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EX-32.2 - EXHIBIT 32.2 - Discovery, Inc.a20180331-exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Discovery, Inc.a20180331-exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Discovery, Inc.a20180331-exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Discovery, Inc.a20180331-exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - Discovery, Inc.a20180331-exhibit101.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, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-34177
 
discoverynewlogo.jpg
Discovery, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
35-2333914
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Discovery Place
Silver Spring, Maryland
 
20910
(Address of principal executive offices)
 
(Zip Code)
(240) 662-2000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the Registrant has submitted electronically 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 1, 2018:
Series A Common Stock, par value $0.01 per share
156,055,418

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

Series C Common Stock, par value $0.01 per share
359,574,904

 
 
 
 
 




DISCOVERY, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
 
 
Page
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017.
 
 
Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017.
 
 
Consolidated Statements of Comprehensive Loss (Income) for the three months ended March 31, 2018 and 2017.
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017.
 
 
Consolidated Statement of Equity for the three months ended March 31, 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements.
DISCOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
 
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
812

 
$
7,309

Receivables, net
 
2,654

 
1,838

Content rights, net
 
419

 
410

Prepaid expenses and other current assets
 
636

 
434

Total current assets
 
4,521

 
9,991

Noncurrent content rights, net
 
3,323

 
2,213

Property and equipment, net
 
928

 
597

Goodwill, net
 
13,102

 
7,073

Intangible assets, net
 
10,825

 
1,770

Equity method investments, including note receivable
 
1,231

 
335

Other noncurrent assets
 
728

 
576

Total assets
 
$
34,658

 
$
22,555

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
283

 
$
277

Accrued liabilities
 
1,730

 
1,309

Deferred revenues
 
299

 
255

Current portion of debt
 
153

 
30

Total current liabilities
 
2,465

 
1,871

Noncurrent portion of debt
 
19,214

 
14,755

Deferred income taxes
 
1,994

 
319

Other noncurrent liabilities
 
972

 
587

Total liabilities
 
24,645

 
17,532

Commitments and contingencies (See Note 18)
 


 


Redeemable noncontrolling interests
 
419

 
413

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

 

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

 

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

 
1

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

 

Series C common stock: $0.01 par value; 2,000 shares authorized; 524 and 383 shares issued
 
5

 
4

Additional paid-in capital
 
10,576

 
7,295

Treasury stock, at cost
 
(6,737
)
 
(6,737
)
Retained earnings
 
4,657

 
4,632

Accumulated other comprehensive loss
 
(613
)
 
(585
)
Total Discovery, Inc. stockholders' equity
 
7,889

 
4,610

     Noncontrolling interests
 
1,705

 

Total equity
 
9,594

 
4,610

Total liabilities and equity
 
$
34,658

 
$
22,555

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

4


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


 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Distribution
 
$
1,051

 
$
855

Advertising
 
1,012

 
687

Other
 
244

 
71

Total revenues
 
2,307

 
1,613

Costs and expenses:
 
 
 
 
Costs of revenues, excluding depreciation and amortization
 
1,060

 
607

Selling, general and administrative
 
609

 
415

Depreciation and amortization
 
193

 
80

Restructuring and other charges
 
241

 
24

Total costs and expenses
 
2,103

 
1,126

Operating income
 
204

 
487

Interest expense
 
(177
)
 
(91
)
Loss on extinguishment of debt
 

 
(54
)
Loss from equity investees, net
 
(22
)
 
(53
)
Other expense, net
 
(22
)
 
(13
)
(Loss) income before income taxes
 
(17
)
 
276

Income tax benefit (expense)
 
20

 
(55
)
Net income
 
3

 
221

Net income attributable to noncontrolling interests
 
(5
)
 

Net income attributable to redeemable noncontrolling interests
 
(6
)
 
(6
)
Net (loss) income available to Discovery, Inc.
 
$
(8
)
 
$
215

Net (loss) income per share allocated to Discovery, Inc. Series A, B and C common stockholders:
 
 
 
 
Basic
 
$
(0.01
)
 
$
0.37

Diluted
 
$
(0.01
)
 
$
0.37

Weighted average shares outstanding:
 
 
 
 
Basic
 
422

 
389

Diluted
 
609

 
588

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

5


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


 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net income
 
$
3

 
$
221

Other comprehensive income (loss) adjustments, net of tax:
 
 
 
 
     Currency translation
 
3

 
68

     Available-for-sale securities
 

 
(1
)
     Derivatives
 
(5
)
 
(8
)
Comprehensive income
 
1

 
280

Comprehensive income attributable to noncontrolling interests
 
(5
)
 

Comprehensive income attributable to redeemable noncontrolling interests
 
(6
)
 
(7
)
Comprehensive (loss) income attributable to Discovery, Inc.
 
$
(10
)
 
$
273

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

6


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

 
Three Months Ended March 31,
 
2018
 
2017
Operating Activities
 
 
 
Net income
$
3

 
$
221

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Share-based compensation expense
15

 
21

Depreciation and amortization
193

 
80

Content rights expense and impairment
751

 
458

Equity in losses of investee companies and cash distributions
36

 
54

Deferred income taxes
(35
)
 
(34
)
Loss on extinguishment of debt

 
54

Other, net
67

 
3

Changes in operating assets and liabilities, net of acquisitions and dispositions:
 
 
 
Receivables, net
(36
)
 
(44
)
Content rights and payables, net
(698
)
 
(474
)
Accounts payable and accrued liabilities
(171
)
 
(122
)
Income taxes receivable and prepaid income taxes
(42
)
 
48

Foreign currency and other, net
77

 
(10
)
Cash provided by operating activities
160

 
255

Investing Activities
 
 
 
Business acquisitions, net of cash acquired
(8,565
)
 

Payments for investments
(22
)
 
(188
)
Distributions from equity method investees

 
5

Purchases of property and equipment
(48
)
 
(47
)
(Payments for) proceeds from derivative instruments, net
(42
)
 
5

Other investing activities, net
2

 
1

Cash used in investing activities
(8,675
)
 
(224
)
Financing Activities
 
 
 
Commercial paper borrowings, net

 
54

Borrowings under revolving credit facility

 
150

Principal repayments of revolving credit facility

 
(125
)
Borrowings under term loan agreements

2,000

 

Borrowings from debt, net of discount and including premiums

 
659

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

 
(650
)
Principal repayments of capital lease obligations
(13
)
 
(13
)
Repurchases of stock

 
(200
)
Cash settlement of common stock repurchase contracts

 
58

Distributions to redeemable noncontrolling interests
(2
)
 
(3
)
Share-based plan proceeds (payments), net
23

 
(8
)
Borrowings under program financing line of credit
22

 

Other financing activities, net
(11
)
 
(6
)
Cash provided by (used in) financing activities
2,019

 
(84
)
Effect of exchange rate changes on cash and cash equivalents
(1
)
 
20

Net change in cash and cash equivalents
(6,497
)
 
(33
)
Cash and cash equivalents, beginning of period
7,309

 
300

Cash and cash equivalents, end of period
$
812

 
$
267

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

7


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

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

 
$

 
547

 
$
5

 
$
7,295

 
$
(6,737
)
 
$
4,632

 
$
(585
)
 
