full impact that COVID-19 will have on our
financial position, operating results, and cash flows in the mid- to long-term
due to numerous uncertainties. 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.
In addition, we have implemented several measures to preserve sufficient
liquidity in the near term. As described further in Note 7, 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. During the second quarter of
2020, we entered into an amendment to our revolving credit facility, which
increased flexibility under our financial covenants and issued $1.0 billion
aggregate principal amount of Senior Notes due May 2030 and $1.0 billion
aggregate principal amount of Senior Notes due May 2050. The proceeds from the
notes were used to fund a tender offer for $1.5 billion of certain Senior Notes
with maturities ranging from 2021 through 2023 and to repay the $500 million
outstanding under our revolving credit facility. (See Note 7.)
In light of the impact of COVID-19, we assessed goodwill, other intangibles,
deferred tax assets, programming assets, and accounts receivable for
recoverability based upon our latest estimates and judgments with respect to
expected future operating results, ultimate usage of content and latest
expectations with respect to expected credit losses. We recorded a goodwill
impairment charge of $36 million for our Asia-Pacific reporting unit during the
three months ended June 30, 2020. (See Note 6.) Asset impairments of $2 million
were recorded as of June 30, 2020, as the carrying value of such assets exceeded
their fair value. Adjustments to reflect increased expected credit losses were
not material. Further, hedged transactions were assessed, and we have concluded
such transactions remain probable of occurrence. Due to significant uncertainty
surrounding the impact of COVID-19, management's judgments could change in the
future. The effects of the pandemic may have further negative impacts on the
Company's financial position, results of operations, and cash flows. 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.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted
on March 27, 2020 in the United States. As of June 30, 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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