# Warner Bros. Discovery, Inc. (WBD) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from Warner Bros. Discovery, Inc.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1437107/000143710722000031/disca-20211231.htm Accession: 0001437107-22-000031 Filing date: 2022-02-24 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/WBD/ All MD&A years: /company/WBD/mda/ Next year: /company/WBD/mda/fy2022/ (FY 2022) ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s discussion and analysis of financial condition and results of operations is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and related notes. This section provides additional information regarding our businesses, current developments, results of operations, cash flows, financial condition, contractual commitments, critical accounting policies, and estimates that require significant judgment and thus have the most significant potential impact on our consolidated financial statements. This discussion and analysis is intended to better allow investors to view the company from management's perspective. This section provides an analysis of our financial results for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020. A discussion of our result of operations and liquidity for the fiscal year ended December 31, 2020 compared to the fiscal year ended December 31, 2019 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on February 22, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at ir.corporate.discovery.com. The information contained on our website is not part of this Annual Report on Form 10-K and is not incorporated by reference herein. BUSINESS OVERVIEW We are a global media company that provides content across multiple distribution platforms, including linear platforms such as pay-TV, FTA and broadcast television, our authenticated GO applications, digital distribution arrangements, content licensing arrangements and DTC subscription products. For a discussion of our global portfolio of networks and joint ventures see our business overview set forth in Item 1, “Business” in this Annual Report on Form 10-K. Our content spans genres including survival, natural history, exploration, sports, general entertainment, home, food, travel, heroes, adventure, crime and investigation, health and kids. We have an extensive library of content and own most rights to our content and footage, which enables us to leverage our library to quickly launch brands and services into new markets and on new platforms. Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world on a variety of platforms. We aim to invest in high-quality content for our networks and brands with the objective of building viewership, optimizing distribution revenue, capturing advertising revenue, and creating or repositioning branded channels and business to sustain long-term growth and occupy a desired content niche with strong consumer appeal. Our strategy is to maximize the distribution, ratings and profit potential of each of our branded networks and discovery+. In addition to growing distribution and advertising revenues for our branded networks, we have extended content distribution across new platforms, including brand-aligned websites, online streaming, mobile devices, VOD, and broadband channels, which provide promotional platforms for our television content and serve as additional outlets for advertising and distribution revenue. Our goal is to reach consumers wherever and whenever they are consuming content, as well as reaching new audiences including broadband only, cord cutters and cord nevers, while continuing to serve our linear network subscribers. Audience ratings, audience engagement and channel packaging are key drivers in generating advertising revenue and creating demand on the part of cable television operators, DTH satellite operators, telecommunication service providers, and other content distributors who deliver our content to their customers. Although we utilize certain brands and content globally, we classify our operations in two reportable segments: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting primarily of international television networks and digital content services. Our segment presentation aligns with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments. For further discussion of financial information for our segments and the geographical areas in which we do business, our content development activities, and revenues see our business overview set forth in Item 1, “Business” and Note 23 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. Impact of COVID-19 On March 11, 2020, the World Health Organization declared the coronavirus disease 2019 (“COVID-19”) outbreak to be a global pandemic. COVID-19 has continued to spread throughout the world, and the duration and severity of its effects and associated economic disruption remain uncertain. We continue to closely monitor the impact of COVID-19 on all aspects of our business and geographies, including the impact on our customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties. Beginning in the second quarter of 2020, demand for our advertising products and services decreased due to economic disruptions from limitations on social and commercial activity. These economic disruptions and the resulting effect on us eased 41 during the second half of 2020. The pandemic did not have a significant impact on demand during fiscal year 2021. Many of our third-party production partners that were shut down during most of the second quarter of 2020 due to COVID-19 restrictions came back online in the third quarter of 2020 and, as a result, we have incurred additional costs to comply with various governmental regulations and implement certain safety measures for our employees, talent, and partners. Additionally, certain sporting events that we have rights to were cancelled or postponed, thereby eliminating or deferring the related revenues and expenses, including the Tokyo 2020 Olympic Games, which occurred in July and August 2021. The postponement of the 2020 Olympic Games deferred both Olympic-related revenues and significant expenses from fiscal year 2020 to fiscal year 2021. In response to the impact of the pandemic, we employed innovative production and programming strategies, including producing content filmed by our on-air talent and seeking viewer feedback on which content to air. We pursued a number of cost savings initiatives, which began during the third quarter of 2020 through the implementation of travel, marketing, production and other operating cost reductions, including personnel reductions, restructurings and resource reallocations to align our expense structure to ongoing changes within the industry. The full extent of COVID-19’s effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others. We will continue to monitor COVID-19 and its impact on our business results and financial condition. The consolidated financial statements set forth in this Annual Report on Form 10-K reflect management’s latest estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions. 42 RESULTS OF OPERATIONS Items Impacting Comparability The impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S. dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis (ex-FX), in addition to results reported in accordance with GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with GAAP. The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, which is a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the “2021 Baseline Rate”), and the prior year amounts translated at the same 2021 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities, as well as realized and unrealized foreign currency transaction gains and losses. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies. Consolidated Results of Operations – 2021 vs. 2020 Our consolidated results of operations for 2021 and 2020 were as follows (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020","","% Change","","% Change (ex-FX)"],["Revenues:"],["Advertising","","$","6,215","","","$","5,583","","","11","%","","10","%"],["Distribution","","5,409","","","4,866","","","11","%","","11","%"],["Other","","567","","","222","","","NM","","NM"],["Total revenues","","12,191","","","10,671","","","14","%","","14","%"],["Costs of revenues, excluding depreciation and amortization","","4,620","","","3,860","","","20","%","","18","%"],["Selling, general and administrative","","4,016","","","2,722","","","48","%","","46","%"],["Depreciation and amortization","","1,582","","","1,359","","","16","%","","15","%"],["Impairment of goodwill and other intangible assets","","\u2014","","","124","","","NM","","NM"],["Restructuring and other charges","","32","","","91","","","(65)","%","","(64)","%"],["Gain on disposition","","(71)","","","\u2014","","","NM","","NM"],["Total costs and expenses","","10,179","","","8,156","","","25","%","","23","%"],["Operating income","","2,012","","","2,515","","","(20)","%","","(18)","%"],["Interest expense, net","","(633)","","","(648)","","","(2)","%"],["Loss on extinguishment of debt","","(10)","","","(76)","","","(87)","%"],["Loss from equity investees, net","","(18)","","","(105)","","","(83)","%"],["Other income, net","","82","","","42","","","95","%"],["Income before income taxes","","1,433","","","1,728","","","(17)","%"],["Income tax expense","","(236)","","","(373)","","","(37)","%"],["Net income","","1,197","","","1,355","","","(12)","%"],["Net income attributable to noncontrolling interests","","(138)","","","(124)","","","11","%"],["Net income attributable to redeemable noncontrolling interests","","(53)","","","(12)","","","NM"],["Net income available to Discovery, Inc.","","$","1,006","","","$","1,219","","","(17)","%"]] [[/GREPCENT_TABLE]] NM - Not meaningful 43 Revenues Our advertising revenue is generated across multiple platforms and consists of consumer advertising, which is sold primarily on a national basis in the U.S. and on a pan-regional or local-language feed basis outside the U.S. Advertising contracts generally have a term of one year or less. Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the popularity of FTA television, the number of subscribers to our channels, viewership demographics, the popularity of our content and our ability to sell commercial time over a group of channels. Revenue from advertising is subject to seasonality, market-based variations, the mix in sales of commercial time between the upfront and scatter markets, and general economic conditions. Advertising revenue is typically highest in the second and fourth quarters. In some cases, advertising sales are subject to ratings guarantees that require us to provide additional advertising time if the guaranteed audience levels are not achieved. We also generate revenue from the sale of advertising through our digital products on a stand-alone basis and as part of advertising packages with our television networks. Advertising revenue increased 11% in 2021. Excluding the impact of foreign currency fluctuations, advertising revenue increased 10%. The increase was primarily attributable to improved overall performance at International Networks as advertising markets recovered from the COVID-19 pandemic, as well as the broadcast of the Summer Olympics throughout Europe in the third quarter of 2021. Distribution revenue consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from SVOD content licensing, DTC subscription services, and other emerging forms of digital distribution. The largest component of distribution revenue is comprised of linear distribution services for rights to our networks from cable, DTH satellite and telecommunication service providers. We have contracts with distributors representing most cable and satellite service providers around the world, including the largest operators in the U.S. and major international distributors. Distribution revenues are largely dependent on the rates negotiated in the agreements, the number of subscribers that receive our networks or content, the number of platforms covered in the distribution agreement, and the market demand for the content that we provide. From time to time, renewals of multi-year carriage agreements include significant year one market adjustments to re-set subscriber rates, which then increase at rates lower than the initial increase in the following years. In some cases, we have provided distributors launch incentives, in the form of cash payments or free periods, to carry our networks. Distribution revenue also includes fees charged for bulk content arrangements and other subscription services for episodic content. These digital distribution revenues are impacted by the quantity, as well as the quality, of the content we provide. As reported and excluding the impact of foreign currency fluctuations, distribution revenue increased 11% in 2021 primarily attributable to the growth of discovery+ at both U.S. Networks and International Networks. Other revenue increased $345 million in 2021. Excluding the impact of foreign currency fluctuations, other revenue increased $354 million in 2021. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe. Costs of Revenues Our principal component of costs of revenues is content expense. Content expense includes television series, television specials, films, sporting events and digital products. The costs of producing a content asset and bringing that asset to market consist of film costs, participation costs, exploitation costs and manufacturing costs. Costs of revenues increased 20% in 2021. Excluding the impact of foreign currency fluctuations, costs of revenues increased 18%. The increase was primarily attributable to the Olympics and to a lesser extent, European sporting events and leagues returning to a more normalized schedule, and higher content investment related to discovery+ at U.S. Networks and International Networks. Selling, General and Administrative Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy and back office support fees. Selling, general and administrative expenses increased 48% in 2021. Excluding the impact of foreign currency fluctuations, selling, general and administrative increased 46%. The increase was primarily attributable to higher marketing related expenses to drive the growth of discovery+ at U.S. Networks and International Networks. Depreciation and Amortization Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization increased 16% in 2021. Excluding the impact of foreign currency fluctuations, depreciation and amortization increased 15%. The increase was primarily attributable to a change in amortization method from the straight-line method to the sum of the years digits method effective October 1, 2021 for acquired customer relationships, and to a lesser extent, assets placed in service related to the launch of discovery+. 