$
4,610

 
$

 
$
4,610

Cumulative effect of accounting change (See Note 1)
 

 

 

 

 

 

 
33

 
(26
)
 
7

 

 
7

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

 

 

 

 

 

 
(8
)
 

 
(8
)
 
5

 
(3
)
Other comprehensive loss
 

 

 

 

 

 

 

 
(2
)
 
(2
)
 

 
(2
)
Share-based compensation
 

 

 

 

 
41

 

 

 

 
41

 

 
41

Tax settlements associated with share-based compensation
 

 

 

 

 
(16
)
 

 

 

 
(16
)
 

 
(16
)
Issuance of stock and noncontrolling interest in connection with the acquisition of Scripps Networks Interactive, Inc. ("Scripps Networks")
 

 

 
139

 
1

 
3,217

 

 

 

 
3,218

 
1,700

 
4,918

Issuance of stock in connection with share-based plans
 

 

 
4

 

 
39

 

 

 

 
39

 

 
39

March 31, 2018
 
14

 
$

 
690

 
$
6

 
$
10,576

 
$
(6,737
)
 
$
4,657

 
$
(613
)
 
$
7,889

 
$
1,705

 
$
9,594

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

8


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


NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Discovery, Inc. (“Discovery” or the “Company”) is a global media company that provides content across multiple distribution platforms, including pay-television ("pay-TV"), free-to-air ("FTA") and broadcast, various digital distribution platforms and content licensing agreements. The Company also operates a portfolio of websites, digital direct-to-consumer products, production studios and curriculum-based education products and services. As further discussed in Note 2, on March 6, 2018, the Company acquired Scripps Networks Interactive, Inc. ("Scripps Networks"), and changed its name from "Discovery Communications, Inc." to "Discovery, Inc." The Company presents the following business units: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting principally of international television networks and digital content services; and Education and Other, consisting principally of curriculum-based product and service offerings and production studios. Financial information for Discovery’s reportable segments is discussed in Note 19.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Discovery and its majority-owned subsidiaries in which a controlling interest is maintained. For each non-wholly owned subsidiary, the Company evaluates its ownership and other interests to determine whether it should consolidate the entity or account for its ownership interest as an investment. As part of its evaluation, the Company makes judgments in determining whether the entity is a variable interest entity ("VIE") and, if so, whether it is the primary beneficiary of the VIE and is thus required to consolidate the entity. (See Note 3.) Inter-company accounts and transactions between consolidated entities have been eliminated in consolidation.
Unaudited Interim Financial Statements
These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (“GAAP”) applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Discovery’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. 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 and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, allowances for doubtful accounts, content rights, depreciation and amortization, business combinations, share-based compensation, defined benefit plans, income taxes, other financial instruments, contingencies and the determination of whether the Company is the primary beneficiary of entities in which it holds variable interests.
Preferred Stock Exchange
As a result of the July 30, 2017, Preferred Share Exchange Agreement (the "Exchange Agreement") with Advance/Newhouse Programming Partnership ("Advance/Newhouse"), in which Discovery agreed to issue newly designated shares of Series A-1 and Series C-1 preferred stock in exchange for all outstanding shares of Discovery's Series A and Series C convertible participating preferred stock (see Note 9), historical basic and diluted earnings per share available to Series C-1 preferred stockholders, previously Series C preferred stockholders, has changed. The transactions contemplated by the Exchange Agreement were completed on August 7, 2017. Prior to the Exchange Agreement, Series C convertible preferred stock was convertible into Series C common stock at a conversion rate of 2.0 shares of Series C common stock for each share of Series C preferred stock. Following the exchange, the Series C-1 preferred stock may be converted into Series C common stock at the initial conversion rate of 19.3648 shares of Series C common stock for each share of Series C-1 preferred stock. As such, the Company has retrospectively recast basic and diluted earnings per share information for Series C preferred stock for the three months ended March 31, 2017 in order to

9


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

conform with per share earnings that would have been available for Series C-1 preferred stock. (See Note 15.) The Exchange Agreement did not impact historical basic and diluted earnings per share attributable to the Company's Series A, B and C common stockholders.
The table below sets forth the impact of the preferred stock modification to the Company's calculated basic earnings per share for the three months ended March 31, 2017.
Pre-Exchange: Basic net income per share available to:
 
 
   Series A, B and C common stockholders
 
$
0.37

   Series C-1 convertible preferred stockholders
 
$
0.74

 
 
 
Post-Exchange: Basic net income per share available to:
 
 
     Series A, B and C common stockholders
 
$
0.37

     Series C-1 convertible preferred stockholders
 
$
7.11


Accounting and Reporting Pronouncements Adopted
Recognition and Measurement of Financial Instruments ("ASU 2016-01")
On January 1, 2018, the Company adopted new guidance that enhances the reporting model for financial instruments. The new guidance impacted the financial statements as follows:
Gains and losses on common stock investments with readily determinable fair values are now recorded in other expense, net. Previously, the Company recorded these gains and losses in other comprehensive income ("OCI"). The Company adopted this guidance on a modified retrospective basis and recorded a transition adjustment, to reclassify accumulated other comprehensive income to retained earnings, of $26 million, net of tax as of January 1, 2018. The new guidance eliminates the available-for-sale ("AFS") classification. (See Note 3 and Note 9.)
Upon adoption of ASU 2016-01, the Lionsgate Collar, as defined in Note 3, no longer receives the hedge accounting designation. There is no change to the manner in which movements in fair value of these instruments will be reflected in the financial statements, as gains and losses will continue to be recorded as a component of other expense, net on the consolidated statements of operations. (See Note 7.)
For equity interests without readily determinable fair values previously accounted for under the cost method, the Company has elected to apply the "measurement alternative" prospectively. Under this election, investments are recorded at cost, less impairment, adjusted for subsequent observable price changes as of the date that an observable transaction took place. The Company will recognize observable price changes as adjustments to fair values of these investments. (See Note 3 and Note 4.) In addition, companies are required to perform a qualitative assessment each reporting period to identify impairment under the single-step model. When a qualitative assessment indicates that an impairment exists, the Company will need to estimate the fair value of the investment and recognize in current earnings an impairment loss equal to the difference between the fair value and the carrying amount of the equity investment.
The Company evaluated the accounting for fair value call rights associated with its equity interests without readily determinable fair values and concluded that there is no change to the accounting for these investments.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("Topic 606") and ASU 340-40, Other Assets and Deferred Costs, which updates numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance also addresses the accounting for costs incurred as part of obtaining or fulfilling a contract with a customer. The guidance in this Subtopic requires that costs of obtaining a contract be recognized as an asset and amortized as goods and services are transferred to the customer, as long as the costs are expected to be recovered.
On January 1, 2018, the Company adopted ASC Topic 606 Revenue from Contracts with Customers using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

