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EX-32.2 - EXHIBIT 32.2 - Discovery, Inc.a20170331-exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Discovery, Inc.a20170331-exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Discovery, Inc.a20170331-exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Discovery, Inc.a20170331-exhibit311.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-34177
 
image1a01a07.jpg
Discovery Communications, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
35-2333914
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Discovery Place
Silver Spring, Maryland
 
20910
(Address of principal executive offices)
 
(Zip Code)
(240) 662-2000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Total number of shares outstanding of each class of the Registrant’s common stock as of May 2, 2017:
Series A Common Stock, par value $0.01 per share
153,770,826

Series B Common Stock, par value $0.01 per share
6,512,379

Series C Common Stock, par value $0.01 per share
224,289,527

 
 
 
 
 




DISCOVERY COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
 
 
Page
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016.
 
 
Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016.
 
 
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016.
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016.
 
 
Consolidated Statement of Equity for the three months ended March 31, 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements.
DISCOVERY COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
 
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
267

 
$
300

Receivables, net
 
1,560

 
1,495

Content rights, net
 
395

 
310

Prepaid expenses and other current assets
 
369

 
397

Total current assets
 
2,591

 
2,502

Noncurrent content rights, net
 
2,038

 
2,089

Property and equipment, net
 
504

 
482

Goodwill, net
 
8,077

 
8,040

Intangible assets, net
 
1,489

 
1,512

Equity method investments, including note receivable
 
690

 
557

Other noncurrent assets
 
473

 
490

Total assets
 
$
15,862

 
$
15,672

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
200

 
$
241

Accrued liabilities
 
1,008

 
1,075

Deferred revenues
 
194

 
163

Current portion of debt
 
132

 
82

Total current liabilities
 
1,534

 
1,561

Noncurrent portion of debt
 
7,970

 
7,841

Deferred income taxes
 
429

 
467

Other noncurrent liabilities
 
345

 
393

Total liabilities
 
10,278

 
10,262

Commitments and contingencies (See Note 15)
 


 


Redeemable noncontrolling interests
 
249

 
243

Equity:
 
 
 
 
Discovery Communications, Inc. stockholders’ equity:
 
 
 
 
Series A convertible preferred stock: $0.01 par value; 75 shares authorized; 71 shares issued
 
1

 
1

Series C convertible preferred stock: $0.01 par value; 75 shares authorized; 27 and 28 shares issued
 
1

 
1

Series A common stock: $0.01 par value; 1,700 shares authorized; 156 and 155 shares issued
 
1

 
1

Series B convertible common stock: $0.01 par value; 100 shares authorized; 7 shares issued
 

 

Series C common stock: $0.01 par value; 2,000 shares authorized; 382 and 381 shares issued
 
4

 
4

Additional paid-in capital
 
7,146

 
7,046

Treasury stock, at cost
 
(6,496
)
 
(6,356
)
Retained earnings
 
5,382

 
5,232

Accumulated other comprehensive loss
 
(704
)
 
(762
)
Total equity
 
5,335

 
5,167

Total liabilities and equity
 
$
15,862

 
$
15,672

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

4


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


 
 
Three Months Ended March 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Distribution
 
$
855

 
$
801

Advertising
 
687

 
687

Other
 
71

 
73

Total revenues
 
1,613

 
1,561

Costs and expenses:
 
 
 
 
Costs of revenues, excluding depreciation and amortization
 
607

 
592

Selling, general and administrative
 
415

 
408

Depreciation and amortization
 
80

 
79

Restructuring and other charges
 
24

 
6

Gain on disposition
 

 
(13
)
Total costs and expenses
 
1,126

 
1,072

Operating income
 
487

 
489

Interest expense
 
(91
)
 
(85
)
Loss on extinguishment of debt
 
(54
)
 

Loss from equity investees, net
 
(53
)
 
(8
)
Other expense, net
 
(13
)
 
(16
)
Income before income taxes
 
276

 
380

Income tax expense
 
(55
)
 
(111
)
Net income
 
221

 
269

Net income attributable to redeemable noncontrolling interests
 
(6
)
 
(6
)
Net income available to Discovery Communications, Inc.
 
$
215

 
$
263

 
 
 
 
 
Net income per share available to Discovery Communications, Inc. Series A, B and C common stockholders:
 
 
 
 
Basic
 
$
0.37

 
$
0.42

Diluted
 
$
0.37

 
$
0.42

Weighted average shares outstanding:
 
 
 
 
Basic
 
389

 
413

Diluted
 
588

 
630

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

5


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


 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net income
 
$
221

 
$
269

Other comprehensive income (loss) adjustments, net of tax:
 
 
 
 
     Currency translation
 
68

 
58

     Available-for-sale securities
 
(1
)
 
(21
)
     Derivatives
 
(8
)
 
(17
)
Comprehensive income
 
280

 
289

Comprehensive income attributable to redeemable noncontrolling interests
 
(7
)
 
(7
)
Comprehensive income attributable to Discovery Communications, Inc.
 
$
273

 
$
282

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

6


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

 
Three Months Ended March 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income
$
221

 
$
269

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Share-based compensation expense
21

 
24

Depreciation and amortization
80

 
79

Content amortization and impairment expense
458

 
441

Gain on disposition

 
(13
)
Equity in losses of investee companies, net of cash distributions
54

 
9

Deferred income taxes
(34
)
 
(58
)
Loss on extinguishment of debt
54

 

Other, net
3

 
15

Changes in operating assets and liabilities:
 
 
 
Receivables, net
(44
)
 
(7
)
Content rights, net
(474
)
 
(488
)
Accounts payable and accrued liabilities
(121
)
 
(148
)
Share-based compensation liabilities
(1
)
 
(5
)
Income taxes receivable and prepaid income taxes
48

 
28

Foreign currency and other, net
(10
)
 
(84
)
Cash provided by operating activities
255

 
62

Investing Activities
 
 
 
Payments for investments
(188
)
 

Distributions from equity method investees
5

 
15

Purchases of property and equipment
(47
)
 
(15
)
Proceeds from derivative instruments, net
5

 

Other investing activities, net
1

 
(1
)
Cash used in investing activities
(224
)
 
(1
)
Financing Activities
 
 
 
Commercial paper borrowings (repayments), net
54

 
(93
)
Borrowings under revolving credit facility
150

 
95

Principal repayments of revolving credit facility
(125
)
 
(252
)
Borrowings from debt, net of discount and including premiums
659

 
498

Principal repayments of debt, including discount payment and premiums to par value
(650
)
 

Principal repayments of capital lease obligations
(13
)
 
(12
)
Repurchases of stock
(200
)
 
(373
)
Cash settlement of common stock repurchase contracts
58

 

Distributions to redeemable noncontrolling interests
(3
)
 
(2
)
Share-based plan payments, net
(8
)
 
(5
)
Other financing activities, net
(6
)
 
(11
)
Cash used in financing activities
(84
)
 
(155
)
Effect of exchange rate changes on cash and cash equivalents
20

 
37

Net change in cash and cash equivalents
(33
)
 
