We can start with the impairment itself, announced as part of Warner Bros.’ second-quarter earnings release filed on Aug. 7. The company declared an impairment of $9.1 billion for its Networks division, which includes operations such as cable TV and other broadcast television operations, both in the United States and abroad.

OK, it’s not news that traditional television has been taking it in the teeth lately, as consumers cut the cable in favor of streaming services. But what exactly caused Warner Bros. to declare a goodwill impairment now, barely two years after the company came into being with the merger of Discovery Inc. and the Warner Media business of AT&T ($T) back in April 2022? 

This is a question worth considering because that merger involved a lot of goodwill — $22.1 billion in a deal with a total value of $42.4 billion, according to the purchase price allocation disclosed by Warner Bros. See Figure 1, below.

So if Warner Bros. is already impairing such a significant part of the deal, could further impairments lurk somewhere down the road? Exactly how bad has business in its Networks segment been, anyway? Could astute analysts have anticipated this impairment landmine and sidestepped it? 

That’s what we wanted to know.

Start With Fair Value Disclosures

Companies are supposed to review their goodwill assets annually and, when necessary, test those assets for possible impairment. An impairment could be triggered by a sudden, specific event (say, a subsidiary that loses exclusive rights to a key product); or by a long, steady, irreversible decline in value of a certain asset or the company’s share price.

According to its footnote disclosure about goodwill, Warner Bros. experienced both triggers. First, and as you may have seen in the news, the network lost its rights to broadcast NBA games; that is one of those sudden, specific events that dramatically weaken the value of the business. (Warner Bros. is now suing the NBA and its decision to broadcast the games on Amazon.) 

More interesting to financial analysts, however, are the criteria Warner Bros. used to monitor the long-term value of its Networks division — exactly the sort of details that could signal potential future trouble, if analysts know where to look and what those signals mean.

There in the goodwill footnote, Warner Bros. disclosed two critical assumptions:

• A long-term growth rate for the Networks division of negative 3 percent.

• A discount rate of 10.5 percent, “reflective of the risks inherent in the future cash flows of the reporting unit and market conditions.” 

Yikes. Taken together, those two assumptions telegraph to investors that Warner Bros. knows that the future of Networks division is only going down. Then came the dust-up over NBA broadcast rights, making matters all the worse.

In other words, astute readers of Warner Bros. financial statements could have anticipated that a goodwill impairment was possible, if you were reading the footnotes and paying attention to external events (the NBA fight) streaking across the headline. Sometimes, when you have 2 and 2, you can calculate that the answer is 4.

More Tricky: Segment Disclosures

Warner Bros. also reports revenue according to three major operating segments: Studios (making content), DTC (direct-to-consumer streaming services), and that troubled Networks division. See Figure 2, below.

Using our show-tag-history feature, we then traced the Network segment’s revenues for the last two years (back to when Warner Bros. Discovery was born in April 2022). As you can see in Figure 3, below, segment revenue has zig-zagged down pretty much from birth, and the trend line in red is alarmingly steep.

You can find even more detail about the Networks segment (and Warner Bros.’ other two segments) if you read the earnings release directly. There, the company breaks down specific lines of business within each segment, complete with comparables to prior periods.

Unfortunately these details are only displayed in a PDF image, so they can’t be indexed for easy and immediate display. But if you know where they are, you can read them and see that the Networks segment is staggering along with a pretty bad limp. See below.

That’s enough for today, but we’ll have more about this impairment in another post — including a look at what other entertainment companies are reporting these days, and how to compare disclosures to suss out what’s what.