10


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

Following the modified retrospective approach for the adoption of this accounting guidance, the Company recorded an increase to opening retained earnings of $7 million as of January 1, 2018, due to the cumulative impact of adopting Topic 606. The impact relates to the capitalization of sales commissions for long-term education-based services. Expense amortized for the three months ended March 31, 2018 for capitalized sales commissions was recorded as part of costs of revenues. The impact to revenue and costs of revenues for the three months ended March 31, 2018 as a result of applying Topic 606 was immaterial. (See Note 11.)
Income Taxes
In October 2016, the FASB issued guidance that simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The new guidance includes requirements to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, and therefore eliminates the exception for an intra-entity transfer of an asset other than inventory. The Company adopted the new standard effective January 1, 2018, and there was no material impact on the consolidated financial statements upon adoption.
Clarifying the definition of a business
On January 1, 2018, the Company adopted new FASB guidance that amends the definition of a business and provides a threshold which must be considered to determine whether a transaction is an acquisition (or disposal) of an asset or a business. Under the previous accounting guidance, the minimum inputs and processes required for a “set” of assets and activities to meet the definition of a business is not specified. That lack of clarity has led to broad interpretations of the definition of a business. Under the new guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. This guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in the revenue recognition guidance.
Compensation - Retirement Benefits
On March 10, 2017, the FASB issued new accounting guidance related to the presentation of net periodic pension costs and net periodic postretirement benefit costs, which requires employers sponsoring postretirement benefit plans to disaggregate the service cost component from the other components of net benefit cost. The standard also provides explicit guidance on how to present the service cost and other components of net benefit cost in the statement of operations and allows only the service cost component of net benefit cost to be eligible for capitalization. In conjunction with the acquisition of Scripps Networks, the Company evaluated the accounting for the qualified defined benefit pension plan ("Pension Plan") and the non-qualified unfunded Supplemental Executive Retirement Plan ("SERP"). As the Pension Plan was frozen effective December 31, 2009 and the Plan sponsor no longer grants credits to participants for service costs, the updated guidance on service costs is not applicable. The presentation as required by this guidance is reflected within the employee benefit plans footnote disclosures. (See Note 13.)
Accounting and Reporting Pronouncements Not Yet Adopted
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued updated guidance which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act ("TCJA") to retained earnings for each period in which the effect of the change is recorded. The update also requires entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued significant amendments to hedge accounting which expand the eligibility for hedge accounting to more financial and nonfinancial hedging strategies. The guidance is intended to align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. In addition, the guidance amends the presentation and disclosure requirements and changes how companies assess effectiveness. The updated guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact that the pronouncement will have on the consolidated financial statements.
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

11


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

quantitative impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the quantitative goodwill impairment test is required to be performed to measure the amount of impairment loss, if any. The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit’s identifiable net assets excluding goodwill is compared to the fair value of the reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill. The new guidance eliminates Step 2 from the goodwill impairment test, and eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Therefore, an entity will recognize impairment charges for the amount by which the carrying amount exceeds the reporting unit's fair value, and the same impairment assessment applies to all reporting units. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this update must be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019.
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 the new accounting guidance may be applied at the beginning of the earliest comparative period presented in the year of adoption or at effective date without applying the provisions of the new guidance to comparative periods presented. 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. The method of transition will be determined when the Company has completed its evaluation.
Concentrations Risk
Customers
The Company has long-term contracts with distributors around the world. For the U.S. Networks segment, more than 95% of distribution revenue comes from the Company's largest 10 distributors in the U.S. For the International Networks segment, approximately 40% of distribution revenue comes from the Company's largest 10 distributors outside of the U.S. Agreements in place with the 10 largest cable and satellite operators in the U.S. Networks and International Networks expire at various times from 2018 through 2024. 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, 2018 or 2017. As of March 31, 2018 and December 31, 2017, the Company’s trade receivables did not represent a significant concentration of credit risk as the customers and markets in which the Company operates are varied and dispersed across many geographic areas.
Financial Institutions
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk. The Company performs periodic evaluations of the relative credit standing of the financial institutions and attempts to limit exposure with any one institution. Additionally, the Company has cash and cash equivalents held by its foreign subsidiaries. Under the TCJA, the Company is subject to U.S. taxes for the deemed repatriation of certain cash balances held by foreign corporations. The Company intends to continue to permanently reinvest these funds outside of the U.S., and current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
Lender Counterparties
There is a risk that the counterparties associated with the Company’s revolving credit facility will not be available to fund as obligated under the terms of the facility and that the Company may, at the time of such unavailability to fund, have limited or no access to the commercial paper market. If funding under the revolving credit facility is unavailable, the Company may have to

12


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

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, 2018, the Company did not anticipate nonperformance by any of its counterparties.
Counterparty Credit Risk
The Company is exposed to the risk that the counterparties to outstanding derivative financial instruments will default on their obligations. The Company manages these credit risks by evaluating and monitoring the creditworthiness of, and concentration of risk with, the respective counterparties. In this regard, credit risk associated with outstanding derivative financial instruments is spread across a relatively broad counterparty base of banks and financial institutions. In connection with the Company's economic hedge of certain investments classified as common stock investments with readily determinable fair value, the Company has pledged shares as collateral to the derivative counterparty. (See Note 3.) The Company also has a limited number of arrangements where collateral is required to be posted in the instance that certain fair value thresholds are exceeded. As of March 31, 2018, $43 million of collateral has been posted by the Company under these arrangements and classified as other noncurrent assets in the consolidated balance sheets. As of March 31, 2018, our exposure to counterparty credit risk included derivative assets with an aggregate fair value of $31 million. (See Note 4.)
NOTE 2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Scripps Networks Interactive, Inc. ("Scripps Networks")
On March 6, 2018, Discovery acquired Scripps Networks pursuant to the Agreement and Plan of Merger (the "Merger Agreement") by and among Discovery, Scripps Networks and Skylight Merger Sub, Inc.; dated July 30, 2017 (the "acquisition of Scripps Networks"). The acquisition of Scripps Networks allows the Company to offer complementary brands with an extensive library of original programming to consumers and to create a scale player with the ability to compete for audiences and advertising revenue. The acquisition is intended to extend Scripps Networks' content to a broader international audience through Discovery's global distribution infrastructure. Finally, the acquisition of Scripps Networks is expected to create significant cost synergies for the Company.
The consideration paid for the acquisition of Scripps Networks consisted of (i) for Scripps Networks shareholders that did not make an election or elected to receive the mixed consideration, $65.82 in cash and 1.0584 shares of Discovery Series C common stock for each Scripps Networks share, (ii) for Scripps Networks shareholders that elected to receive the cash consideration, $90.00 in cash for each Scripps Networks share, (iii) for Scripps Networks shareholders that elected to receive the stock consideration, 3.9392 shares of Discovery Series C common stock for each Scripps Networks share, subject to the terms and conditions set forth in the Merger Agreement and (iv) transaction costs related to amounts reimbursed by Discovery to Scripps Networks for costs incurred in conjunction with the acquisition. The following table summarizes the components of the aggregate consideration paid for the acquisition of Scripps Networks (in millions of dollars and shares, except for per share amounts, share conversion ratio and stock option conversion ratio) as of March 6, 2018.