44 Impairment of Goodwill and Other Intangible Assets There was no impairment of goodwill and other intangible assets in 2021 compared to $124 million in 2020. (See Note 7 to the accompanying consolidated financial statements.) Restructuring and Other Charges Restructuring and other charges were $32 million and $91 million in 2021 and 2020, respectively. Restructuring and other charges primarily include employee relocation and termination costs. (See Note 17 to the accompanying consolidated financial statements.) Gain on Disposition Gain on disposition was $71 million for 2021, and was primarily attributable to the sale of our Great American Country network. (See Note 3 to the accompanying consolidated financial statements.) Interest Expense, net Interest expense decreased 2% in 2021. (See Note 8 and Note 10 to the accompanying consolidated financial statements.) Loss on Extinguishment of Debt Losses on extinguishment of debt were $10 million and $76 million in 2021 and 2020, respectively. In 2020, we repurchased $1.5 billion aggregate principal amount of DCL's and Scripps Networks' senior notes. The repurchase resulted in a loss on extinguishment of debt of $76 million. (See Note 8 to the accompanying consolidated financial statements.) Loss from Equity Investees, net We reported losses from our equity method investees of $18 million and $105 million in 2021 and 2020, respectively. The changes are attributable to the Company's share of earnings and losses from its equity investees. Other Income, net The table below presents the details of other income, net (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020"],["Foreign currency gains (losses), net","","$","93","","","$","(115)"],["(Losses) gains on derivative instruments, net","","(33)","","","29"],["Interest income","","18","","","10"],["Gain on sale of investment with readily determinable fair value","","15","","","101"],["Change in the value of equity investments without readily determinable fair value","","(13)","","","\u2014"],["Change in the value of investments with readily determinable fair value","","(6)","","","28"],["Expenses from debt modification","","\u2014","","","(11)"],["Other income, net","","8","","","\u2014"],["Other income, net","","$","82","","","$","42"]] [[/GREPCENT_TABLE]] 45 Income Taxes The following table reconciles our effective income tax rate to the U.S. federal statutory income tax rate. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020"],["Pre-tax income at U.S. federal statutory income tax rate","","$","301","","","21","%","","$","363","","","21","%"],["State and local income taxes, net of federal tax benefit","","108","","","7","%","","(10)","","","\u2014","%"],["Effect of foreign operations","","25","","","2","%","","58","","","3","%"],["UK Finance Act legislative change","","(155)","","","(11)","%","","(51)","","","(3)","%"],["Noncontrolling interest adjustment","","(40)","","","(3)","%","","(29)","","","(2)","%"],["Change in uncertain tax positions","","12","","","1","%","","17","","","1","%"],["Impairment of goodwill","","\u2014","","","\u2014","%","","25","","","2","%"],["Deferred tax adjustment","","\u2014","","","\u2014","%","","(22)","","","(1)","%"],["Other, net","","(15)","","","(1)","%","","$","22","","","1","%"],["Income tax expense","","$","236","","","16","%","","$","373","","","22","%"]] [[/GREPCENT_TABLE]] Income tax expense was $236 million and $373 million, and the Company's effective tax rate was 16% and 22% for 2021 and 2020, respectively. The decrease in income tax expense for the year ended December 31, 2021 was primarily attributable to a decrease in pre-tax book income and an increase in the deferred tax benefit from the UK Finance Act 2021 that was enacted in June 2021. Those decreases were partially offset by an increase in the state and local income tax expense recorded in 2021. Segment Results of Operations – 2021 vs. 2020 We evaluate the operating performance of our operating segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) employee share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, (vii) third-party transaction and integration costs, and (viii) other items impacting comparability. We use this measure to assess the operating results and performance of our segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. We believe Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. We exclude share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. We also exclude the depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (“GAAP”). 46 The table below presents our Adjusted OIBDA by segment, with a reconciliation of consolidated net income available to Discovery, Inc. to Adjusted OIBDA (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020","","% Change"],["Net income available to Discovery, Inc.","","$","1,006","","","$","1,219","","","(17)","%"],["Net income attributable to redeemable noncontrolling interests","","53","","","12","","","NM"],["Net income attributable to noncontrolling interests","","138","","","124","","","11","%"],["Income tax expense","","236","","","373","","","(37)","%"],["Income before income taxes","","1,433","","","1,728","","","(17)","%"],["Other (income) expense, net","","(82)","","","(42)","","","95","%"],["Loss from equity investees, net","","18","","","105","","","(83)","%"],["Loss on extinguishment of debt","","10","","","76","","","(87)","%"],["Interest expense, net","","633","","","648","","","(2)","%"],["Operating income","","2,012","","","2,515","","","(20)","%"],["Depreciation and amortization","","1,582","","","1,359","","","16","%"],["Impairment of goodwill and other intangible assets","","\u2014","","","124","","","NM"],["Employee share-based compensation","","167","","","99","","","69","%"],["Restructuring and other charges","","32","","","91","","","(65)","%"],["Transaction and integration costs","","95","","","6","","","NM"],["(Gain) loss on disposition","","(71)","","","2","","","NM"],["Adjusted OIBDA","","$","3,817","","","$","4,196","","","(9)","%"],["Adjusted OIBDA"],["U.S. Networks","","3,940","","","3,975","","","(1)","%"],["International Networks","","494","","","723","","","(32)","%"],["Corporate, inter-segment eliminations, and other","","(617)","","","(502)","","","23","%"],["Adjusted OIBDA","","$","3,817","","","$","4,196","","","(9)","%"]] [[/GREPCENT_TABLE]] 47 The table below presents the calculation of Adjusted OIBDA (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020","","% Change"],["Revenue:"],["U.S. Networks","","$","7,662","","","$","6,949","","","10","%"],["International Networks","","4,539","","","3,713","","","22","%"],["Corporate, inter-segment eliminations, and other","","(10)","","","9","","","NM"],["Total revenue","","12,191","","","10,671","","","14","%"],["Costs of revenues, excluding depreciation and amortization","","4,620","","","3,860","","","20","%"],["Selling, general and administrative (a)","","3,754","","","2,615","","","44","%"],["Adjusted OIBDA","","$","3,817","","","$","4,196","","","(9)","%"],["(a) Selling, general and administrative expenses exclude employee share-based compensation and third-party transaction and integration costs."]] [[/GREPCENT_TABLE]] U.S. Networks The table below presents, for our U.S. Networks segment, revenues by type, certain operating expenses, and Adjusted OIBDA (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020","","Change %"],["Revenues:"],["Advertising","","$","4,188","","","$","4,012","","","4","%"],["Distribution","","3,297","","","2,852","","","16","%"],["Other","","177","","","85","","","NM"],["Total revenues","","7,662","","","6,949","","","10","%"],["Costs of revenues, excluding depreciation and amortization","","1,841","","","1,843","","","\u2014","%"],["Selling, general