(57
)
Cash and cash equivalents, beginning of period
300

 
390

Cash and cash equivalents, end of period
$
267

 
$
333

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

7


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

 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Equity
 
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
 
December 31, 2016
 
99

 
$
2

 
543

 
$
5

 
$
7,046

 
$
(6,356
)
 
$
5,232

 
$
(762
)
 
$
5,167

Cumulative effect of accounting change - share-based payments
 

 

 

 

 
4

 

 
(4
)
 

 

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

 

 

 

 

 

 
215

 

 
215

Other comprehensive income
 

 

 

 

 

 

 

 
58

 
58

Repurchases of stock
 
(1
)
 

 

 

 

 
(140
)
 
(60
)
 

 
(200
)
Cash settlement of common stock repurchase contracts
 

 

 

 

 
58

 

 

 

 
58

Share-based compensation
 

 

 

 

 
11

 

 

 

 
11

Tax settlements associated with share-based compensation
 

 

 
(1
)
 

 
(30
)
 

 

 

 
(30
)
Issuance of stock in connection with share-based plans
 

 

 
3

 

 
57

 

 

 

 
57

Redeemable noncontrolling interest adjustments to redemption value
 

 

 

 

 

 

 
(1
)
 

 
(1
)
March 31, 2017
 
98

 
$
2

 
545

 
$
5

 
$
7,146

 
$
(6,496
)
 
$
5,382

 
$
(704
)
 
$
5,335

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

8


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



NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Discovery Communications, Inc. (“Discovery” or the “Company”) is a global media company that provides content across multiple distribution platforms, including pay-television ("pay-TV"), free-to-air ("FTA") and broadcast, various digital distribution platforms and content licensing agreements. The Company also operates a portfolio of websites, digital direct-to-consumer products, production studios and curriculum-based education products and services. The Company presents its operations in two reportable segments: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting principally of international television networks and digital content services. In addition, Education and Other consists principally of curriculum-based product and service offerings and production studios. Financial information for Discovery’s reportable segments is discussed in Note 16.
Basis of Presentation
The consolidated financial statements include the accounts of Discovery and its majority-owned subsidiaries in which a controlling interest is maintained. For each non-wholly owned subsidiary, the Company evaluates its ownership and other interests to determine whether it should consolidate the entity or account for its ownership interest as an investment. As part of its evaluation, the Company makes judgments in determining whether the entity is a variable interest entity ("VIE") and, if so, whether it is the primary beneficiary of the VIE and is thus required to consolidate the entity. (See Note 3.) Inter-company accounts and transactions between consolidated entities have been eliminated in consolidation.
Unaudited Interim Financial Statements
These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (“GAAP”) applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Discovery’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”).
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. These estimates are sometimes complex, sensitive to changes in assumptions and may require fair value determinations using Level 3 fair value measurements. Actual results may differ materially from those estimates.
Estimates inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, allowances for doubtful accounts, content rights, depreciation and amortization, business combinations, share-based compensation, income taxes, other financial instruments, contingencies and the determination of whether the Company is the primary beneficiary of entities in which it holds variable interests.
Reclassifications
The Company adopted new accounting guidance for share-based payments, deferred income taxes and statements of cash flows as of January 1, 2017. These adoptions resulted in reclassifications of current deferred tax assets to noncurrent deferred tax assets and liabilities in the Company's balance sheet as of December 31, 2016 to conform to the current period presentation. The impact of these reclassifications is shown within the Balance Sheet Classification of Deferred Income Taxes section below. The new accounting pronouncements adopted for share-based payments and cash flow statements did not impact the prior period amounts presented in these financial statements. The impact of the adoptions to other prior periods not presented in these financial statements were disclosed in the 2016 Form 10-K. See further discussion of new accounting pronouncements adopted below.

9


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


Accounting and Reporting Pronouncements Adopted
Share-Based Payments
On January 1, 2017, the Company adopted new guidance that simplifies how share-based payments are accounted for and presented in the financial statements. The new guidance impacted the financial statements as follows:
Actual forfeitures are used in the calculations of share-based compensation expense instead of estimated forfeitures. Retained earnings was decreased by approximately $4 million to effect the modified retrospective method impact of the adoption as of January 1, 2017.
Net windfall tax benefits or deficiencies are recorded in income tax expense in the period in which they occur, whereas they were previously recorded in additional paid-in capital (“APIC”). This change has been applied prospectively. There were no net tax windfall benefits or deficiencies for the three months ended March 31, 2016.
Expected cash flows from net windfall tax benefits are no longer factored into the calculation of the number of shares for diluted earnings per share. This change has been applied prospectively. Net windfall tax benefits did not impact the presentation of diluted earnings per share for the three months ended March 31, 2016.
Cash flows from net windfall tax benefits are classified as operating activities in the statement of cash flows presentation. Previously net windfall tax benefits were classified as financing activities. This change is applied retrospectively, resulting in the adjustment of prior period amounts; however, cash flows from operating activities and cash used in financing activities were not impacted for the three months ended March 31, 2016, as there was no net tax windfall benefit for the period.
The Company evaluated the accounting for awards that are liability-classified and marked-to-market each accounting period and concluded that there is no change to the accounting for those awards.
Balance Sheet Classification of Deferred Income Taxes
On January 1, 2017, the Company adopted new guidance that removes the requirement to separate deferred tax assets and liabilities into current and noncurrent amounts and instead requires all such amounts be classified as noncurrent on the Company's consolidated balance sheets. As a result, each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The Company retrospectively adopted the new guidance effective January 1, 2017. The following table summarizes the adjustments the Company made to conform prior period classifications to the new guidance:
 
 
December 31, 2016
 
 
As reported
 
As adjusted
Current deferred income tax assets
 
$
97

 
$

Noncurrent deferred income tax assets (included within other noncurrent assets)
 
9

 
20

Noncurrent deferred income tax liabilities
 
(553
)
 
(467
)
Total
 
$
(447
)
 
$
(447
)
Statement of Cash Flows
On January 1, 2017, the Company adopted new guidance that reduces diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The topics relevant to the Company include: (1) debt prepayment or debt extinguishment costs, which prior to adoption were classified as operating activities, but are now classified as financing activities, (2) settlement and receipt of discounts and premiums associated with our senior notes, which prior to adoption were classified as operating activities, but are now classified as financing activities when the stated interest rate is deemed not insignificant to the effective interest rate of the borrowing, (3) contingent consideration payments not made soon after a business combination date must be classified as financing activities up to the contingent consideration liability amount and any excess payment is classified as operating activities, and (4) the Company has elected to assess distributions received from equity method investees based on the nature of distribution approach, which classifies distributions received from equity method investees based on the nature of the activity that generated the distribution as either a return on investment (classified as cash inflows from operating activities) or a return of investment (classified as cash inflows from investing activities). The Company early adopted this guidance retrospectively effective January 1, 2017. There was no impact from the adoption of the new guidance on the prior period financial statements presented for the three months ended March 31, 2016, as there were no transactions related to the first and second items listed above and no change in the Company's historical accounting policy was required for the third and fourth items listed above.