13


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

Scripps Networks equity
 
 
Scripps Networks shares outstanding
 
131

Cash consideration including collar payment (per Scripps Networks share)
 
$
65.82

Cash portion of purchase price
 
$
8,590

 
 
 
Scripps Networks shares outstanding
 
131

Share conversion ratio (per Scripps Networks share)
 
1.0584

Discovery Series C common stock
 
138

Discovery Series C common stock price per share
 
$
23.01

Equity portion of purchase price
 
$
3,179

 
 
 
Shares under Scripps Networks share-based compensation programs
 
 
Shares under Scripps Networks share-based compensation programs
 
3

Scripps Networks share-based compensation converting to cash

 
2

Average cash consideration (per share less applicable exercise price)
 
$
46.90

Cash portion of purchase price
 
$
88

 
 
 
Scripps Networks share-based compensation awards

 
1

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

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

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

Share-based compensation equity value
 
$
51

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

 
 
 
Scripps Networks transaction costs paid by Discovery
 
$
117

 
 
 
Total consideration paid
 
$
12,013

Balances reflect rounding of dollar and share amounts to millions, which may result in differences for recalculated standalone amounts compared with the amounts presented above.
The Company applied the acquisition method of accounting to Scripps Networks' business, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocated to goodwill. Goodwill reflects workforce and synergies expected from cost savings, operations and revenue enhancements of the combined company that are expected to result from the acquisition. The goodwill recorded as part of this acquisition has been provisionally allocated to the U.S. Networks and International Networks reportable segments in the amounts of $5.4 billion and $600 million, respectively, and is not amortizable for tax purposes.
The preliminary opening balance sheet is subject to adjustment based on final assessment of the fair values of certain acquired assets, principally intangibles, equity method investments, content and income taxes. The Company used discounted cash flow ("DCF") analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. The fair value of equity interests previously held by Scripps Networks was determined using the discounted cash flow method. The fair value for trade-names and trademarks was determined using the relief from royalty method of the income approach; the remaining intangibles were determined using the excess earnings method of the income approach. The fair value of interest-bearing debt was determined using publicly-traded prices. The fair value estimates for the previously held equity interest and intangible assets are based on (i) projected discounted cash flows, (ii) historical and projected financial information, (iii) synergies including cost savings and (iv) attrition rates, as relevant, that market participants would consider when estimating fair values. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period

14


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

in which the adjustments occur. The preliminary fair value of assets acquired and liabilities assumed, as well as a reconciliation to cash consideration transferred is presented in the table below (in millions).
 
 
Preliminary
March 6, 2018
Accounts receivable
 
$
783

Other current assets
 
421

Content rights
 
1,088

Property and equipment
 
315

Goodwill
 
6,003

Intangible assets
 
9,175

Equity method investments, including note receivable
 
870

Other noncurrent assets
 
111

Current liabilities assumed
 
(494
)
Debt assumed
 
(2,481
)
Deferred income taxes
 
(1,695
)
Other noncurrent liabilities
 
(383
)
Noncontrolling interests
 
(1,700
)
Total consideration paid
 
$
12,013


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

 
10
Advertiser relationships
 
4,995

 
10
Advertising backlog
 
280

 
1
Affiliate relationships
 
2,455

 
12
Broadcast licenses
 
220

 
6
Total intangible assets acquired
 
$
9,175

 
 


15


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

OWN
On November 30, 2017, the Company acquired from Harpo, Inc. ("Harpo") a controlling interest in the Oprah Winfrey Network ("OWN"), increasing Discovery’s ownership from 49.50% to 73.75%. OWN is a pay-TV network and website that provides adult lifestyle and entertainment content, which is focused on African Americans. Discovery paid $70 million in cash and recognized a gain of $33 million to account for the difference between the carrying value and the fair value of the previously held 49.50% equity interest. The price included an assessment of fair value of the equity interest in the network, subject to the impact of the note payable to Discovery. Discovery consolidated OWN under the VIE consolidation model upon closing of the transaction.
Following the acquisition of the incremental equity interest and change to governance provisions, the Company has determined that it is now the primary beneficiary of OWN as Discovery obtained control of the Board of Directors and operational rights that significantly impact the economic performance of the business such as programming and marketing, and selection of key personnel. As a result, the accounting for OWN was changed from an equity method investment to a consolidated subsidiary. As the primary beneficiary, Discovery includes OWN's assets, liabilities and results of operations in the Company's consolidated financial statements. As of March 31, 2018, the carrying amounts of assets and liabilities of the consolidated VIE were $733 million and $267 million, respectively.
The Company applied the acquisition method of accounting to OWN’s business, whereby the excess of the fair value of the business over the fair value of identifiable net assets was allocated to goodwill. The goodwill reflects the workforce and synergies expected from broader exposure to the self-discovery and self-improvement entertainment sector. The goodwill recorded as part of this acquisition is included in the U.S. Network reportable segment and is not amortizable for tax purposes. Intangible assets consist of advertiser backlog, advertiser relationships and affiliate relationships with a weighted average estimated useful life of 9 years.
The preliminary opening balance sheet is subject to adjustment based on final assessment of the fair values of contingent liabilities. The Company used DCF analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. The Company will reflect measurement period adjustments, if any, in the period in which the adjustment occurs. The preliminary fair value of assets acquired and liabilities assumed, as well as a reconciliation to cash consideration transferred is presented in the table below (in millions).
 
 
Preliminary
November 30, 2017
Intangible assets
 
$
295

Content rights
 
176

Accounts receivable
 
84

Other assets
 
26

Other liabilities
 
(230
)
Net assets acquired
 
$
351

Goodwill
 
136

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

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

16


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

The Enthusiast Network, Inc.
On September 25, 2017, the Company contributed its linear cable network focused on cars and motor sports, Velocity, to a new joint venture ("VTEN"), with GoldenTree Asset Management L.P. ("GoldenTree"). GoldenTree's contributions to the joint venture included businesses from The Enthusiast Network, Inc. ("TEN"), primarily MotorTrend.com, Motor Trend YouTube channel and the Motor Trend OnDemand OTT service. TEN did not contribute its print businesses to the joint venture. The joint venture has a portfolio of digital content, social groups, live events and original content focused on the automotive audience. In exchange for their contributions, Discovery and GoldenTree received 67.5% and 32.5% ownership of the new joint venture, respectively.
Discovery consolidated the joint venture under the voting interest consolidation model upon the closing of the transaction. As the Company controlled Velocity and continues to control Velocity after the transaction, the change in the value of the Company's ownership interest was accounted for as an equity transaction and no gain or loss was recognized in the Company's consolidated statements of operations. The Company applied the acquisition method of accounting to TEN's contributed businesses, whereby the excess of the fair value of the contributed business over the fair value of identifiable net assets was allocated to goodwill. The goodwill reflects the workforce and synergies expected from broader exposure to the automotive entertainment sector. The goodwill recorded as part of this acquisition is included in the U.S. Network reportable segment and is not amortizable for tax purposes. Intangible assets primarily consist of trade names, licensing agreements and customer relationships with a weighted average estimated useful life of 16 years.
The Company used DCF analyses, which represent Level 3 fair value measurements, to assess certain components of its purchase price allocation. The fair value of the assets acquired and liabilities assumed is presented in the table below (in millions).
 