and administrative","","1,881","","","1,131","","","66","%"],["Adjusted OIBDA","","3,940","","","3,975","","","(1)","%"],["Employee share-based compensation","","1","","","\u2014"],["Gain on disposition","","(77)","","","\u2014"],["Depreciation and amortization","","1,065","","","899"],["Restructuring and other charges","","4","","","41"],["Transactions and integration costs","","1","","","\u2014"],["Inter-segment eliminations","","20","","","4"],["Operating income","","$","2,926","","","$","3,031"]] [[/GREPCENT_TABLE]] Revenues Advertising revenue increased 4% in 2021 and was primarily attributable to higher pricing, the continued monetization of content offerings on our next generation initiatives, and higher inventory, partially offset by lower overall ratings and secular declines in the pay-TV ecosystem. Distribution revenue increased 16% in 2021 and was primarily attributable to growth of discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers, and certain prior year nonrecurring items. Excluding these nonrecurring items, distribution revenue increased 17% in 2021. Total portfolio subscribers at December 31, 2021 were 8% lower than at December 31, 2020, while subscribers to our fully distributed networks were 4% lower than the prior year. Excluding the impact of the sale of our Great American Country linear network, total subscribers to our linear networks at December 31, 2021 were 5% lower than at December 31, 2020. Other revenue increased $92 million in 2021 and was primarily attributable to a nonrecurring item. 48 Costs of Revenues Costs of revenues were flat in 2021, primarily attributable to our content investment in discovery+, a nonrecurring, non-cash item in 2020, and third-party app store fees, offset by more efficient content spend on our linear networks. Content expense was $1.6 billion in 2021 and 2020. Selling, General and Administrative Selling, general and administrative expenses increased 66% in 2021 and was primarily attributable to higher marketing-related expenses to drive the growth of discovery+. Adjusted OIBDA Adjusted OIBDA decreased 1% in 2021. International Networks The following table presents, for our International Networks segment, revenues by type, certain operating expenses, and Adjusted OIBDA (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020","","Change %","","Change % (ex-FX)"],["Revenues:"],["Advertising","","$","2,027","","","$","1,571","","","29","%","","25","%"],["Distribution","","2,112","","","2,014","","","5","%","","4","%"],["Other","","400","","","128","","","NM","","NM"],["Total revenues","","4,539","","","3,713","","","22","%","","20","%"],["Costs of revenues, excluding depreciation and amortization","","2,784","","","2,004","","","39","%","","35","%"],["Selling, general and administrative","","1,261","","","986","","","28","%","","24","%"],["Adjusted OIBDA","","494","","","723","","","(32)","%","","(27)%"],["Depreciation and amortization","","394","","","374"],["Impairment of goodwill and other intangible assets","","\u2014","","","124"],["Restructuring and other charges","","26","","","29"],["Transaction and integration costs","","4","","","4"],["Inter-segment eliminations","","(15)","","","1"],["Loss on disposition","","6","","","\u2014"],["Operating income","","$","79","","","$","191"]] [[/GREPCENT_TABLE]] Revenues Advertising revenue increased 29% in 2021. Excluding the impact of foreign currency fluctuations, advertising revenue increased 25%. The increases were attributable to improved overall performance as advertising markets recovered from the COVID-19 pandemic, as well as the broadcast of the Summer Olympics throughout Europe in the third quarter of 2021. Distribution revenue increased 5% in 2021. Excluding the impact of foreign currency fluctuations, distribution revenue increased 4%. The increases were primarily attributable to higher next generation revenues due to growth of discovery+, partially offset by lower contractual affiliate rates in some European markets. Other revenue increased $272 million in 2021. Excluding the impact of foreign currency fluctuations, other revenue increased $281 million. The increases were primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe. Costs of Revenues Costs of revenues increased 39% in 2021. Excluding the impact of foreign currency fluctuations, costs of revenues increased 35%. The increases were primarily attributable to the Olympics and to a lesser extent, European sporting events and leagues returning to a more normalized schedule, and higher content investment related to discovery+. Content expense, excluding the impact of foreign currency fluctuations, was $2.0 billion for 2021 and $1.4 billion 2020. 49 Selling, General and Administrative Selling, general and administrative expenses increased 28% in 2021. Excluding the impact of foreign currency fluctuations, selling, general, and administrative expenses increased 24%. The increases were primarily attributable to higher marketing-related expenses to drive the growth of discovery+ and the Olympics, as well as personnel costs to support our next generation platforms. Adjusted OIBDA Adjusted OIBDA decreased 32% in 2021. Excluding the impact of foreign currency fluctuations, adjusted OIBDA decreased 27%. Corporate, Inter-segment Eliminations, and Other The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating loss (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020","","% Change"],["Revenues","","$","(10)","","","$","9","","","NM"],["Costs of revenues, excluding depreciation and amortization","","(5)","","","13","","","NM"],["Selling, general and administrative","","612","","","498","","","23","%"],["Adjusted OIBDA","","(617)","","","(502)","","","(23)","%"],["Employee share-based compensation","","166","","","99"],["Depreciation and amortization","","123","","","86"],["Transaction and integration costs","","90","","","2"],["Restructuring and other charges","","2","","","21"],["Loss on asset disposition","","\u2014","","","2"],["Inter-segment eliminations","","(5)","","","(5)"],["Operating loss","","$","(993)","","","$","(707)"]] [[/GREPCENT_TABLE]] Corporate operations primarily consist of executive management, administrative support services, substantially all of our share-based compensation and third-party transaction and integration costs. LIQUIDITY AND CAPITAL RESOURCES Liquidity Sources of Cash Historically, we have generated a significant amount of cash from operations. During 2021, we funded our working capital needs primarily through cash flows from operations. As of December 31, 2021, we had $3.9 billion of cash and cash equivalents on hand. We are a well-known seasoned issuer and have the ability to conduct registered offerings of securities, including debt securities, common stock and preferred stock, on short notice, subject to market conditions. Access to sufficient capital from the public market is not assured. We also have a $2.5 billion revolving credit facility and commercial paper program described below. •Debt     Revolving Credit Facility and Commercial Paper In June 2021, we entered into a multicurrency revolving credit agreement (the "Credit Agreement"), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. We have the capacity to initially borrow up to $2.5 billion under the Credit Agreement. Upon the closing of the proposed Combination with WarnerMedia and subject to certain conditions, the available commitments will increase by $3.5 billion, to an aggregate amount not to exceed $6 billion. The Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. We may also request additional commitments up to $1 billion from the lenders upon satisfaction of certain conditions. Obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by Discovery, Inc. and Scripps Networks Interactive, Inc., and will also be guaranteed by the holding company of the WarnerMedia business upon the closing of the proposed Combination. 