Warner Bros. Discovery, Inc. (filing registrant: Discovery, Inc.) — 2021 Form 10-K
Important scope note: This is Discovery, Inc.’s annual report for the fiscal year ended December 31, 2021, filed February 24, 2022. It is not a post-merger Warner Bros. Discovery filing. The requested “2021 Q4” corresponds to the year-end annual filing, not standalone fourth-quarter results.
Business context and reporting period
Discovery operated a global media business spanning U.S. and international television networks, advertising, affiliate distribution, content licensing, sports, and direct-to-consumer (DTC) streaming. It reported two segments: U.S. Networks and International Networks. Discovery+ launched in the U.S. in January 2021 and expanded internationally; paid DTC subscribers totaled 22 million at year-end.
In May 2021, Discovery agreed to combine with AT&T’s WarnerMedia business in a Reverse Morris Trust transaction. The transaction was expected to close in Q2 2022, subject to Discovery shareholder approval and remaining closing conditions. AT&T shareholders were expected to own 71% of the combined company and Discovery shareholders 29%, fully diluted.
Financial results and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $12.191 billion | $10.671 billion | +14% |
| Operating income | $2.012 billion | $2.515 billion | -20% |
| Net income available to Discovery | $1.006 billion | $1.219 billion | -17% |
| Diluted earnings per share | $1.54 | $1.81 | Lower |
| Adjusted OIBDA | $3.817 billion | $4.196 billion | -9% |
| Cash provided by operations | $2.798 billion | $2.739 billion | +$59 million |
Advertising revenue increased 11% to $6.215 billion and distribution revenue increased 11% to $5.409 billion. Other revenue rose to $567 million from $222 million, principally reflecting European Olympics sports-rights sublicensing. Operating margin was approximately 16.5%, versus 23.6% in 2020; Adjusted OIBDA margin was approximately 31.3%, versus 39.3%.
- U.S. Networks: Revenue of $7.662 billion (+10%); Adjusted OIBDA of $3.940 billion (-1%). Growth in distribution, including Discovery+, was partly offset by higher marketing costs and linear subscriber declines.
- International Networks: Revenue of $4.539 billion (+22%); Adjusted OIBDA of $494 million (-32%). Advertising recovery and Olympics sublicensing lifted revenue, while sports, content, and marketing costs rose substantially.
- Cash and liquidity: Cash and cash equivalents were $3.905 billion at year-end, compared with $2.091 billion on the balance sheet at year-end 2020. The company reported $2.798 billion of operating cash flow and $373 million of capital expenditures; operating cash flow less capital expenditures was approximately $2.425 billion, a simple calculation rather than a company-defined free-cash-flow measure. The $2.5 billion revolving facility was undrawn; reported unused capacity including cash was $6.405 billion.
- Debt: Outstanding debt principal was $15.187 billion, including $339 million current; net carrying value was $14.759 billion. Interest expense was $633 million. The filing reported $9.988 billion of scheduled future interest payments on outstanding debt.
- Balance sheet: Current assets were $7.264 billion and current liabilities $3.459 billion. Total assets were $34.427 billion and total liabilities $21.031 billion.
Material changes versus the prior year
- Revenue recovered from 2020, with advertising-market improvement and Olympics-related activity contributing to growth. Revenue remained above 2019’s $11.144 billion.
- Profitability declined despite higher revenue: costs of revenue rose 20%, selling, general and administrative expense rose 48%, and total content expense increased to $3.965 billion from $3.290 billion. Discovery cited Olympics and other sports returning to fuller schedules, investment in Discovery+, and its marketing as key cost drivers.
- Adjusted OIBDA fell 9%; International Networks’ decline was especially pronounced. Corporate Adjusted OIBDA loss widened to $617 million from $502 million, including higher transaction and integration costs.
- Cash from operations increased modestly, while cash used in investing and financing activities fell year over year. No common-stock repurchases occurred in 2021, compared with $969 million in 2020.
- No goodwill or other intangible impairment was recorded in 2021, versus $124 million in 2020. A change in the amortization method for acquired customer relationships increased 2021 amortization expense by $196 million, prospectively from October 1.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific consolidated revenue or earnings guidance. Management expected the WarnerMedia transaction to close in Q2 2022, but completion remained subject to shareholder approval and regulatory and other closing conditions.
- Upon closing, Discovery expected to assume responsibility for up to approximately $43 billion of additional debt, subject to adjustments. The filing cautions that higher debt and interest costs could reduce financial flexibility and funds available for other uses. The credit facility’s commitments were expected to increase from $2.5 billion to as much as $6 billion, subject to conditions.
- Discovery reported $95 million of 2021 transaction and integration costs, primarily related to WarnerMedia, and expected significant additional costs in 2022 and beyond. Specified termination circumstances could require Discovery to pay AT&T a $720 million fee, or AT&T to pay Discovery $1.8 billion.
- Key business risks include traditional pay-TV subscriber erosion, competition from streaming services, Discovery+ subscriber retention and execution, content and sports-rights costs, distributor concentration and contract renewals, advertising-market volatility, cybersecurity and privacy, foreign exchange, and international regulation. U.S. Networks portfolio subscribers declined 8% in 2021; fully distributed network subscribers declined 4%.
- The COVID-19 pandemic did not have a significant effect on demand in 2021, according to the company, but production safety costs and uncertainty remained. The Tokyo Olympics’ postponement shifted related revenue and expenses from 2020 into 2021.
- Eight lawsuits had been filed by alleged Discovery stockholders by February 1, 2022, generally alleging proxy-statement deficiencies and seeking to block the transaction, damages, or other relief. Management stated that ordinary-course litigation was not expected to materially affect financial position, results, or cash flows; the merger-related suits remained a transaction risk.
- Unrecognized tax benefits were $420 million; the company said the balance could decrease by as much as $125 million within 12 months, though timing and outcome were uncertain. The auditor identified certain uncertain-tax-position reserves as a critical audit matter, while issuing an unmodified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Confirm the eventual WarnerMedia transaction terms, closing conditions, ownership split, final debt assumed or issued, and expected interest burden against subsequent filings.
- Track Discovery+ paid-subscriber growth, retention, monetization, and marketing/content costs alongside continuing linear subscriber declines.
- Assess whether revenue growth converts into sustained operating income and cash flow, particularly given higher content, sports, and marketing expenses.
- Review near-term debt maturities, contractual content commitments ($5.352 billion disclosed), total contractual obligations ($33.233 billion), and available liquidity.
- Monitor merger-related litigation, remaining regulatory approvals, tax exposures, and the potential effects of international regulatory or political developments, including in Poland.