 
Preliminary
September 25, 2017
 
Measurement Period Adjustments
 
Final
September 25, 2017
Goodwill
 
$
59

 
$
16

 
$
75

Intangible assets
 
71

 
(18
)
 
53

Property plant and equipment, net
 
16

 
1

 
17

Other assets acquired
 
6

 

 
6

Liabilities assumed
 
(8
)
 
1

 
(7
)
Net assets acquired
 
$
144

 
$

 
$
144

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

17


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

3.
The exclusion of acquisition-related costs incurred during the three months ended March 31, 2018 and allocation of all acquisition-related costs to the three months ended March 31, 2017.
4.
Associated tax-related impacts of adjustments; and
5.
Changes to align accounting policies
The pro forma results do not necessarily represent what would have occurred if the Transactions had taken place on January 1, 2017, nor do they represent the results that may occur in the future.
The pro forma adjustments were based on available information and upon assumptions that the Company believes are reasonable to reflect the impact of these acquisitions on the Company's historical financial information on a supplemental pro forma basis (in millions).
 
Pro Forma Combined
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues
 
$
2,930

 
$
2,569

Net income available to Discovery, Inc.
 
$
107

 
$
171

Net income per share - basic
 
$
0.10

 
$
0.20

Net income per share - diluted
 
$
0.10

 
$
0.20

Impact of Business Combinations
The operations of each of the business combinations discussed above were included in the consolidated financial statements as of each of their respective acquisition dates. The following table presents their revenue and earnings as reported within the consolidated financial statements for the three months ended March 31, 2018 (in millions).
 
 
Three Months Ended March 31, 2018
Revenues:
 
 
    Distribution
 
$
108

      Advertising
 
244

      Other
 
28

Total revenues
 
$
380

Net income
 
$
(50
)
Dispositions
Education Business Held for Sale
On April 30, 2018, the Company sold an 87.5% controlling equity stake in its education business to Francisco Partners for cash of $120 million subject to working capital adjustments. No loss occurred upon sale. As of March 31, 2018, the Company determined that the education business met the held for sale criteria, as defined in GAAP. Given the relative size of the carrying amounts of the assets and liabilities of the education business, the Company has elected to disclose these amounts in this footnote in lieu of disclosure on the balance sheet. As of March 31, 2018, the carrying amounts of assets and liabilities of the education business were $129 million and $80 million, respectively. The disposal will not meet the definition of discontinued operations, because the disposition does not represent a strategic shift that has a significant impact on the Company's operations and consolidated financial results. The Company retained a 12.5% equity interest in the business and will have ongoing license agreements which are considered to be at fair value.

18


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

NOTE 3. INVESTMENTS
The Company’s investments consisted of the following (in millions).
Category
 
Balance Sheet Location
 
March 31, 2018
 
December 31, 2017
Cash equivalents:
 
 
 
 
 
 
Time deposits
 
Cash and cash equivalents
 
$

 
$
1,305

Trading securities:
 
 
 
 
 
 
Money market funds
 
Cash and cash equivalents
 
39

 
2,707

Mutual funds
 
Prepaid expenses and other current assets
 
237

 
182

Equity method investments
 
Equity method investments, including note receivable
 
1,231

 
335

Common stock investments with readily determinable fair values
 
Other noncurrent assets
 
126

 
164

Equity investments without readily determinable fair values

 
Other noncurrent assets
 
374

 
295

Total investments
 
 
 
$
2,007

 
$
4,988

Money Market Funds, Time Deposits and U.S. Treasury Securities
During 2017, the Company issued $6.8 billion in senior notes to fund the March 6, 2018 acquisition of Scripps Networks. (See Note 2 and Note 6.) A portion of the proceeds were invested in various short-term investments prior to the acquisition of Scripps Networks, and were classified as cash and cash equivalents on the consolidated balance sheet. As of March 31, 2018, the decrease in these funds is the result of funding the Scripps Networks acquisition.
Mutual Funds
Trading securities include investments in mutual funds held in separate trusts, which are owned as part of the Company’s supplemental retirement plans. (See Note 4.)
Equity Method Investments
The Company makes investments that support its underlying business strategy and enable it to enter new markets and develop programming. Certain of the Company's equity method investments are VIEs, for which the Company is not the primary beneficiary. As of March 31, 2018, the Company’s maximum exposure for all its unconsolidated VIEs including the investment carrying values, unfunded contractual commitments, and guarantees made on behalf of VIEs was approximately $737 million. The Company's maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $692 million and $181 million as of March 31, 2018 and December 31, 2017, respectively. The Company recognized its portion of VIE operating results with losses of $11 million and $43 million for the three months ended March 31, 2018 and 2017, respectively.
UKTV
In connection with the acquisition of Scripps Networks, the Company acquired a 50% ownership interest in UKTV, a British multi-channel broadcaster jointly owned with BBC Studios (“BBC”). UKTV was formed on March 26, 1992, through a joint venture arrangement between BBC and Virgin Media Inc. ("VMED"). On August 11, 2011, Scripps Networks acquired VMED's 50% equity interest in UKTV along with a note receivable for debt instruments provided by VMED to UKTV. The Company has determined that UKTV is a VIE as the entity is unable to fund its activities without additional subordinated financial support provided by the note receivable. While the Company and BBC have equal voting rights in the management committee, the governing body of UKTV, power is not shared because BBC holds operational rights related to programming and creative development that significantly impact UKTV’s economic performance. Therefore, Discovery is not the primary beneficiary. The Company determined that its 50% equity interest in UKTV gives the Company the ability to exercise significant influence over the entity's operating and financial policies. Accordingly, the Company accounts for its investment in UKTV using the equity method. As of March 31, 2018, the Company’s investment in UKTV totaled $506 million, including a note receivable of $103 million.

19


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

nC+
In connection with the acquisition of Scripps Networks, the Company acquired a 32% ownership interest in nC+, a Polish satellite distributor of television content. nC+ is controlled by Group Canal+ S.A, a French broadcaster. The Company applies the equity method of accounting to its 32% investment in nC+ ordinary shares, which provide the ability to exercise significant influence over the operating and financial policies of nC+. The Company's investment in nC+ totaled $299 million as of March 31, 2018.
Renewable Energy Investments
During the three months ended March 31, 2018 and 2017, the Company invested $17 million and $181 million, respectively, in limited liability companies that sponsor renewable energy projects related to solar energy. The Company expects these investments to result in tax benefits, which would reduce the Company's future tax liability, and cash flows from the operations of the investees. These investments are considered VIEs of the Company. The Company accounts for these investments under the equity method of accounting. While the Company possesses rights that allow it to exercise significant influence over the investments, the Company does not have the power to direct the activities that will most significantly impact their economic performance, such as the investee's ability to obtain sufficient customers or control solar panel assets. Once a stipulated return on investment is earned by the Company, the investment allocations to the Company are significantly reduced. Accordingly, the Company applies the Hypothetical Liquidation at Book Value ("HLBV") methodology for allocating earnings, which is a generally accepted method under the equity method of accounting when a substantive profit sharing arrangement exists.
During the three months ended March 31, 2018 and 2017, the Company recognized $8 million and $83 million, respectively of net losses on renewable energy investments as part of loss from equity investees, net in the consolidated statements of operations. The Company recorded benefits of $2 million and $56 million associated with these investments during the three months ended March 31, 2018 and 2017, respectively, that were recorded as a component of income tax benefit (expense) and operating cash flows. These benefits are comprised of $2 million from the entities' passive losses for the three months ended March 31, 2018 and $31 million from the entities' passive losses and $25 million from investment tax credits for the three months ended March 31, 2017.
The Company accounts for investment tax credits utilizing the flow through method. As of March 31, 2018 and December 31, 2017, the Company's carrying value of renewable energy investments was $105 million and $98 million, respectively. The Company has $3 million of future funding commitments for these investments as of March 31, 2018, which are cancelable under limited circumstances. The Company has concluded that losses incurred on these investments to-date are not indicative of an other-than-temporary impairment due to the nature of these investments. Losses in the early stages of investments in companies that sponsor renewable energy projects are not uncommon, and the Company expects improved performance from these investments in future periods.
Other Equity Method Investments
At March 31, 2018 and December 31, 2017, the Company's other equity method investments included All3Media, a Russian cable television business, Mega TV in Chile and certain joint ventures in Canada. Other equity method investments acquired in conjunction with the Scripps Networks include joint ventures in Canada, and HGTV and Food Network Magazines.
Investor Basis Differential
With the exception of the OWN investment prior to the Company's November 30, 2017 consolidation (see Note 2), UKTV, nC+ and certain investments in renewable energy projects for which we use the HLBV methodology for allocating earnings, the carrying values of the Company’s remaining equity method investments are consistent with its ownership in the underlying net assets of the investees. A portion of the purchase prices of these investments were attributed to amortizable intangible assets, which are included in their carrying values. Earnings from our equity investees were reduced by amortization of $1 million during the period of March 6, 2018 to March 31, 2018. Amortization that reduces the Company's equity in earnings of equity method investees for future periods is expected to be approximately $180 million.
Summarized Financial Information
The table set forth below presents selected statement of operations financial information for certain investments accounted for under the equity method. Because renewable energy projects discussed above are accounted for under the HLBV equity method of accounting, the Company's equity method losses do not directly correlate with the GAAP results of the investees presented below. The following are selected statement of operations information for each of the three months ended March 31, 2018 and 2017 (in millions).