10


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


Accounting and Reporting Pronouncements Not Yet Adopted
Goodwill
Under the current accounting guidance, the quantitative goodwill impairment test is performed using a two-step process. The first step of the process is to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the quantitative impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative goodwill impairment test is required to be performed to measure the amount of impairment loss, if any. The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit’s identifiable net assets excluding goodwill is compared to the fair value of the reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill impairments. The new guidance eliminates Step 2 from the goodwill impairment test, and eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Therefore, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this update should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
Income Taxes
In October 2016, the FASB issued guidance that simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new guidance includes requirements to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, and therefore eliminates the exception for an intra-entity transfer of an asset other than inventory. The new standard is effective for reporting periods beginning after December 15, 2017, with any adjustments applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
Leases
In February 2016, the FASB issued guidance on leases that will require lessees to recognize almost all of their leases on the balance sheet by recording a right-of-use asset and liability. The new standard will be effective for reporting periods beginning after December 15, 2018, and requires application of the new accounting guidance at the beginning of the earliest comparative period presented in the year of adoption. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements however, it is expected that assets and liabilities will increase materially when operating leases are recorded under the new standard.
Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued guidance regarding the classification and measurement of financial instruments. The standard requires equity securities, including available-for-sale ("AFS") securities, to be measured at fair value with changes in the fair value recognized through net income, superseding the guidance permitting entities to record gains and losses on equity securities with readily determinable fair values in accumulated other comprehensive income. Investments accounted for under the equity method of accounting or that result in consolidation are not included within the scope of this update. The new standard will affect the Company's accounting for AFS securities for reporting periods prospectively beginning after December 15, 2017.
Revenue from Contracts with Customers
In May 2014, the FASB issued an accounting pronouncement related to revenue recognition, which applies a single, comprehensive revenue recognition model for all contracts with customers. This standard, as amended, contains principles with respect to the measurement and timing of recognition of revenue. The Company will recognize revenue to reflect the transfer of goods or services to customers at an amount that it expects to be entitled to receive in exchange for those goods or services. The new standard is effective for annual reporting periods beginning after December 15, 2017. In addition, the guidance requires new or expanded disclosures related to the judgments made by companies when following the framework. The Company will apply the new revenue standard beginning January 1, 2018, and will not early adopt. The Company has identified the advertising sales and distribution revenue streams as significant and has made progress with respect to its analysis of each of these in accordance with the new guidance to determine the impact on the consolidated financial statements. The guidance permits two methods of adoption:

11


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


retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). When the Company has completed its evaluation, it will determine the method of transition that will be used in adopting the new standard.
Concentrations Risk
Customers
The Company has long-term contracts with distributors around the world. For the U.S. Networks segment, more than 90% of distribution revenue comes from the Company's largest 10 distributors in the U.S. For the International Networks segment, approximately 42% of distribution revenue comes from the Company's largest 10 distributors outside of the U.S. Agreements in place with the major cable and satellite operators in the U.S. Networks and International Networks expire at various times from 2017 through 2021. Although the Company seeks to renew its agreements with its distributors prior to expiration of a contract, a delay in securing a renewal that results in a service disruption, a failure to secure a renewal or a renewal on less favorable terms may have a material adverse effect on the Company’s financial condition and results of operations. Not only could the Company experience a reduction in distribution revenue, but it could also experience a reduction in advertising revenue, as viewership is impacted by affiliate subscriber levels.
No individual customer accounted for more than 10% of total consolidated revenues for the three months ended March 31, 2017 or 2016. As of March 31, 2017 and December 31, 2016, the Company’s trade receivables did not represent a significant concentration of credit risk as the customers and markets in which the Company operates are varied and dispersed across many geographic areas.
Financial Institutions
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk. Additionally, the Company has cash and cash equivalents held by its foreign subsidiaries that would result in U.S. tax consequences should the Company decide it needs to repatriate these funds to the U.S.
Lender Counterparties
There is a risk that the counterparties associated with the Company’s revolving credit facility will not be available to fund as obligated under the terms of the facility and that the Company may, at the time of such unavailability to fund, have limited or no access to the commercial paper market. If funding under the revolving credit facility is unavailable, the Company may have to acquire a replacement credit facility from different counterparties at a higher cost or may be unable to find a suitable replacement. Typically, the Company seeks to manage such risks from its revolving credit facility by contracting with experienced large financial institutions and monitoring the credit quality of its lenders. As of March 31, 2017, the Company did not anticipate nonperformance by any of its counterparties.
Counterparty Credit Risk
The Company is exposed to the risk that the counterparties to outstanding derivative financial instruments will default on their obligations. The Company manages these credit risks through evaluating and monitoring the creditworthiness of, and concentration of risk with, the respective counterparties. In this regard, credit risk associated with outstanding derivative financial instruments is spread across a relatively broad counterparty base of banks and financial institutions. In connection with the Company's hedge of certain investments classified as AFS securities, the Company has pledged shares as collateral to the derivative counterparty. (See Note 3.) The Company also has a limited number of arrangements where collateral is required to be posted in the instance that certain fair value thresholds are exceeded. As of March 31, 2017, no collateral has been posted by either party under these arrangements. As of March 31, 2017, our exposure to counterparty credit risk included derivative assets with an aggregate fair value of $61 million. (See Note 4.)
NOTE 2. DISPOSITIONS
Group Nine Transaction
In 2016, the Company recorded a pre-tax gain of $50 million upon disposition of its digital network Seeker and production studio SourceFed, following its contribution of the businesses and $100 million in cash for the formation of a new joint venture, Group Nine Media, Inc. ("Group Nine Media"), on December 2, 2016 ("Group Nine Transaction"). Group Nine Media includes Thrillist Media Group, NowThis Media and TheDodo.com. As a result of the transaction, Discovery obtained a 39% ownership interest in the preferred stock of Group Nine Media, which is accounted for under the cost method of accounting. (See Note 3.) The

12


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


gain on contribution of the digital networks business included the disposition of $32 million in net assets, including $22 million of goodwill allocated to the transaction based on the relative fair values of the digital networks business disposed of and the portion of the U.S. Networks reporting unit that was retained.
Radio
On June 30, 2015, Discovery sold its radio business in the Nordics to Bauer Media Group ("Bauer") for total consideration, net of cash disposed, of €72 million ($80 million), which included €54 million ($61 million) in cash and €18 million ($19 million) of contingent consideration. The cumulative gain on the disposal is $1 million. Based on the final resolution and receipt of contingent consideration payable, Discovery recorded a pre-tax gain of $13 million for the three months ended March 31, 2016. The Company had previously recorded a $12 million loss including estimated contingent consideration as disclosed for the quarter ended December 31, 2015.
Raw and Betty Studios, LLC.
On April 28, 2017, the Company sold its production studios Raw TV Limited (“Raw”) and Betty TV Limited (“Betty”) to DLG Acquisitions Limited (“All3Media”). All3Media is a U.K. based television, film and digital production and distribution company. The Company owns 50% of All3Media and accounts for its investment in All3Media under the equity method of accounting. As of March 31, 2017, the assets and liabilities of Raw and Betty qualified as held for sale; total assets were approximately $69 million, comprised of goodwill, cash, receivables and content, and total liabilities were $32 million. The Company expects to reflect a small gain for the disposition of these businesses in the June 30, 2017 financial statements.
The Company determined that the disposals noted above did not meet the definition of discontinued operations, because the dispositions do not represent strategic shifts that have a significant impact on the Company's operations and consolidated financial results.
NOTE 3. INVESTMENTS
The Company’s investments consisted of the following (in millions).
Category
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
Trading securities: mutual funds
 
