Discovery, Inc. Form 10-Q Summary
Entity and period: The supplied filing is Discovery, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2020, not a filing under the Warner Bros. Discovery name. Discovery operated U.S. Networks and International Networks segments.
Financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the same 2019 period.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,561 | $2,678 | $7,785 | $8,270 |
| Operating income | $531 | $619 | $2,027 | $2,304 |
| Operating margin | 20.7% | 23.1% | 26.0% | 27.9% |
| Adjusted OIBDA | $954 | $1,126 | $3,194 | $3,566 |
| Net income attributable to Discovery | $300 | $262 | $948 | $1,593 |
| Diluted EPS | $0.44 | $0.35 | $1.40 | $2.21 |
| Operating cash flow | Not separately presented for the quarter | $2,186 | $2,167 |
- Q3 revenue fell 4%; advertising declined 8%, distribution was flat, and other revenue declined 13%. For the first nine months, revenue fell 6%, led by a 10% advertising decline; distribution was approximately flat as reported.
- Q3 adjusted OIBDA fell 15% and operating income fell 14%. Nine-month adjusted OIBDA declined 10% and operating income declined 12%. Adjusted OIBDA margin was approximately 37.3% in Q3 versus 42.0%, and 41.0% for the nine months versus 43.1%.
- Q3 net income attributable to Discovery increased 15% despite lower operating income, in part because income taxes were a benefit of $11 million, compared with tax expense of $147 million a year earlier. Nine-month attributable net income fell 40%; 2019 included a one-time, noncash $457 million deferred tax benefit from legal-entity restructuring.
- Cash provided by operations was $2.186 billion for the first nine months, versus $2.167 billion. Investing used $550 million and financing used $1.272 billion; cash, cash equivalents and restricted cash ended at $1.956 billion.
- At September 30, cash and cash equivalents were $1.893 billion; debt was $15.764 billion gross and $15.317 billion net of unamortized discount, premium and issuance costs. Current debt was $336 million. The $2.5 billion revolving facility and commercial paper program had no borrowings outstanding; the company reported covenant compliance. Current assets of $5.478 billion exceeded current liabilities of $2.756 billion.
Material changes and management commentary
- COVID-19 reduced advertising demand, disrupted production and shifted or postponed sporting-event revenue and costs. Management said advertising demand eased slightly in Q3 and most third-party production partners restarted; production restarts also brought additional safety costs. The Tokyo Olympics postponement shifted related revenue and significant expenses into 2021.
- U.S. Networks Q3 revenue decreased 4% and adjusted OIBDA 5%; U.S. portfolio subscribers were 6% below the prior-year level. International Networks revenue decreased 5% and adjusted OIBDA 46% (41% excluding foreign-exchange effects), reflecting advertising weakness, distribution losses and sports-event timing.
- The company recorded $38 million of goodwill and intangible impairment in the first half, including a $36 million Asia-Pacific goodwill write-off; no impairment was recorded in Q3. Europe and Asia-Pacific goodwill valuation headroom was below 20% at quarter-end, and management said estimates could change.
- Restructuring and other charges were $53 million in Q3 and $75 million for the nine months, versus $8 million and $20 million, respectively, in 2019. Cost reductions, including personnel actions, were expected to continue through the rest of 2020 and into 2021; total future costs were not reasonably estimable because plans were unfinished.
- In 2020, Discovery issued $2 billion of 2030 and 2050 notes and used proceeds for a $1.5 billion debt tender and repayment of a $500 million revolver draw. In September it exchanged $1.4 billion of older notes for $1.7 billion face amount of 2055 notes, before a $318 million debt discount. The exchange extended maturities but did not represent a comparable reduction in stated principal.
- Management expected cash, operating cash generation and credit-facility availability to cover needs for the next 12 months. The company also repurchased $741 million of Series C stock in the first nine months, and had $1.612 billion remaining under its repurchase authorizations at September 30.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or cash-flow guidance. Management said the full financial effect of COVID-19 could not be reasonably estimated, citing uncertainty around future outbreaks, restrictions, advertising spending, production capacity, sports schedules and customer payment ability. Other risks include secular pay-TV subscriber declines, affiliate renewals and rates, foreign-exchange movements, access to capital, debt levels and the recoverability of goodwill and content assets. Management did not expect routine legal matters to have a material adverse effect. Put rights granted to certain subsidiary minority holders may be exercised beginning in 2021; redeemable noncontrolling interests were $443 million.
Most important facts for investors to verify
- Confirm the filing entity: this is Discovery, Inc., despite the request metadata naming Warner Bros. Discovery.
- Track whether advertising demand and production activity recover, and how the Olympic revenue and cost shift affects 2021.
- Monitor International Networks performance, U.S. subscriber trends, and the impact of affiliate-rate changes.
- Review debt maturities, the 2055 exchange-note discount, covenant thresholds and the company’s ability to sustain liquidity and capital returns.
- Assess the sensitivity of Europe and Asia-Pacific goodwill valuations to operating forecasts and COVID-19 assumptions.