20


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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Selected statement of operations information:
 
 
 
 
Revenues
 
$
286

 
$
150

Costs of revenues
 
201

 
111

Operating income (loss)
 
12

 
(7
)
Pre-tax income (loss) from continuing operations before extraordinary items
 
7

 
(16
)
After-tax net income (loss)
 
4

 
(16
)
Net income (loss) attributable to the entity
 
4

 
(16
)
Common stock investments with readily determinable fair value
The Company owns 5 million shares of common stock, or approximately 3%, of Lions Gate Entertainment Corp. ("Lionsgate"), an entertainment company. Lionsgate operates in the motion picture production and distribution, television programming and syndication, home entertainment and digital distribution business. Upon the adoption of ASU 2016-01, as the shares have a readily determinable fair value and the Company has the intent to retain the investment, the shares are measured at fair value, with realized gains and losses recorded in other expense, net.
The accumulated amounts associated with the components of the Company's common stock investments with readily determinable fair values, which are included in other non-current assets, are summarized in the table below (in millions).
 
 
March 31, 2018
 
December 31, 2017
Cost
 
$
195

 
$
195

Accumulated change in the value of:
 
 
 
 
Equity securities recognized in other expense, net
 
(39
)
 
(1
)
Unhedged equity securities recorded in other comprehensive income(a) 
 

 
32

Reclassification of accumulated other comprehensive income to retained earnings(a)
 
32

 

Other-than-temporary impairment
 
(62
)
 
(62
)
Carrying value
 
$
126

 
$
164

(a) As of January 1, 2018, upon adoption of ASU 2016-01, the Company recorded a transition adjustment to reclassify accumulated other comprehensive income associated with Lionsgate shares in the amount of $32 million pre-tax ($26 million, net of tax) to retained earnings. Previously, amounts were recorded as a component of other comprehensive income.
The Company hedged 50% of the Lionsgate shares with an equity collar (the “Lionsgate Collar”) and pledged those shares as collateral to the derivative counterparty on November 12, 2015. Prior to adoption of ASU 2016-01, when the share price of Lionsgate was within the boundaries of the collar and the hedge had no intrinsic value, the Company recorded the gains or losses on the Lionsgate shares as a component of other comprehensive income (loss). When the share price of the Lionsgate shares was outside the boundaries of the collar and the hedge had intrinsic value, the Company recorded the gains or losses resulting from a change in the fair value of the hedged portion of Lionsgate shares that correspond to the change in intrinsic value of the hedge as a component of other expense, net. Upon adoption of ASU 2016-01, the Lionsgate Collar no longer receives hedge accounting designation. There is no change to the manner in which movements in fair value of the Lionsgate Collar will be reflected in the financial statements as gains and losses will continue to be recorded as a component of other expense, net on the consolidated statements of operations. (See Note 1, Note 4 and Note 7.)
In 2016, the Company determined that the decline in value of equity securities related to its investment in Lionsgate was other-than-temporary in nature and, as such, the cost basis was adjusted to fair value. The impairment determination was based on the sustained decline in the stock price of Lionsgate in relation to the purchase price and the prolonged length of time the fair value of the investment had been less than the carrying value. Based on the other-than-temporary impairment determination, unrealized pre-tax losses of $62 million previously recorded as a component of other comprehensive income (loss) were recognized as an impairment charge that was included as a component of other expense, net for the quarter ended September 30, 2016.

21


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

Equity investments without readily determinable fair values assessed under the measurement alternative
The Company's equity investments without readily determinable fair values assessed under the measurement alternative as of March 31, 2018 primarily include its 42% minority interest in Group Nine Media valued at $212 million. Discovery has significant influence through its voting rights in the preferred stock of Group Nine Media, however, this ownership interest has liquidation preferences that do not allow the investment to meet the definition of in-substance common stock. The Company accounts for its ownership interest in Group Nine Media as an equity investment without readily determinable fair values assessed under the measurement alternative. The Company also has similar investments in an educational website, an electric car racing series and certain investments to enhance the Company's digital distribution strategies, such as a $35 million investment in Refinery29. The Company completed its quarterly qualitative assessment and concluded that its equity investments without readily determinable fair values had no indicators that a change in fair value had taken place as of March 31, 2018.
NOTE 4. FAIR VALUE MEASUREMENTS
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the following three categories:
Level 1
Quoted prices for identical instruments in active markets.
Level 2
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3
Valuations derived from techniques in which one or more significant inputs are unobservable.
The tables below present assets and liabilities measured at fair value on a recurring basis (in millions).
 