Prepaid expenses and other current assets
 
$
167

 
$
160

Equity method investments
 
Equity method investments, including note receivable
 
690

 
557

AFS securities:
 
 
 
 
 
 
Common stock
 
Other noncurrent assets
 
63

 
64

Common stock - pledged
 
Other noncurrent assets
 
64

 
64

Cost method investments
 
Other noncurrent assets
 
245

 
245

Total investments
 
 
 
$
1,229

 
$
1,090

Trading Securities
Trading securities include investments in mutual funds held in a separate trust which are owned as part of the Company’s supplemental retirement plan. (See Note 4.)
Equity Method Investments
The Company makes investments that support its underlying business strategy and enable it to enter new markets and develop programming. Almost all equity method investees are privately owned. The carrying values of the Company’s equity method investments are consistent with its ownership in the underlying net assets of the investees, except for Oprah Winfrey Network ("OWN"), because the Company has recorded losses in excess of its ownership interest, and certain investments in renewable energy projects accounted for using the Hypothetical Liquidation at Book Value ("HLBV") methodology under the equity method of accounting. Certain of the Company's equity method investments are VIEs, for which the Company is not the primary beneficiary. As of March 31, 2017, the Company’s estimated risk of loss for all its VIEs including the investment carrying values, unfunded contractual commitments, and guarantees made on behalf of VIEs was approximately $619 million. The Company's maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $556 million and $426 million as of March 31, 2017 and December 31, 2016, respectively. The

13


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


Company recognized its portion of net losses and net income generated by VIEs of $43 million and $8 million for the three months ended March 31, 2017 and 2016, respectively.
OWN
OWN is a pay-TV network and website that provides adult lifestyle content, which is focused on self-discovery, self-improvement and entertainment. Since the initial equity was not sufficient to fund OWN's activities without additional subordinated financial support in the form of a note receivable held by the Company, OWN is a VIE. While the Company and Harpo, Inc. ("Harpo") are partners who share equally in voting control, power is not shared because Harpo holds operational rights related to programming and marketing, as well as selection and retention of key management personnel, that significantly impact OWN’s economic performance. Accordingly, the Company has determined that it is not the primary beneficiary of OWN and accounts for its investment in OWN using the equity method. However, the Company provides OWN content licenses and services, such as distribution, sales and administrative support, for a fee and has provided OWN funding. (See Note 14.)
The carrying value of the Company’s investment in OWN of $353 million and $320 million as of March 31, 2017 and December 31, 2016, respectively, includes the Company's note receivable and accumulated investment balance. The Company's combined advances to and note receivable from OWN, including accrued interest, were $309 million and $311 million as of March 31, 2017 and December 31, 2016, respectively. The interest on the note, compounded annually, is 5.0%. During the three months ended March 31, 2017, the Company received net repayments of $6 million from OWN and accrued interest on the note receivable of $4 million. The note receivable is secured by the net assets of OWN. While the Company has no further funding commitments, the Company will provide additional funding to OWN, if necessary, and expects to recoup amounts funded. There can be no event of default on the borrowing until 2023. However, borrowings are scheduled for repayment four years after the borrowing date to the extent that OWN has excess cash to repay the borrowings then due. Following such repayment, OWN’s subsequent cash distributions will be shared equally between the Company and Harpo. The Company monitors the financial results of OWN along with other relevant business information to assess the recoverability of the OWN note receivable. There has been no impairment of the OWN note receivable.
In accordance with the venture agreement, losses generated by OWN are generally allocated to both investors based on their proportionate ownership interests. However, the Company has recorded its portion of OWN’s losses based upon accounting rules for equity method investments. Prior to the contribution of the Discovery Health network to OWN at its launch, the Company had recognized $104 million, or 100%, of OWN’s net losses. During the three months ended March 31, 2012, accumulated operating losses at OWN exceeded the equity contributed to OWN, and Discovery began again to record 100% of OWN’s net losses. Although OWN has become profitable, the Company will record 100% of any net losses to the extent they result from OWN's operations as long as Discovery has provided all funding to OWN and OWN’s accumulated losses continue to exceed the equity contributed. All of OWN's net income has been and will continue to be recorded by the Company until the Company recovers losses absorbed in excess of the Company's equity ownership interest.
Based on the joint venture agreement, as amended on April 1, 2016, Harpo has the right to require the Company to purchase all or part of Harpo’s interest in OWN at fair market value up to a maximum put amount during 90-day windows beginning on April 1, 2017 and every two and a half years commencing July 1, 2018 through January 1, 2026. The maximum put amount ranges from $100 million on the first put exercise date up to a cumulative cap of $400 million on the fifth put exercise date. The Company has not recorded amounts for the put right because the fair value of this put right was zero as of March 31, 2017 and December 31, 2016.
Renewable Energy Investments
During three months ended March 31, 2017, the Company invested $181 million in limited liability companies that sponsor renewable energy projects related to solar energy. The Company expects these investments to result in tax benefits received, which reduce the Company's tax liability, and cash flows from the operation of the investee. These investments are considered VIEs of the Company. The Company does not consolidate the investments as the Company does not have the power to direct the activities that will most significantly impact their economic performance such as the investee's ability to obtain sufficient customers or control solar panel assets. As such, the Company accounts for these investments under the equity method of accounting as the Company possesses rights that allow the Company to exercise significant influence over the investments. Once a stipulated return on investment is garnered by the Company, the investment allocations to the Company are significantly reduced. Accordingly, the Company applies the HLBV method for recognizing the Company's proportionate share of the investments' net earnings or losses.
During the three months ended March 31, 2017, the Company recognized $83 million of losses on these investments as part of loss from equity investees, net in the consolidated statements of operations. The Company recorded tax benefits of $56 million associated with these investments during the three months ended March 31, 2017. These tax benefits, recorded as a component of income tax expense, which is comprised of $31 million from the entities' passive losses and $25 million from investment tax

14


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


credits, the latter of which is accounted for utilizing the flow through method. No investments in renewable energy projects were held by the Company for the three months ended March 31, 2016. As of March 31, 2017 and December 31, 2016, the Company's carrying value of renewable energy investments was $137 million and $39 million, respectively. The Company has $61 million of future funding commitments for these investments as of March 31, 2017, which are cancelable under limited circumstances.
Other Equity Method Investments
At March 31, 2017 and December 31, 2016, the Company's other equity method investments included All3Media, a Russian cable television business, Mega TV in Chile, and certain joint ventures in Canada. The Company acquired other equity method investments and made additional contributions to existing equity method investments totaling $9 million during the three months ended March 31, 2017.
Available-for-Sale Securities
On November 12, 2015, the Company acquired 5 million shares, or approximately 3%, of Lions Gate Entertainment Corp. ("Lionsgate"), an entertainment company, for $195 million. Lionsgate operates in the motion picture production and distribution, television programming and syndication, home entertainment and digital distribution business. As the shares have a readily determinable fair value and the Company has the intent to retain the investment, the shares are classified as AFS securities.
The accumulated amounts associated with the components of the Company's AFS securities, which are included in other non-current assets, are summarized in the table below (in millions).

