Business context and reporting period
The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014, filed July 31, 2014. It is not a filing by Warner Bros. Discovery, Inc.; the issuer named in the source is Discovery Communications, Inc. The company operated U.S. Networks, International Networks, and Education businesses.
Financial results and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,610 | $1,467 | $3,021 | $2,623 |
| Operating income | $640 | $549 | $1,074 | $965 |
| Net income | $384 | $300 | $615 | $531 |
| Net income available to Discovery stockholders | $379 | $300 | $609 | $531 |
| Diluted EPS | $1.09 | $0.82 | $1.74 | $1.45 |
| Adjusted OIBDA | $694 | $653 | $1,219 | $1,153 |
| Cash from operating activities | — | $473 | $470 |
Q2 revenue increased 10% and operating income increased 17% year over year; six-month revenue rose 15% and operating income 11%. Q2 operating margin was approximately 39.8%, versus 37.4% a year earlier; six-month operating margin was approximately 35.6%, versus 36.8%. These margins are calculated from reported revenue and operating income.
At June 30, cash was $372, total debt net of discount was $7,074, and the current portion of debt was $1,029. The company reported $162 of commercial paper outstanding, no revolver borrowings, and $1,337 of unused revolver capacity; its capital-resources table showed total unused capacity and cash of $1,709. Total assets were $16,105 and total liabilities were $9,473. Management said cash, operating cash flow, and revolver availability were expected to fund needs for the next 12 months.
Material changes versus the prior comparable period
- Reported revenue growth reflected acquisitions as well as underlying performance. Excluding foreign-exchange effects and newly acquired businesses, revenue increased 6% in both Q2 and the first half; Adjusted OIBDA increased 4% in Q2 and 3% in the first half.
- International Networks was the main growth engine: reported segment revenue increased 23% in Q2 and 34% for the first half. Excluding acquisitions and foreign exchange, revenue increased 15% and 13%, respectively. U.S. Networks revenue was down 2% in Q2 and approximately flat for the first half; first-half segment Adjusted OIBDA was flat at $849.
- Advertising revenue increased 13% in Q2 and 22% for the first half; management attributed underlying growth to pricing and, internationally, ratings. Costs of revenues rose 18% in Q2 and 28% for the first half, reflecting content investment and acquisition-related activity.
- Cash from operations was nearly unchanged year over year. Investing cash outflow fell to $303 from $1,964, chiefly because prior-year acquisition spending was substantially higher. Financing cash flow was a $201 outflow versus a $680 inflow, including $769 of common-stock repurchases in the first half.
- Debt net of discount rose from $6,499 at year-end 2013 to $7,074 at June 30, 2014. The current portion increased to $1,029, principally reflecting the $850 senior notes due in June 2015 and commercial paper.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management expected available cash, operating cash flow, and revolver availability to be sufficient for the coming 12 months.
- Acquisitions and disposition: Discovery acquired control of Eurosport International for approximately $349 cash, recognizing a $29 remeasurement gain on its previously held stake. TF1’s remaining 49% interest carries put rights, with a $558 redeemable noncontrolling interest recorded. The company also agreed to acquire 50% of All3Media for approximately $153, with closing expected in September 2014, and sold HowStuffWorks for $45, recording a $31 pretax gain.
- Contingencies and investments: Discovery’s advances and note receivable from OWN totaled $461. Management noted OWN’s earlier results were below its initial plan and continued to monitor recoverability, though no impairment was recorded in the first half. The company also identified potential impairment risk if the Hub Network’s performance initiatives do not succeed. It had a Hub performance guarantee with a maximum potential payment below $25 at quarter-end.
- Market and operating risks: The company reported a $7 foreign-currency remeasurement loss related to Venezuelan bolivar assets and held approximately $21 of such assets exposed to further devaluation and repatriation uncertainty. It also noted U.S. distribution revenue concentration among major distributors: about 90% of domestic distribution revenue came from the top 10 distributors, and major U.S. carriage agreements began expiring in 2014.
- Other items: A planned $110 preferred-stock repurchase was expected around August 4, 2014. The board-approved share dividend was scheduled for August 6, 2014; reported per-share figures were pre-split. Management said disclosure controls were effective and that risk factors had not materially changed since year-end 2013.
Important facts for investors to verify
- Confirm issuer identity: the supplied 10-Q is for Discovery Communications, Inc., not Warner Bros. Discovery, Inc.
- Separate acquired-business and foreign-exchange contributions from underlying growth, particularly for International Networks.
- Review the maturity and refinancing implications of the $850 senior notes due June 2015, commercial paper, and total debt.
- Assess the potential cash cost and timing of TF1’s Eurosport put rights, the All3Media transaction, and ongoing repurchases.
- Monitor OWN and Hub investment recoverability, Venezuelan currency exposure, and renewals of major distributor agreements.