 
 
 
March 31, 2018
Category
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
 
Money market funds
 
Cash and cash equivalents
 
$
39

 
$

 
$

 
$
39

Mutual funds
 
Prepaid expenses and other current assets
 
237

 

 

 
237

AFS securities:

 
 
 
 
 
 
 
 
 
 
Common stock
 
Other noncurrent assets
 
126

 

 

 
126

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

 
8

 

 
8

No hedging designation:(a)

 
 
 
 
 
 
 
 
 
 
Equity (Lionsgate Collar)
 
Other noncurrent assets
 

 
23

 

 
23

Total
 
 
 
$
402

 
$
31

 
$

 
$
433

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
245

 
$

 
$

 
$
245

Derivatives:
 
 
 
 
 
 
 
 
 
 
  Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
20

 

 
20

  Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Accrued liabilities
 

 
19

 

 
19

Cross-currency swaps
 
Other noncurrent liabilities
 

 
145

 

 
145

No hedging designation:
 
 
 
 
 
 
 
 
 


Cross-currency swaps
 
Accrued liabilities
 

 
1

 

 
1

Cross-currency swaps
 
Other noncurrent liabilities
 

 
7

 

 
7

Total
 
 
 
$
245

 
$
192

 
$

 
$
437


22


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

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

 
$

 
$
1,305

 
$

 
$
1,305

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

 

 

 
2,707

Mutual funds
 
Prepaid expenses and other current assets
 
182

 

 

 
182

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

 

 

 
82

Common stock - pledged
 
Other noncurrent assets
 
82

 

 

 
82

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

 
7

 

 
7

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Other noncurrent assets
 

 
3

 

 
3

Foreign exchange
 
Prepaid expenses and other current assets
 

 
2

 

 
2

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

 
13

 

 
13

Total
 
 
 
$
3,053

 
$
1,330

 
$

 
$
4,383

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred compensation plan
 
Accrued liabilities
 
$
182

 
$

 
$

 
$
182

Derivatives:
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange
 
Accrued liabilities
 

 
12

 

 
12

Net investment hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
 
Accrued liabilities
 

 
13

 

 
13

Cross-currency swaps
 
Other noncurrent liabilities
 

 
98

 

 
98

Foreign exchange

 
Accrued liabilities
 

 
8

 

 
8

No hedging designation:
 
 
 
 
 
 
 
 
 
 
Credit contracts
 
Other noncurrent liabilities

 

 
1

 

 
1

Cross-currency swaps
 
Other noncurrent liabilities

 

 
6

 

 
6

Total
 
 
 
$
182

 
$
138

 
$

 
$
320

(a) Prior to January 1, 2018, and the adoption of ASU 2016-01, the Company applied hedge accounting to the Lionsgate Collar. (See Note 1 and Note 7.)
Cash obtained as a result of the issuance of senior notes to fund a portion of the purchase price of the Scripps Networks acquisition was invested in money market funds, time deposit accounts, U.S. Treasury securities and highly liquid short-term instruments that qualify as cash and cash equivalents. Any accrued interest received after maturity was reinvested into additional short-term instruments. (See Note 3.) The Company values cash and cash equivalents using quoted market prices. As of March 31, 2018, following the acquisition of Scripps Networks, the Company no longer holds these investments as these investments were liquidated and utilized in the acquisition of Scripps Networks.
The fair value of Level 1 trading securities was determined by reference to the quoted market price per share in active markets multiplied by the number of shares held without consideration of transaction costs. (See Note 3.) The fair value of the deferred compensation plan liability was determined based on the fair value of the related investments elected by employees. Changes in the fair value of the investments are offset by changes in the fair value of the deferred compensation obligation. (See Note 3.)

23


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

Common stock investments represent equity investments with readily determinable fair values. The fair value of Level 1 common stock investments 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.) As of January 1, 2018, the Company adopted ASU 2016-01, which eliminates the AFS classification. (See Note 1 and Note 3.)
Derivative financial instruments are comprised of foreign exchange, interest rate, credit and equity contracts. (See Note 7.) The fair value of Level 2 derivative financial instruments was determined using a market-based approach.
In addition to the financial instruments listed in the tables above, the Company holds other financial instruments, including cash deposits, accounts receivable, accounts payable, borrowings under the revolving credit facility and senior notes. The carrying values for such financial instruments, other than the senior notes, each approximated their fair values as of March 31, 2018 and December 31, 2017. The estimated fair value of the Company’s outstanding senior notes using quoted prices from over the counter markets, considered Level 2 inputs, was $16.9 billion and $14.8 billion as of March 31, 2018 and December 31, 2017, respectively.
NOTE 5. CONTENT RIGHTS
The table below presents the components of content rights (in millions). 
 
 
March 31, 2018
 
December 31, 2017
Produced content rights:
 
 
 
 
Completed
 
$
5,299

 
$
4,355

In-production
 
690

 
442

Coproduced content rights:
 
 
 
 
Completed
 
757

 
745

In-production
 
65

 
27

Licensed content rights:
 
 
 
 
Acquired
 
1,078

 
1,070

Prepaid(a)
 
187

 
181

Content rights, at cost
 
8,076

 
6,820

Accumulated content rights expense
 
(4,334
)
 
(4,197
)
Total content rights, net
 
3,742

 
2,623

Current portion
 
(419
)
 
(410
)
Noncurrent portion
 
$
3,323

 
$
2,213

(a) Prepaid licensed content rights includes payments for rights to the Olympic games of $61 million that are reflected as noncurrent content rights and $83 million that are reflected as current content rights assets on the consolidated balance sheet as of March 31, 2018 and December 31, 2017, respectively.

24


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

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

 
$
411

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

 
500

Floating rate notes, quarterly interest, due September 2019
 
400

 
400

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

 

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

 

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

 
789

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

 
650

2.375% Senior notes, euro denominated, annual interest, due March 2022
 
370

 
358

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

 
500

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

 

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

 
1,200

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

 
350

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

 
450

2.500% Senior notes, sterling denominated, annual interest, due September 2024
 
563

 
538

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

 

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

 
300

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

 

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

 
700

1.900% Senior notes, euro denominated, annual interest, due March 2027
 
739

 
717

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

 
1,700

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

 
1,250

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

 
850

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

 
500

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

 
850

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

 
1,250

Term loans
 
2,000

 

Revolving credit facility
 
425

 
425

Program financing line of credit
 
22

 

Capital lease obligations
 
244

 
225

Total debt
 
19,513

 
14,913

Unamortized discount, premium and debt issuance costs, net
 
(146
)
 
(128
)
Debt, net of unamortized discount, premium and debt issuance costs
 
19,367

 
14,785

Current portion of debt
 
(153
)
 
(30
)
Noncurrent portion of debt
 
$
19,214

 
$
14,755

Senior Notes
In connection with the acquisition of Scripps Networks on March 6, 2018, the Company assumed $2.5 billion aggregate principal amount of Scripps Networks 2.750% senior notes due 2019, 2.800% senior notes due 2020, 3.500% senior notes due 2022, 3.900% senior notes due 2024 and 3.950% senior notes due 2025 (the "Scripps Networks Senior Notes"). As part of accounting for the acquisition of Scripps Networks, the Scripps Networks Senior Notes were adjusted to fair value using observable trades as of the acquisition date. (See Note 2.) The fair value adjustment resulted in an opening balance sheet carrying value that is $19 million less than the face amount of the senior notes. This difference will be amortized to interest expense until maturity.
On April 3, 2018, pursuant to the Offering Memorandum and Consent Solicitation Statement to Exchange dated March 5, 2018, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, completed the exchange of $2.3 billion aggregate principal amount of Scripps Networks Senior Notes, for equivalent $2.3 billion aggregate principal amount

