S&P Global Ratings adjusts reported financials in our analysis of credit metrics in line with our methodologies, in part to increase comparability. Here, we provide the annual update to our analytical adjustments for EBITDA, free operating cash flow (FOCF), and debt for the five major U.S. media companies we rate: Fox Corp., Netflix Inc., Paramount Global, The Walt Disney Co., and Warner Bros. Discovery Inc. (Previous versions of this article were titled, "Calculating Leverage For Large U.S. Media Companies." See Related Research section for more details.)

We have historically favored leverage in evaluating the credit quality of the U.S. media companies. However, we recognize the limitation of using leverage as the main metric because generally accepted accounting principles (GAAP) EBITDA is not a perfect measure of cash flows given the way programming costs are expensed over time (amortized) rather than expensed when cash is paid. The growth in streaming and decline in legacy linear TV is exacerbating this effect, which will disproportionately impair the media industry's cash flows. Therefore, earlier this year, we added FOCF-to-debt ratio to our analysis, which we believe will better capture this difference. We note that companies with both leverage and FOCF-to-debt thresholds will have to meet BOTH metrics.

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Frequently Asked Questions

What debt adjustments does S&P Global Ratings make for the five major U.S. media companies?

Many of our adjustments to a company's as-reported debt balance--such as the tax-effected unfunded portion of pension and other post-employment benefits (OPEB), operating lease debt, and netting of accessible cash and liquid investments--are common across most corporate issuers. However, we make several less-common adjustments to debt for these companies. The most significant involve the put options to purchase minority stakes in investments and joint ventures (usually disclosed within redeemable noncontrolling interests). The largest such adjustment is Disney's put/call option for Hulu, which was $8.743 billion as of Jan. 1, 2023. For more details on our methodology and adjustments, see "Corporate Methodology: Ratios And Adjustments," published April 1, 2019 on RatingsDirect.

How does S&P Global Ratings treat one-time restructuring and programming charges?

Companies report restructuring charges each year. Some are seemingly recurring, such as severance due to headcount reductions. Others are more transformational and are the result of major companywide reorganizations or mergers. We break restructuring charges into three buckets, some of which we add back to EBITDA and some we consider the cost of doing business. We don't exclude these latter costs from our EBITDA calculation:

• General restructuring costs, including severance and exit costs, as ongoing costs so we include them in EBITDA.
• Programming charges or write-downs of ongoing operational costs. These charges are specific to programming investments either abandoned before completion or written down because the project is no longer likely to generate revenues it once expected.
• Large mergers and acquisitions (M&A)--such as Discovery's merger in 2022 with Warner Media--which we consider transformational events, so we add those specific merger-related costs back to EBITDA. The merger-related costs also include cost-transformation initiatives. However, we generally only consider merger-related costs incurred in the first year of a transaction. Only in specific cases do we extend this beyond the first year. One example is Disney's Twenty-First Century Fox Inc. (TFCF) acquisition. Given the complexity of that merger, we added back merger-related costs through the quarter ended in September 2020.

Why does S&P Global Ratings use as-reported EBITDA instead of cash EBITDA?

Cost accounting for film and TV series allows for costs associated with a project to be capitalized and then amortized at the same pace as revenues are recognized. (Note that even though this is called programming or content amortization, we view this as an operating cost and treat such amortization as a cost of sales.) Cash costs, meanwhile, are recognized as spent.

As a result, cash programming costs often differ in timing and amount from GAAP programming costs. For companies expanding their programming investments, cash programming costs will exceed GAAP costs. For those companies with programming investments that have reached a steady state, GAAP costs equal cash costs. Some would argue that substituting cash costs for GAAP costs would make cash EBITDA a more accurate measure of cash flow.

We choose to stick with as-reported EBITDA for three reasons:

• To maintain a consistent definition for EBITDA across all sectors and companies;
• Cash EBITDA is more volatile than as-reported EBITDA; and
• The disclosure of programming costs among media companies is inconsistent.

Some companies disclose both cash and amortized programming costs, a few others disclose only the difference between the two, and some don't disclose them at all.

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How do we treat the step-up of the fair value of content due to an acquisition?

We do not treat this as an operating cost, which occurs because accounting rules require that the purchase price be allocated across the acquired company's assets. More often than not, a significant portion of this value is allocated to goodwill, but also across the acquired company's assets including intangibles (intellectual property, trademarks); property, plant, and equipment; and inventory. With media companies, it's also their film and TV content libraries. We find EBITDA useful to our credit analysis because it reflects underlying profitability. Including the step-up amount in cost of goods sold would, in our opinion, distort EBITDA and thus our profitability analysis. Therefore, we don't include amortization or expenses related to fair value step-up in our EBITDA calculation.

When a company buys or merges with another, does S&P Global Ratings assess the rating based on pro forma adjusted leverage?

We generally don't assess the impact of M&A on ratings using pro forma EBITDA unless there's a compelling reason. Company-provided pro forma financial statements allow for a more representative measure of full-year performance and more meaningful ratios. Still, pro forma has several limitations. First, it reflects the financial performance of the acquisition under a different management team, so at best it's an approximation of how the larger company will perform. Each company may have somewhat different accounting standards, especially for how they amortize programming costs. Also, pro forma estimates that companies provide to the market reflect recognition of all immediate synergies. Most synergies are realized over time (and some may not be achieved at all), and most companies' pro forma guidance don't include the costs (such as severance or restructuring) they will incur to achieve them. For example, Paramount Global's original 2020 pro forma guidance for the new company recognized all $750 million in expected synergies, even though the company expected to achieve those synergies over three years.

How does S&P Global Ratings treat programming guarantees?

We don't consider these obligations to be debt. We believe they are future operating costs that will be paid with future cash flow. In addition, if a media company defaults on its programming obligations, we believe these contracts would be voided. Depending on how attractive the programming guarantee is, the owner could easily sell those rights to a third party.

How does S&P Global Ratings calculate EBITDA for diversified media companies?

We define S&P Global Ratings-adjusted EBITDA as a company's revenues minus operating expenses (excluding depreciation, amortization, and noncurrent asset impairment and impairment reversals). We include cash dividends a company may receive from investments accounted for under the equity method and exclude its share of these investees' profits. We also exclude share-based compensation expense payable in shares. We add back acquisition-related transformational or M&A restructuring costs in our EBITDA calculation and don't exclude current asset impairments and write-downs. We treat programming amortization as a cost of sales (an operating cost) and therefore include the amortization (and any related write-downs) in our EBITDA calculation. Our adjustments to EBITDA include the interest and depreciation expenses associated with capitalizing operating leases.

How frequently does S&P Global Ratings update its adjustments?

We update our adjustments for pension and OPEB each year, when the companies release their annual Form 10-K reports. However, we make midyear adjustments when they're deemed material. For example, we made an adjustment for Disney, which closed on its acquisition of TFCF on March 20, 2019, after disclosing its revised pension and operating lease liabilities. We update all other adjustments quarterly.

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Related Criteria

• Criteria | Corporates | General: Corporate Methodology, Jan. 7, 2024
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

Related Research

• Credit FAQ: Calculating Leverage For Large U.S. Media Companies (2023 Update), March 13, 2023