50 The Credit Agreement will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders' consent. The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of December 31, 2021, DCL was in compliance with all covenants and there were no events of default under the Credit Facility. Additionally, our commercial paper program is supported by the Credit Facility. Under the commercial paper program, we may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is reduced by any outstanding borrowings under the commercial paper program. As of December 31, 2021 and 2020, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program. •Investments We received proceeds of $599 million during 2021 from the sales and maturities of investments. Uses of Cash Our primary uses of cash include the creation and acquisition of new content, business acquisitions, repurchases of our capital stock, income taxes, personnel costs, costs to develop and market discovery+, principal and interest payments on our outstanding senior notes, and funding for various equity method and other investments. •Content Acquisition We plan to continue to invest significantly in the creation and acquisition of new content. Our investment in content has increased as we acquire and develop new content for discovery+. Additional information regarding contractual commitments to acquire content is set forth in "Material Cash Requirements from Known Contractual and Other Obligations" in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." •Debt Senior Notes In July 2021, we issued notices for the redemption in full of all $168 million aggregate principal amount outstanding of our 3.300% Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of our 3.500% Senior Notes due June 2022 (collectively, the "2022 Notes"). The 2022 Notes were redeemed in July 2021 for an aggregate redemption price of $235 million, plus accrued interest. In February 2021, we issued a notice for the redemption in full of all $335 million aggregate principal amount outstanding of our 4.375% Senior Notes due June 2021 (the “2021 Notes”). The 2021 Notes were redeemed in March 2021 for an aggregate redemption price of $339 million, plus accrued interest. In addition, we have $339 million of senior notes coming due in March 2022. •Capital Expenditures and Investments in Next Generation Initiatives We effected capital expenditures of $373 million in 2021, including amounts capitalized to support our next generation platforms, such as discovery+. In addition, we expect to continue to incur significant costs to develop and market discovery+ in the future. •Investments and Business Combinations Our uses of cash have included investments in equity method investments and equity investments without readily determinable fair value. (See Note 4 to the accompanying consolidated financial statements.) We provide funding to our investees from time to time. We contributed $184 million and $181 million in 2021 and 2020, for investments in and advances to our investees. We also purchased $103 million and $250 million of time deposit investments during 2021 and 2020. In May 2021, we entered into an agreement with AT&T Inc. to combine with WarnerMedia’s ("WarnerMedia") entertainment, sports and news assets to create a standalone, global entertainment company. The transaction is expected to close in the second quarter of 2022, subject to approval by the Company's shareholders and customary closing conditions, including receipt of regulatory approvals. For the year ended December 31, 2021, we incurred transaction and integration costs of $95 million, primarily related to the WarnerMedia acquisition, and we expect to continue to incur significant transaction and integration costs in 2022 and beyond. (See Note 3 to the accompanying consolidated financial statements.) 51 •Redeemable Noncontrolling Interest and Noncontrolling Interest Due to business combinations, we also have redeemable equity balances of $363 million, which may require the use of cash in the event holders of noncontrolling interests put their interests to us. Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $251 million and $254 million in 2021 and 2020, respectively. •Common Stock Repurchases Historically, we have funded our stock repurchases through a combination of cash on hand, cash generated by operations and the issuance of debt. In February 2020, our Board of Directors authorized additional stock repurchases of up to $2 billion upon completion of our existing $1 billion authorization announced in May 2019. Under the new stock repurchase authorization, management is authorized to purchase shares from time to time through open market purchases at prevailing prices or privately negotiated purchases subject to market conditions and other factors. (See Note 12 to the accompanying consolidated financial statements.) There was no common stock repurchase activity during 2021. During 2020, we repurchased $969 million of our Series C common stock. •Income Taxes and Interest We expect to continue to make payments for income taxes and interest on our outstanding senior notes. During 2021 and 2020, we made cash payments of $643 million and $641 million for income taxes and $664 million and $673 million for interest on our outstanding debt. Following the closing of the proposed Combination with WarnerMedia, we expect cash required for interest payments to significantly increase. Cash Flows The following table presents changes in cash and cash equivalents (in millions). [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020"],["Cash, cash equivalents, and restricted cash, beginning of period","","$","2,122","","","$","1,552"],["Cash provided by operating activities","","2,798","","","2,739"],["Cash used in investing activities","","(56)","","","(703)"],["Cash used in financing activities","","(853)","","","(1,549)"],["Effect of exchange rate changes on cash, cash equivalents, and restricted cash","","(106)","","","83"],["Net change in cash, cash equivalents, and restricted cash","","1,783","","","570"],["Cash, cash equivalents, and restricted cash, end of period","","$","3,905","","","$","2,122"]] [[/GREPCENT_TABLE]] Operating Activities Cash provided by operating activities was $2.8 billion and $2.7 billion in 2021 and 2020, respectively. The increase in cash provided by operating activities was primarily attributable to an increase in net income excluding non-cash items, partially offset by a negative fluctuation in working capital activity. Investing Activities Cash used in investing activities was $56 million and $703 million in 2021 and 2020, respectively. The decrease in cash used in investing activities was primarily attributable to proceeds received from the sales and maturities of investments and a reduction in purchases of investments, partially offset by an increase in payments for derivatives during 2021. Financing Activities Cash used in financing activities was $853 million and $1.5 billion in 2021 and 2020, respectively. The decrease in cash used in financing activities was primarily attributable to the suspension of stock repurchases throughout 2021. 