 
 
 
 
 
March 31, 2017
 
December 31, 2016
Cost
 
$
195

 
$
195

Accumulated change in value of the hedged AFS recognized in other expense, net
 
(19
)
 
(19
)
Other-than-temporary impairment of AFS securities
 
(62
)
 
(62
)
Unhedged AFS - other comprehensive income (loss)
 
13

 
14

Carrying value
 
$
127

 
$
128


The Company hedged 50% of the shares with an equity collar (the “Lionsgate Collar”) and pledged those shares as collateral to the derivative counter party. In the application of hedge accounting, when the share price of Lionsgate is within the boundaries of the collar and the hedge has no intrinsic value, the Company records the gains or losses on the Lionsgate AFS securities as a component of other comprehensive income (loss). When the share price of the Lionsgate AFS is outside the boundaries of the collar and the hedge has intrinsic value, the Company records a gain or loss for the change in the fair value of the hedged portion of Lionsgate shares that correspond to the change in intrinsic value of the hedge as a component of other expense, net. (See Note 7.)
In 2016, the Company determined that the decline in value of AFS securities related to its investment in Lionsgate was other-than-temporary in nature and, as such, the cost basis was adjusted to fair value. The impairment determination was based on the sustained decline in the stock price of Lionsgate in relation to the purchase price and the prolonged length of time the fair value of the investment had been less than the carrying value. Based on the other-than-temporary impairment determination, unrealized pre-tax losses of $62 million previously recorded as a component of other comprehensive income (loss) were recognized as an impairment charge that was included as a component of other expense, net for the quarter ended September 30, 2016. Since the impairment charge in 2016, the changes in fair value as a result of changes in stock price have been recorded as a component of other comprehensive income (loss).
Cost Method Investments
The Company's cost method investments as of March 31, 2017 primarily include its 39% minority interest in Group Nine Media valued at $182 million. (See Note 2.) Although Discovery has significant influence through its voting rights in the preferred stock of Group Nine Media, the Company applies the cost method for its ownership interest, which does not meet the definition of in-substance common stock. The Company also has investments in an educational website and an electric car racing series.

15


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


NOTE 4. FAIR VALUE MEASUREMENTS
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the following three categories:
Level 1
Quoted prices for identical instruments in active markets.
Level 2
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3
Valuations derived from techniques in which one or more significant inputs are unobservable.
The tables below present assets and liabilities measured at fair value on a recurring basis (in millions).
 
 
 
 
March 31, 2017
Category
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities - mutual funds
 
Prepaid expenses and other current assets
 
$
167

 
$

 
$

 
$
167

AFS securities:
 
 
 
 
 
 
 
 
 
 
Common stock
 
Other noncurrent assets
 
63

 

 

 
63

Common stock - pledged
 
Other noncurrent assets
 
64

 

 

 
64

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

 
16

 

 
16

  Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Prepaid expenses and other current assets
 

 
1

 

 
1

Cross-currency swaps
 
Other noncurrent assets
 

 
21

 

 
21

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

 
23

 

 
23

Total
 
 
 
$
294

 
$
61

 
$

 
$
355

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
172

 
$

 
$

 
$
172

Derivatives:
 
 
 
 
 
 
 
 
 
 
  Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
19

 

 
19

  Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Accrued liabilities
 

 
5

 

 
5

Cross-currency swaps
 
Other noncurrent liabilities
 

 
25

 

 
25

Total
 
 
 
$
172

 
$
49

 
$

 
$
221


16


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


 
 
 
 
December 31, 2016
Category
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities - mutual funds
 
Prepaid expenses and other current assets
 
$
160

 
$

 
$

 
$
160

AFS securities:
 
 
 
 
 
 
 
 
 
 
Common stock
 
Other noncurrent assets
 
64

 

 

 
64

Common stock - pledged
 
Other noncurrent assets
 
64

 

 

 
64

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

 
31

 

 
31

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Other noncurrent assets
 

 
35

 

 
35

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

 
25

 

 
25

No hedging designation:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Other noncurrent assets
 

 
1

 

 
1

Total
 
 
 
$
288

 
$
92

 
$

 
$
380

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
160

 
$

 
$

 
$
160

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
18

 

 
18

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Accrued liabilities
 

 
3

 

 
3

Cross-currency swaps
 
Other noncurrent liabilities
 

 
31

 

 
31

Total
 
 
 
$
160

 
$
52

 
$

 
$
212

The fair value of Level 1 trading securities was determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. (See Note 3). The fair value of the deferred compensation plan liability was determined based on the fair value of the related investments elected by employees. While the deferred compensation plan liability is typically equal to the fair value of trading securities, as of March 31, 2017, a payment to the plan was pending. As such, the deferred compensation liability is $5 million more than the fair value of trading securities at March 31, 2017.
AFS securities represent equity investments with readily determinable fair values. The fair value of Level 1 AFS securities was determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. (See Note 3).
Derivative financial instruments are comprised of foreign exchange, interest rate and equity contracts. (See Note 7). The fair value of Level 2 derivative financial instruments was determined using a market-based approach.
In addition to the financial instruments listed in the tables above, the Company holds other financial instruments, including cash deposits, accounts receivable, accounts payable, commercial paper, borrowings under the revolving credit facility, capital leases and senior notes. The carrying values for such financial instruments, other than the senior notes, each approximated their fair values as of March 31, 2017 and December 31, 2016. The estimated fair value of the Company’s outstanding senior notes using quoted prices from over the counter markets, considered Level 2 inputs, was $7.5 billion and $7.4 billion as of March 31, 2017 and December 31, 2016, respectively.

17


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


NOTE 5. CONTENT RIGHTS
The table below presents the components of content rights (in millions). 
 
 
March 31, 2017
 
December 31, 2016
Produced content rights:
 
 
 
 
Completed
 
$
3,942

 
$
3,920

In-production
 
436

 
420

Coproduced content rights:
 
 
 
 
Completed
 
656

 
632

In-production
 
35

 
57

Licensed content rights:
 
 
 
 
Acquired
 
1,049

 
1,090

Prepaid(a)
 
165

 
129

Content rights, at cost
 
6,283

 
6,248

Accumulated amortization
 
(3,850
)
 
(3,849
)
Total content rights, net
 
2,433

 
2,399

Current portion
 
(395
)
 
(310
)
Noncurrent portion
 
$
2,038

 
$
2,089

(a) Prepaid licensed content rights includes prepaid rights to the Olympic games of $52 million that are reflected as current content rights assets on the consolidated balance sheet as of March 31, 2017.
Content expense is included in costs of revenues on the consolidated statements of operations and consisted of the following (in millions).
 