25


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

2.750% senior notes due 2019 (the "2019 Notes"), 2.800% senior notes due 2020 (the "2020 Notes"), 3.500% senior notes due 2022 (the "2022 Notes"), 3.900% senior notes due 2024 (the "2024 Notes") and 3.950% senior notes due 2025. Interest on the 2019 Notes and the 2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year beginning on May 15, 2018. Interest on the 2020 Notes, the 2022 Notes and the 2025 Notes is payable semi-annually in arrears on June 15 and December 15 of each year commencing on June 15, 2018. In connection with this transaction, Scripps Networks Interactive, Inc., a wholly-owned subsidiary of the Company, fully and unconditionally guaranteed these senior notes (See Note 21.) These notes are unsecured and rank equally in right of payment with all of DCL’s other unsecured senior indebtedness. The exchange will be accounted for as a debt modification and therefore all third-party issuance costs will be expensed as incurred. The unexchanged Scripps Networks Senior Notes with an aggregate principal balance of $243 million will lose certain covenants or guarantees.
On September 21, 2017, DCL issued $500 million principal amount of 2.200% senior notes due 2019, $1.20 billion principal amount of 2.950% senior notes due 2023, $1.70 billion principal amount of 3.950% senior notes due 2028, $1.25 billion principal amount of 5.000% senior notes due 2037, $1.25 billion principal amount of 5.200% senior notes due 2047 (collectively, the “Senior Fixed Rate Notes”) and $400 million principal amount of floating rate senior notes due 2019 (the “Senior Floating Rate Notes” and, together with the Senior Fixed Rate Notes, the “USD Notes”). Interest on the Senior Fixed Rate Notes is payable on March 20 and September 20 of each year. Interest on the Senior Floating Rate Notes is payable on March 20, June 20, September 20 and December 20 of each year. The USD Notes are fully and unconditionally guaranteed by the Company. On September 21, 2017, DCL also issued £400 million principal amount ($540 million at issuance based on the exchange rate of $1.35 per pound at September 21, 2017) of 2.500% senior notes due 2024 (the “Sterling Notes”). Interest on the Sterling Notes is payable on September 20 of each year, beginning September 20, 2018. The proceeds received by DCL from the USD Notes and the Sterling Notes were net of a $11 million issuance discount and $57 million of debt issuance costs.
On March 13, 2017, DCL 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.
DCL used the proceeds from the offerings of the 2017 USD Notes and the 2016 USD Notes to repurchase $600 million aggregate principal amount of DCL's 5.050% 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 for the three months ended March 31, 2017, 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.
With the exception of the $2.5 billion of Scripps Networks Senior Notes acquired in conjunction with the acquisition of Scripps Networks, as of March 31, 2018, the remaining senior notes are fully and unconditionally guaranteed by the Company.
Term Loans
On August 11, 2017, DCL entered into a three-year delayed draw tranche and a five-year delayed draw tranche unsecured term loan credit facility (the "Term Loans"), each with a principal amount of up to $1 billion. The term of each delayed draw loan commenced on March 6, 2018 when Discovery used these funds to finance a portion of the Scripps Networks acquisition. The Term Loans' interest rates are based, at the Company's option, on either adjusted LIBOR plus a margin, or an alternate base rate plus a margin. The Company paid a commitment fee of 20 basis points per annum for each loan, based on its then-current credit rating, beginning September 28, 2017 through March 6, 2018. As of March 31, 2018, the Company had an outstanding balance of $2 billion under the Term Loan.
Revolving Credit Facility
On August 11, 2017, DCL amended its $2.0 billion revolving credit facility to allow DCL and certain designated foreign subsidiaries of DCL to borrow up to $2.5 billion, including a $100 million sublimit for the issuance of standby letters of credit and a $50 million sublimit for Euro-denominated swing line loans. Borrowing capacity under this credit facility is reduced by any outstanding borrowings under the commercial paper program. There were no outstanding borrowings of commercial paper for the periods ended March 31, 2018 and December 31, 2017. The revolving credit facility agreement amendment extends the maturity date from February 4, 2021 to August 11, 2022. The original agreement includes the option for up to two additional 364-day renewal periods.

26


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

The credit agreement governing the revolving credit facility contains customary representations, warranties and events of default, as well as affirmative and negative covenants. In addition to the change in the revolver's capacity, on August 11, 2017, the financial covenants were modified to increase the maximum consolidated leverage ratio financial covenant to 5.50 to 1.00, with step-downs to 5.00 to 1.00 and to 4.50 to 1.00, one year and two years after the closing of the Scripps Networks acquisition, respectively. As of March 31, 2018, the Company's subsidiary, DCL, was in compliance with all covenants and there were no events of default under the revolving credit facility.
As of March 31, 2018, the Company had outstanding U.S. dollar-denominated borrowings under the revolving credit facility of $425 million at a weighted average interest rate of 3.14%. As of December 31, 2017, the Company had outstanding U.S. dollar-denominated borrowings under the revolving credit facility of $425 million at a weighted average interest rate of 2.69%. 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 U.S. 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. The Company may also borrow in foreign currencies under the credit facility, at an interest rate 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. The Company had no borrowings under the credit facility in foreign currencies as of March 31, 2018 or December 31, 2017. 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.
Program Financing Line of Credit
On January 12, 2018, the Company entered into a secured line of credit for an aggregate principal amount of $26 million to finance content production costs. Interest rates on this line of credit are based on the Company’s option to elect either an adjusted LIBOR or a variable prime rate. Interest on the outstanding balance is due quarterly commencing on October 15, 2018 with a final payment due on October 15, 2020. As of March 31, 2018, the Company has an outstanding balance of $22 million.
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 and interest rates. 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 its 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 recorded gains and losses for 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 of the hedged item.
Effective January 1, 2018, upon adoption of ASU 2016-01, the Company no longer applies hedge accounting to the Lionsgate Collar. There is no change to the manner in which the Company accounts for the collar as movements in fair value of the collar will continue to be recorded as a component of other expense, net on the consolidated statements of operations. (See Note 1 and Note 4.)

27


DISCOVERY, 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, 2018 and December 31, 2017.
 
March 31, 2018
 
December 31, 2017
 
 
 
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
$
806

 
$
8

 
$

 
$
20

 
$

 
$
817

 
$
7

 
$

 
$
12

 
$

Net investment hedges:(a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps
1,737

 

 

 
19

 
145

 
1,708

 

 
3

 
13

 
98

Foreign exchange


 

 

 

 

 
303

 
2

 

 
8

 

Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity (Lionsgate collar)(b)

 

 

 

 

 
97

 

 
13

 

 

No hedging designation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
25

 

 

 

 

 
25

 

 

 

 

Cross-currency swaps
64

 

 

 
1

 
7

 
64

 

 

 

 
6

Equity (Lionsgate collar)(b)
97

 

 
23

 

 

 

 

 

 

 

Credit contracts

 

 

 

 

 
665

 

 

 

 
1

Total


 
$
8

 
$
23

 
$
40

 
$
152

 


 
$
9

 
$
16

 
$
33

 
$
105

(a) Excludes £400 million of sterling notes ($563 million equivalent at March 31, 2018) designated as a net investment hedge. (See Note 6.)
(b) Effective January 1, 2018, upon adoption of ASU 2016-01, the Lionsgate Collar no longer receives the hedge accounting designation. (See Note 1 and Note 4.)
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,
 
 
2018
 
2017
Losses recognized in accumulated other comprehensive loss:
 
 
 
 
Foreign exchange - derivative adjustments
 
$
(10
)
 
$
(13
)
Gains (losses) reclassified into income from accumulated other comprehensive loss (effective portion):
 
 
 
 
Foreign exchange - distribution revenue
 

 
(3
)
Foreign exchange - advertising revenue
 
1