52 Capital Resources As of December 31, 2021, capital resources were comprised of the following (in millions). [[GREPCENT_TABLE]] [["","","December 31, 2021"],["","","Total Capacity","","Outstanding Letters of Credit","","Outstanding Indebtedness","","Unused Capacity"],["Cash and cash equivalents","","$","3,905","","","$","\u2014","","","$","\u2014","","","$","3,905"],["Revolving credit facility and commercial paper program","","2,500","","","\u2014","","","\u2014","","","2,500"],["Senior notes (a)","","15,187","","","\u2014","","","15,187","","","\u2014"],["Total","","$","21,592","","","$","\u2014","","","$","15,187","","","$","6,405"],["(a) Interest on senior notes is paid annually or semi-annually. Our senior notes outstanding as of December 31, 2021 had interest rates that ranged from 1.90% to 6.35% and will mature between 2022 and 2055."]] [[/GREPCENT_TABLE]] We expect that our cash balance, cash generated from operations and availability under the Credit Agreement will be sufficient to fund our cash needs for both the short-term and the long-term. Our borrowing costs and access to capital markets can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in part, on our performance as measured by credit metrics such as interest coverage and leverage ratios. As of December 31, 2021, we held $236 million of our $3.9 billion of cash and cash equivalents in our foreign subsidiaries. The 2017 Tax Act features a participation exemption regime with current taxation of certain foreign income and imposes a mandatory repatriation toll tax on unremitted foreign earnings. Notwithstanding the U.S. taxation of these amounts, we intend to continue to reinvest these funds outside of the U.S. Our current plans do not demonstrate a need to repatriate them to the U.S. However, if these funds are needed in the U.S., we would be required to accrue and pay non-U.S. taxes to repatriate them. The determination of the amount of unrecognized deferred income tax liability with respect to these undistributed foreign earnings is not practicable. Summarized Guarantor Financial Information Basis of Presentation As of December 31, 2021, all of the Company’s outstanding registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company and guaranteed by the Company and Scripps Networks, except for $23 million of senior notes outstanding as of December 31, 2021 that have been issued by Scripps Networks and are not guaranteed. (See Note 8 to the accompanying consolidated financial statements.) DCL primarily includes the Discovery Channel and TLC networks in the U.S. DCL is a wholly owned, indirect subsidiary of the Company. Scripps Networks is also 100% owned by the Company. The tables below present the summarized financial information as combined for Discovery, Inc. (the “Parent”), Scripps Networks and DCL (collectively, the “Obligors”). All guarantees of DCL's senior notes (the “Note Guarantees”) are full and unconditional, joint and several and unsecured, and cover all payment obligations arising under the senior notes. Note Guarantees issued by Scripps Networks or any subsidiary of the Parent that in the future issues a Note Guarantee (each, a “Subsidiary Guarantor”) may be released and discharged (i) concurrently with any direct or indirect sale or disposition of such Subsidiary Guarantor or any interest therein, (ii) at any time that such Subsidiary Guarantor is released from all of its obligations under its guarantee of payment by DCL, (iii) upon the merger or consolidation of any Subsidiary Guarantor with and into DCL or the Parent or another Subsidiary Guarantor, or upon the liquidation of such Subsidiary Guarantor and (iv) other customary events constituting a discharge of the Obligors’ obligations. 53 Summarized Financial Information The Company has included the accompanying summarized combined financial information of the Obligors after the elimination of intercompany transactions and balances among the Obligors and the elimination of equity in earnings from and investments in any subsidiary of the Parent that is a non-guarantor (in millions). [[GREPCENT_TABLE]] [["","","December 31, 2021"],["Current assets","","$","4,452"],["Non-guarantor intercompany trade receivables, net","","85"],["Noncurrent assets","","5,969"],["Current liabilities","","1,018"],["Noncurrent liabilities","","15,778"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2021"],["Revenues","","$","2,091"],["Operating income","","1,028"],["Net income","","294"],["Net income available to Discovery, Inc.","","246"]] [[/GREPCENT_TABLE]] Additional information regarding the changes in our outstanding indebtedness and the significant terms and provisions of our revolving credit facility and outstanding indebtedness is discussed in Note 8 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. MATERIAL CASH REQUIREMENTS FROM KNOWN CONTRACTUAL AND OTHER OBLIGATIONS As of December 31, 2021, our significant contractual and other obligations were as follows (in millions). [[GREPCENT_TABLE]] [["","","Total","","Short-term","","Long-term"],["Long-term debt:"],["Principal payments","","$","15,187","","","$","339","","","$","14,848"],["Interest payments","","9,988","","","629","","","9,359"],["Purchase obligations:"],["Content","","5,352","","","1,798","","","3,554"],["Other","","1,611","","","704","","","907"],["Finance lease obligations","","277","","","65","","","212"],["Operating lease obligations","","801","","","84","","","717"],["Pension and other employee obligations","","17","","","3","","","14"],["Total","","$","33,233","","","$","3,622","","","$","29,611"]] [[/GREPCENT_TABLE]] Long-term Debt Principal payments on long-term debt reflect the repayment of our outstanding senior notes, at face value, assuming repayment will occur upon maturity. Interest payments on our outstanding senior notes are projected based on their contractual interest rates and maturity dates. Additionally, DCL's revolving credit facility allows DCL and certain designated foreign subsidiaries of DCL to borrow up to $2.5 billion, including a $150 million sublimit for the issuance of standby letters of credit. Upon the closing of the Combination with WarnerMedia and subject to certain conditions, the available commitments will increase by $3.5 billion, to an aggregate amount not to exceed $6 billion. As of December 31, 2021, we had no outstanding borrowings under the credit facility or the commercial paper program. (See Note 8 to the accompanying consolidated financial statements.) 