 
Three months ended March 31,
 
 
2017
 
2016
Content amortization
 
$
455

 
$
435

Other production charges
 
65

 
59

Content impairments
 
3

 
6

Total content expense
 
$
523

 
$
500



18


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


NOTE 6. DEBT
The table below presents the components of outstanding debt (in millions).
 
 
March 31, 2017
 
December 31, 2016
5.625% Senior notes, semi-annual interest, due August 2019
 
$
411

 
$
500

5.05% Senior notes, semi-annual interest, due June 2020
 
789

 
1,300

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

 
650

2.375% Senior notes, euro denominated, annual interest, due March 2022
 
322

 
314

3.30% Senior notes, semi-annual interest, due May 2022
 
500

 
500

3.25% Senior notes, semi-annual interest, due April 2023
 
350

 
350

3.80% Senior notes, semi-annual interest, due March 2024
 
450

 

3.45% Senior notes, semi-annual interest, due March 2025
 
300

 
300

4.90% Senior notes, semi-annual interest, due March 2026
 
700

 
500

1.90% Senior notes, euro denominated, annual interest, due March 2027
 
644

 
627

6.35% Senior notes, semi-annual interest, due June 2040
 
850

 
850

4.95% Senior notes, semi-annual interest, due May 2042
 
500

 
500

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

 
850

Revolving credit facility
 
575

 
550

Commercial paper
 
102

 
48

Capital lease obligations
 
167

 
151

Total debt
 
8,160

 
7,990

Unamortized discount and debt issuance costs
 
(58
)
 
(67
)
Debt, net
 
8,102

 
7,923

Current portion of debt
 
(132
)
 
(82
)
Noncurrent portion of debt
 
$
7,970

 
$
7,841

Senior Notes
On March 13, 2017, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, issued $450 million principal amount of 3.80% senior notes due March 13, 2024 (the "2017 USD Notes") and an additional $200 million principal amount of its existing 4.90% senior notes due March 11, 2026 (the "2016 USD Notes"). Interest on the 2017 USD Notes is payable semi-annually on March 13 and September 13 of each year. Interest on the 2016 USD Notes is payable semi-annually on March 11 and September 11 of each year. The proceeds received by DCL from the 2017 USD Notes were net of a $1 million issuance discount and $4 million of debt issuance costs. The proceeds received by DCL from the 2016 USD Notes included a $10 million issuance premium and were net of $2 million of debt issuance costs. The issuances are fully and unconditionally guaranteed by the Company.
DCL used the proceeds from the offerings to repurchase $600 million aggregate principal amount of DCL's 5.05% senior notes due 2020 and 5.625% senior notes due 2019 in a cash tender offer. The repurchase resulted in a pretax loss on extinguishment of debt of $54 million, which is presented as a separate line item on the Company's consolidated statements of operations and recognized as a component of financing cash outflows on the consolidated statements of cash flows. The loss included $50 million for premiums to par value, $2 million of non-cash write-offs of unamortized deferred financing costs, $1 million for the write-off of the original issue discount of these senior notes and $1 million accrued for other third-party fees.
Revolving Credit Facility
DCL's revolving credit facility allows DCL and certain designated foreign subsidiaries of DCL to borrow up to $2.0 billion, including a $100 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for swingline loans. Borrowing capacity under this agreement is reduced by any outstanding borrowings under the commercial paper program discussed below. The revolving credit facility agreement provides for a maturity date of February 4, 2021 and the option for up to two additional 364-day renewal periods.
As of March 31, 2017, the Company had outstanding borrowings under the revolving credit facility of $575 million at a weighted average interest rate of 2.16%, none of which were denominated in foreign currencies. As of December 31, 2016, the Company had outstanding borrowings under the revolving credit facility of $550 million at a weighted average interest rate of

19


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


2.05%, none of which were denominated in foreign currencies. The interest rate on borrowings under the revolving credit facility is variable based on DCL's then-current credit ratings for its publicly traded debt and changes in financial index rates. For dollar-denominated borrowings, the interest rate is based, at the Company's option, on either adjusted LIBOR plus a margin, or an alternate base rate plus a margin. For borrowings denominated in foreign currencies, the interest rate is based on adjusted LIBOR, plus a margin. The current margins are 1.30% and 0.30%, respectively, per annum for adjusted LIBOR and alternate base rate borrowings. A monthly facility fee is charged based on the total capacity of the facility, and interest is charged based on the amount borrowed on the facility. The current facility fee rate is 0.20% per annum and subject to change based on DCL's then-current credit ratings. All obligations of DCL and the other borrowers under the revolving credit facility are unsecured and are fully and unconditionally guaranteed by Discovery.
The credit agreement governing the revolving credit facility contains customary representations, warranties and events of default, as well as affirmative and negative covenants. As of March 31, 2017, the Company, DCL and the other borrowers were in compliance with all covenants, and there were no events of default under the revolving credit facility.
Commercial Paper
The Company's commercial paper program is supported by the revolving credit facility described above. Outstanding commercial paper borrowings were $102 million with a weighted average interest rate of approximately 1.25% as of March 31, 2017 and $48 million with a weighted average interest rate of approximately 1.20% as of December 31, 2016.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to modify its exposure to market risks from changes in foreign currency exchange rates, interest rates and the fair value of investments classified as AFS securities. At the inception of a derivative contract, the Company designates the derivative as one of four types based on the Company's intentions and belief as to likely effectiveness as a hedge. These four types are: (1) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), (2) a hedge of net investments in foreign operations ("net investment hedge"), (3) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), or (4) an instrument with no hedging designation. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.
Unsettled derivative contracts are recorded at their gross fair values on the consolidated balance sheets. (See Note 4.) The portion of the fair value that represents cash flows occurring within one year are classified as current, and the portion related to cash flows occurring beyond one year are classified as noncurrent. Gains and losses on the effective portions of designated cash flow and net investment hedges are initially recognized as components of accumulated other comprehensive loss on the consolidated balance sheets and reclassified into the statements of operations in the same line item in which the hedged item is recorded and in the same period as the hedged item affects earnings. The ineffective portion of any previous gains and losses recorded in accumulated other comprehensive loss on the consolidated balance sheets are reclassified immediately to other expense, net on the consolidated statements of operations. The Company records gains and losses from the Lionsgate Collar, designated as a fair value hedge, and instruments that receive no hedging designation, as a component of other expense, net on the consolidated statements of operations. The cash flows from the effective portion of derivative instruments used as hedges are classified in the consolidated statements of cash flows in the same section as the cash flows from the hedged item.


20


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


The following table summarizes the impact of derivative financial instruments on the Company's consolidated balance sheets (in millions). There were no amounts eligible to be offset under master netting agreements as of March 31, 2017 and December 31, 2016.
 