54 Purchase Obligations Content purchase obligations include commitments and liabilities associated with third-party producers and sports associations for content that airs on our television networks. Production contracts generally require: purchase of a specified number of episodes; payments over the term of the license; and include both programs that have been delivered and are available for airing and programs that have not yet been produced or sporting events that have not yet taken place. If the content is ultimately never produced, our commitments expire without obligation. The commitments exclude content liabilities recognized on the consolidated balance sheet. We expect to enter into additional production contracts and content licenses to meet our future content needs. Other purchase obligations include agreements with certain vendors and suppliers for the purchase of goods and services whereby the underlying agreements are enforceable, legally binding and specify all significant terms. Significant purchase obligations include transmission services, television rating services, marketing commitments and research, equipment purchases, and information technology and other services. Some of these contracts do not require the purchase of fixed or minimum quantities and generally may be terminated with a 30-day to 60-day advance notice without penalty, and are not included in the table above past the 30-day to 60-day advance notice period. Finance Lease Obligations We acquire satellite transponders and other equipment through multi-year finance lease arrangements. Principal payments on finance lease obligations reflect amounts due under our finance lease agreements. Interest payments on our outstanding finance lease obligations are based on the stated or implied rate in our finance lease agreements. Operating Lease Obligations We obtain office space and equipment under multi-year lease arrangements. Most operating leases are not cancelable prior to their expiration. Payments for operating leases represent the amounts due under the agreements assuming the agreements are not canceled prior to their expiration. Pension and Other Employee Obligations We sponsor a qualified defined benefit pension plan (“Pension Plan”) that covers certain U.S.-based employees. We also have a non-qualified Supplemental Executive Retirement Plan (“SERP”). Contractual commitments include payments to meet minimum funding requirements of our Pension Plan in 2022 and estimated benefit payments for our SERP that exceed plan assets. Payments for the SERP have been estimated over a ten-year period. While benefit payments under these plans are expected to continue beyond 2031, we believe it is not practicable to estimate payments beyond this period. We are unable to reasonably predict the ultimate amount of any payments due to cash-settled share-based compensation awards. As of December 31, 2021, the current portion of the liability for cash-settled share-based compensation awards was $17 million. Unrecognized Tax Benefits We are unable to reasonably predict the ultimate amount or timing of settlement of our unrecognized tax benefits because, until formal resolutions are reached, reasonable estimates of the amount and timing of cash settlements with the respective taxing authorities are not practicable. Our unrecognized tax benefits totaled $420 million as of December 31, 2021. Put Rights We have granted put rights to certain consolidated subsidiaries, but we are unable to reasonably predict the ultimate amount or timing of any payment. We recorded the carrying value of the noncontrolling interest in the equity associated with the put rights as a component of redeemable noncontrolling interest in the amount of $363 million. (See Note 11 to the accompanying consolidated financial statements.) Noncontrolling Interest The Food Network and Cooking Channel are operated and organized under the terms of the TV Food Network Partnership (the "Partnership"). We hold interests in the Partnership, along with another noncontrolling owner. The Partnership agreement specifies a dissolution date of December 31, 2022. If the term of the Partnership is not extended prior to that date, the Partnership agreement permits us, as holder of 80% of the applicable votes, to reconstitute the Partnership and continue its business. If for some reason the Partnership is not continued, it will be required to limit its activities to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests. 55 RELATED PARTY TRANSACTIONS In the ordinary course of business, we enter into transactions with related parties, primarily the Liberty Entities and our equity method investees. Information regarding transactions and amounts with related parties is discussed in Note 21 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. NEW ACCOUNTING AND REPORTING PRONOUNCEMENTS We adopted certain accounting and reporting standards during 2021. Information regarding our adoption of new accounting and reporting standards is discussed in Note 2 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to uncertain tax positions, goodwill and intangible assets, content rights, consolidation and revenue recognition. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates. Management considers an accounting estimate to be critical if it required assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on our results of operations. The development and selection of these critical accounting estimates have been determined by management and the related disclosures have been reviewed with the Audit Committee of the Board of Directors of the Company. We believe the following accounting policies are critical to our business operations and the understanding of our results of operations and involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. Uncertain Tax Positions We are subject to income taxes in numerous U.S. and foreign jurisdictions. From time to time, we engage in transactions or take filing positions in which the tax consequences may be uncertain and may recognize tax liabilities based on estimates of whether additional taxes and interest will be due. We establish a reserve for uncertain tax positions unless we determine that such positions are more likely than not to be sustained upon examination based on their technical merits, including the resolution of any appeals or litigation processes. We include interest and where appropriate, potential penalties, as a component of income tax expense on the consolidated statement of operations. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events including the status and results of income tax audits with the relevant tax authorities. Significant judgment is exercised in evaluating all relevant information, the technical merits of the tax positions, and the accurate measurement of uncertain tax positions when determining the amount of reserve and whether positions taken on our tax returns are more likely than not to be sustained. This also involves the use of significant estimates and assumptions with respect to the potential outcome of positions taken on tax returns that may be reviewed by tax authorities. At December 31, 2021, the reserve for uncertain tax positions was $420 million, and it is reasonably possible that the total amount of unrecognized tax benefits related to certain of our uncertain tax positions could decrease by as much as $125 million within the next twelve months as a result of ongoing audits, foreign judicial proceedings, lapses of statutes of limitations or regulatory developments. Goodwill and Intangible Assets Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments (the component level). Reporting units are determined by the discrete financial information available for the component and whether it is regularly reviewed by segment management. Components are aggregated into a single reporting unit if they share similar economic characteristics. Our reporting units are as follows: U.S. Networks, Europe, Latin America, and Asia-Pacific. 