March 31, 2017
 
December 31, 2016
 
 
 
Fair Value
 
 
 
Fair Value
 
Notional
 
Prepaid expenses and other current assets
 
Other non-
current assets
 
Accrued liabilities
 
Other non-
current liabilities
 
Notional
 
Prepaid expenses and other current assets
 
Other non-
current assets
 
Accrued liabilities
 
Other non-
current liabilities
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange
$
650

 
$
16

 
$

 
$
19

 
$

 
$
677

 
$
31

 
$

 
$
18

 
$

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
1,658

 
1

 
21

 
5

 
25

 
751

 

 
35

 
3

 
31

Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity (Lionsgate collar)
97

 

 
23

 

 

 
97

 

 
25

 

 

No hedging designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
25

 

 

 

 

 
25

 

 

 

 

Cross-currency swaps
64

 

 

 

 

 
64

 

 
1

 

 


The following table presents the pretax impact of derivatives designated as cash flow hedges on income and other comprehensive income (loss) (in millions).
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Losses recognized in accumulated other comprehensive loss:
 
 
 
 
Foreign exchange - derivative adjustments
 
$
(13
)
 
$
(21
)
(Losses) gains reclassified into income from accumulated other comprehensive loss (effective portion):
 
 
 
 
Foreign exchange - distribution revenue
 
(3
)
 
1

Foreign exchange - costs of revenues
 
4

 
4

Foreign exchange - other expense, net
 

 
1

Interest rate - interest expense
 
(1
)
 
(1
)
Fair value excluded from effectiveness assessment:
 
 
 
 
Foreign exchange - other expense, net
 

 
(1
)

21


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


If current fair values of designated cash flow hedges as of March 31, 2017 remained static over the next twelve months, the Company would reclassify $4 million of net deferred losses from accumulated other comprehensive loss into income in the next twelve months.
The following table presents the pretax impact of derivatives designated as net investment hedges on other comprehensive income (loss) (in millions). There were no net investment hedges outstanding during the three months ended March 31, 2016.
 
 
Three Months Ended March 31,
 
 
2017
Currency translation adjustments:
 
 
Cross-currency swaps - changes in fair value
 
$
(9
)
Cross-currency swaps - interest settlements
 
5

Total other comprehensive loss
 
$
(4
)
The following table presents the pretax impact of derivatives designated as fair value hedges on income, including offsetting changes in fair value of the hedged items and amounts excluded from the assessment of effectiveness (in millions). There were no amounts of ineffectiveness recognized on fair value hedges for the three months ended March 31, 2017 and 2016.
 
Three Months Ended March 31,
 
2017
 
2016
Losses on changes in fair value of hedged AFS
$

 
$
(26
)
Gains on changes in the intrinsic value of equity contracts

 
26

Fair value of equity contracts excluded from effectiveness assessment
(2
)
 
(8
)
Total in other expense, net
$
(2
)
 
$
(8
)
The following table presents the pretax losses on derivatives not designated as hedges and recognized in other expense, net in the consolidated statements of operations (in millions).     
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cross-currency swaps
 
$
(1
)
 
$

NOTE 8. REDEEMABLE NONCONTROLLING INTERESTS
The table below presents the reconciliation of changes in redeemable noncontrolling interests (in millions). 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Beginning balance
 
$
243

 
$
241

Cash distributions to redeemable noncontrolling interests
 
(3
)
 
(2
)
Comprehensive income adjustments:
 
 
 
 
Net income attributable to redeemable noncontrolling interests
 
6

 
6

Other comprehensive income attributable to redeemable noncontrolling interests
 
1

 
1

Currency translation on redemption values
 
1

 
2

Retained earnings adjustments:
 
 
 
 
Adjustments of redemption values to the floor
 
1

 

Ending balance
 
$
249

 
$
248



22


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


Redeemable noncontrolling interests consist of the following arrangements:
In connection with its non-controlling interest in Discovery Family, Hasbro Inc. ("Hasbro") has the right to put the entirety of its remaining 40% non-controlling interest to the Company for one year after December 31, 2021, or in the event a Discovery performance obligation related to Discovery Family is not met. Embedded in the redeemable noncontrolling interest is also a Discovery call right that is exercisable for one year after December 31, 2021. Upon the exercise of the put or call options, the price to be paid for the redeemable noncontrolling interest is generally a function of the then-current fair market value of the redeemable noncontrolling interest, to which certain discounts and floor values may apply in specified situations depending upon the party exercising the put or call and the basis for the exercise of the put or call. As Hasbro's put right is outside the control of the Company, Hasbro's 40% noncontrolling interest is presented as redeemable noncontrolling interest outside of permanent equity on the Company's consolidated balance sheet.
In connection with its non-controlling interest in Discovery Japan, Jupiter Telecommunications Co., Ltd ("J:COM") has the right to put all, but not less than all, of its 20% noncontrolling interest to Discovery at any time for cash. As amended, through January 10, 2018, the redemption value is the January 10, 2013 fair value denominated in Japanese yen; thereafter, as chosen by J:COM, the redemption value is the then-current fair value or the January 10, 2013 fair value denominated in Japanese yen.
Redeemable noncontrolling interests reflected as of the balance sheet date are the greater of the noncontrolling interest balances adjusted for comprehensive income items and distributions or the redemption values remeasured at the period end foreign exchange rates (i.e., the "floor"). Adjustments to the carrying amount of redeemable noncontrolling interests to redemption value as a result of changes in exchange rates are reflected in currency translation adjustments, a component of other comprehensive income (loss); however, such currency translation adjustments to redemption value are allocated to Discovery stockholders only. Redeemable noncontrolling interest adjustments of redemption value to the floor are reflected in retained earnings.
NOTE 9. EQUITY
Common Stock Repurchase Program
On August 3, 2010, the Company implemented a stock repurchase program. Under the Company's stock repurchase program, management is authorized to purchase shares of the Company's common stock from time to time through open market purchases, privately negotiated transactions at prevailing prices, pursuant to one or more accelerated stock repurchase agreements, or other derivative arrangements as permitted by securities laws and other legal requirements, and subject to stock price, business and market conditions and other factors. As of March 31, 2017, the total amount authorized under the stock repurchase program was $7.5 billion, and the Company had $1.0 billion of remaining authorization for future repurchases under the existing stock repurchase program, which will expire on October 8, 2017.
All common stock repurchases, including prepaid common stock repurchase contracts, have been made through open market transactions and have been recorded as treasury stock on the consolidated balance sheet. As of March 31, 2017, the Company had repurchased over the life of the program 3 million and 155 million shares of Series A and Series C common stock, respectively, for an aggregate purchase price of $171 million and $6.3 billion, respectively. The table below presents a summary of common stock repurchases (in millions).
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Series C Common Stock:
 
 
 
 
Shares repurchased
 
5.2

 
8.4

Purchase price
 
$
140

 
$
214

Preferred Stock Conversion and Repurchase Program
Series C convertible preferred stock held by Advance/Newhouse Programming Partnership (“Advance/Newhouse”) is convertible, at the option of the holder, into two shares of Series C common stock. The Company has an agreement with Advance/Newhouse to repurchase, on a quarterly basis, a number of shares of Series C convertible preferred stock equal to 3/7 of the number of shares of Series C common stock purchased under the Company’s common stock repurchase program during the then most recently completed fiscal quarter. The price paid per preferred share is calculated as 99% of the average price paid for the Series C common shares repurchased by the Company during the applicable fiscal quarter multiplied by the Series C conversion rate. The Advance/Newhouse repurchases are made outside of the Company’s publicly announced common stock repurchase program. The repurchase transactions are recorded as a decrease in par value of preferred stock and retained earnings upon settlement as there is no remaining additional paid-in capital for this class of stock and the shares are retired upon repurchase.