56 We evaluate our goodwill for impairment annually as of October 1 or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows, or ongoing declines in market capitalization. If we believe that as a result of our qualitative assessment it is not more likely than not that the fair value of a reporting unit is greater than its carrying amount, a quantitative impairment test is required. The quantitative impairment test requires significant judgment in determining the fair value of the reporting units. We determine the fair value of our reporting units by using a combination of the income approach, which incorporates the use of the discounted cash flow (“DCF”) method and the market multiple approach, which incorporates the use of EBITDA multiples based on market data. For the DCF method, we use projections specific to the reporting unit, as well as those based on general economic conditions, which require the use of significant estimates and assumptions. Determining fair value specific to each reporting unit requires the Company to exercise judgment when selecting the appropriate discount rates, control premiums, terminal growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows, including revenue growth rates and profit margins. The cash flows employed in the DCF analysis for each reporting unit are based on the reporting unit's budget, long range plan, and recent operating performance. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit and market conditions. 2021 Impairment Analysis During the fourth quarter of 2021, the Company performed a qualitative goodwill impairment assessment for all reporting units and it determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values, therefore, no quantitative goodwill impairment analysis was performed Content Rights Content rights principally consist of television series, specials, films and sporting events. Costs of produced and coproduced content consist of development costs, acquired production costs, direct production costs, certain production overhead costs and participation costs and are capitalized if we have previously generated revenues from similar content in established markets and the content will be used and revenues will be generated for a period of at least one year. Linear content amortization expense for each period is recognized based on the revenue forecast model, which approximates the proportion that estimated distribution and advertising revenues for the current period represent in relation to the estimated remaining total lifetime revenues. Digital content amortization for each period is recognized based on estimated viewing patterns as there are no direct revenues to associate to the individual content assets and therefore, number of views is most representative of the use of the title. Judgment is required to determine the useful lives and amortization patterns of our content assets. Critical assumptions used in determining content amortization include: (i) the grouping of content with similar characteristics, (ii) the application of a quantitative revenue forecast model or viewership model based on the adequacy of historical data, (iii) determining the appropriate historical periods to utilize and the relative weighting of those historical periods in the forecast model, (iv) assessing the accuracy of our forecasts and (v) incorporating secondary streams. We then consider the appropriate application of the quantitative assessment given forecasted content use, expected content investment and market trends. Content use and future revenues may differ from estimates based on changes in expectations related to market acceptance, network affiliate fee rates, advertising demand, the number of cable and satellite television subscribers receiving our networks, the number of subscribers to our digital services, and program usage. Accordingly, we continually review our estimates and planned usage and revise our assumptions if necessary. Consolidation We have ownership and other interests in and contractual arrangements with various entities, including corporations, partnerships, and limited liability companies. For each such entity, we evaluate our ownership, other interests and contractual arrangements to determine whether we should consolidate the entity or account for its interest as an investment at inception and upon reconsideration events. As part of its evaluation, we initially determine whether the entity is a variable interest entity ("VIE"). Management evaluates key considerations through a qualitative and quantitative analysis in determining whether an entity is a VIE including whether (i) the entity has sufficient equity to finance its activities without additional financial support from other parties, (ii) the ability or inability to make significant decisions about the entity’s operations, and (iii) the proportionality of voting rights of investors relative to their obligations to absorb the expected losses (or receive the expected returns) of the entity. If the entity is a VIE and if we have a variable interest in the entity, we use judgment in determining if we are the primary beneficiary and are thus required to consolidate the entity. In making this determination, we evaluate whether we or another party involved with the VIE (1) has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) has the obligation to absorb losses of or receive benefits from the VIE that could be significant to the VIE. 57 If it is concluded that an entity is not a VIE, we consider our proportional voting interests in the entity and consolidate majority-owned subsidiaries in which a controlling financial interest is maintained. A controlling financial interest is determined by majority ownership and the absence of substantive third-party participation rights. Key factors we consider in determining the presence of substantive third-party participation rights include, but are not limited to, control of the board of directors, budget approval or veto rights, or operational rights that significantly impact the economic performance of the business such as programming, creative development, marketing, and selection of key personnel. Ownership interests in unconsolidated entities for which we have significant influence are accounted for as equity method. We evaluated reconsideration events during the year ended December 31, 2021 and concluded there were no changes to our consolidation assessments. Revenue Recognition As described in Note 2, we generate advertising revenues primarily from advertising sold on our television networks, authenticated TVE applications, DTC subscription services and websites and distribution revenues from fees charged to distributors of our network content, which include cable, direct-to-home satellite, telecommunications and digital service providers and bundled long-term content arrangements, as well as through DTC subscription services. A substantial portion of the advertising contracts in the U.S. and certain international markets guarantee the advertiser a minimum audience level that either the program in which their advertisements are aired or the advertisement will reach. These advertising campaigns are considered to represent a single, distinct performance obligation. For such contracts, judgment is required in measuring progress across the Company’s single performance obligation. Various factors such as pricing specific to the channel, daypart and targeted demographic, as well as estimated audience guarantees, are considered in determining how to appropriately measure progress across the campaigns. Revenues are ultimately recognized based on the audience level delivered multiplied by the average price per impression. See Item 1A, "Risk Factors" for details on significant risks that could impact our ability to successfully grow our cash flows. For an in-depth discussion of each of our significant accounting policies, including our critical accounting policies and further information regarding estimates and assumptions involved in their application, see Note 2 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.