23


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


The table below presents a summary of Series C convertible preferred stock repurchases (in millions).
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Series C Convertible Preferred Stock:
 
 
 
 
Shares repurchased
 
1.2

 
2.9

Purchase price
 
$
60

 
$
159

Based on the number of shares of Series C common stock repurchased during the three months ended March 31, 2017, the Company expects to repurchase, convert and retire 1 million shares of its Series C convertible preferred shares under the preferred stock conversion and repurchase arrangement for an aggregate purchase price of $59 million on or about May 11, 2017. The expected purchase of these shares has not been recognized as a liability on the Company's consolidated balance sheet as of March 31, 2017, due to certain termination rights held by Discovery and Advance/Newhouse in the preferred stock conversion and repurchase arrangement.
Stock Repurchases
As of March 31, 2017, total shares repurchased, on a split-adjusted and as-converted basis, under these programs represent 36% of the Company's outstanding shares since the repurchase programs were authorized. Total shares repurchased, on a split-adjusted and as-converted basis, under these programs were 32% of the Company's outstanding shares since the repurchase programs were authorized, including offsetting adjustments for the issuance of equity for share-based compensation.
Common Stock Repurchase Contract
On March 15, 2017, the Company settled a December 15, 2016 common stock repurchase contract through the receipt of $58 million of cash. The Company had prepaid $57 million for the common stock repurchase contract in 2016 with the option to settle the contract in cash or Series C common stock in March 2017. The Company elected to receive a cash settlement inclusive of a $1 million premium, which is reflected as an adjustment to additional paid-in capital.

24


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



Other Comprehensive Income (Loss)
The table below presents the tax effects related to each component of other comprehensive income (loss) and reclassifications made in the consolidated statements of operations (in millions).
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 

Pretax
 
Tax
Benefit (Expense)
 

Net-of-tax
 

Pretax
 
Tax
Benefit (Expense)
 

Net-of-tax
Currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains - foreign currency
$
71

 
$
1

 
$
72

 
$
50

 
$
8

 
$
58

Unrealized losses - net investment hedges
(4
)
 

 
(4
)
 

 

 

Total currency translation adjustments
67

 
1

 
68

 
50

 
8

 
58

Available-for-sale securities adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses
(1
)
 

 
(1
)
 
(52
)
 
10

 
(42
)
Reclassifications to other expense, net:
 
 
 
 
 
 
 
 
 
 
 
Hedged portion of AFS securities

 

 

 
26

 
(5
)
 
21

Total available-for-sale securities adjustments
(1
)
 

 
(1
)
 
(26
)
 
5

 
(21
)
Derivative adjustments:
 
 
 
 
 
 
 
 
 
 
 
Unrealized losses
(13
)
 
5

 
(8
)
 
(21
)
 
8

 
(13
)
Reclassifications:
 
 
 
 
 
 
 
 
 
 
 
Distribution revenue
3

 
(1
)
 
2

 
(1
)
 

 
(1
)
Costs of revenues
(4
)
 
1

 
(3
)
 
(4
)
 
1

 
(3
)
Interest expense
1

 

 
1

 
1

 

 
1

Other expense, net

 

 

 
(1
)
 

 
(1
)
Total derivative adjustments
(13
)
 
5

 
(8
)
 
(26
)
 
9

 
(17
)
Other comprehensive income (loss)
$
53

 
$
6

 
$
59

 
$
(2
)
 
$
22

 
$
20

Accumulated Other Comprehensive Loss
The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes (in millions).
 
Three Months Ended March 31, 2017
 
Currency Translation
 
Available-For-Sale Securities
 
Derivatives
 
Accumulated
Other
Comprehensive Loss
Beginning balance
$
(797
)
 
$
11

 
$
24

 
$
(762
)
Other comprehensive income (loss)
68

 
(1
)
 
(8
)
 
59

Other comprehensive income attributable to redeemable noncontrolling interests
(1
)
 

 

 
(1
)
Ending balance
$
(730
)
 
$
10

 
$
16

 
$
(704
)


25


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


 
Three Months Ended March 31, 2016
 
Currency Translation
 
Available-For-Sale Securities
 
Derivatives
 
Accumulated
Other
Comprehensive Loss
Beginning balance
$
(606
)
 
$
(27
)
 
$

 
$
(633
)
Other comprehensive income (loss) before reclassifications
58

 
(42
)
 
(13
)
 
3

Reclassifications from accumulated other comprehensive loss to net income

 
21

 
(4
)
 
17

Other comprehensive income (loss)
58

 
(21
)
 
(17
)
 
20

Other comprehensive income attributable to redeemable noncontrolling interests
(1
)
 

 

 
(1
)
Ending balance
$
(549
)
 
$
(48
)
 
$
(17
)
 
$
(614
)
NOTE 10. SHARE-BASED PAYMENTS
The Company has various incentive plans under which stock options, time-based restricted stock units ("RSUs"), performance-based restricted stock units ("PRSUs") and stock appreciation rights ("SARs") have been issued. During the three months ended March 31, 2017, the vesting and service requirements of share-based awards granted were consistent with the arrangements disclosed in the 2016 Form 10-K.
The table below presents the components of share-based compensation expense (in millions).
 
 
Three Months Ended March 31,
 
 
2017
 
2016
PRSUs
 
$
9

 
$
9

RSUs
 
6

 
6

Stock options
 
3

 
5

SARs
 
3

 
4

Total share-based compensation expense
 
$
21

 
$
24

Tax benefit recognized
 
$
8

 
$
9

Compensation expense for all awards was recorded in selling, general and administrative expense on the consolidated statements of operations. Liability-classified share-based compensation awards include certain PRSUs and SARs. The Company records expense for the fair value of cash-settled and other liability-classified share-based compensation awards ratably over the graded vesting service period based on changes in fair value and the probability that performance targets will be met, if applicable. The table below presents current and non-current portions of liability-classified share-based compensation awards (in millions).
 
 
March 31, 2017
 
December 31, 2016
Current portion of liability-classified awards:
 
 
 
 
     PRSUs
 
$
16

 
$
29

     SARs
 
4

 
2

Non-current portion of liability-classified awards:
 
 
 
 
     PRSUs
 
34

 
47

     SARs
 
5

 
5

Total liability-classified share-based compensation award liability
 
$
59

 
$
83


26


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


The table below presents award activity (in millions, except weighted-average grant price) for PRSUs, RSUs and SARs.
 
 
Three Months Ended March 31, 2017
 
 
Awards
 
Weighted-Average Grant Price
Awards granted:
 
 
 
 
     PRSUs
 
0.7

 
$
29.50

     RSUs
 
1.4

 
$
29.46

     SARs
 
3.0

 
$
27.40

Awards converted or settled:
 
 
 
 
     PRSUs
 
1.7

 
$
34.55

     RSUs
 
0.4

 
$
36.99

     SARs
 
0.6

 
$
25.73

The table below presents stock option activity (in millions, except weighted-average exercise price).
 
 
Stock Options