Filing identity and reporting period
Important identity mismatch: The supplied filing is Discovery Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed February 17, 2012. It is not a Warner Bros. Discovery, Inc. filing. The filing includes unaudited quarterly data, including Q4 2011, but reports full-year results.
Discovery was a global nonfiction media company, with U.S. Networks, International Networks, and Education and Other segments. Its programming reached more than 1.7 billion cumulative subscribers worldwide. All financial figures below are in U.S. dollars; amounts are in millions except per-share data.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $4,235 | $3,773 | +12% |
| Operating income | $1,799 | $1,360 | +32% |
| Net income attributable to Discovery | $1,132 | $653 | +73% |
| Diluted EPS | $2.80 | $1.52 | +84% |
| Adjusted OIBDA | $1,914 | $1,699 | +13% |
| Cash from operating activities | $1,100 | $668 | +65% |
- Distribution revenue was $2,070 million (+13%); advertising revenue was $1,852 million (+13%); other revenue was $313 million (+6%). Management cited contractual rate increases, subscriber growth, international expansion, stronger advertising pricing and sellouts, and library-content licensing.
- Operating margin was approximately 42.5% versus 36.0%; net margin was approximately 26.8% versus 17.3%. Adjusted OIBDA margin was approximately 45.2% versus 45.0%. Margins are calculated from reported figures.
- Segment revenue and Adjusted OIBDA: U.S. Networks $2,619 million and $1,495 million; International Networks $1,455 million and $645 million; Education and Other $162 million and $23 million. International Networks had the fastest revenue growth, up 16%.
- At December 31, 2011, cash and equivalents were $1,048 million, total assets $11,913 million, and total liabilities $5,394 million. Current assets were $2,431 million and current liabilities $746 million.
- Debt was approximately $4.2 billion, including capital leases; reported long-term debt net of discount was $4,245 million. Cash less reported debt implies net debt of roughly $3.2 billion. The $1.0 billion revolving facility had no borrowings and approximately $999 million unused capacity. The company reported covenant compliance.
- Content rights totaled $1,395 million net. Goodwill was $6,291 million. Equity-method investments were $807 million, up from $455 million, including increased funding related to OWN.
Material changes and unusual items
- FY 2011 revenue increased $462 million and operating income rose $439 million. Content expense and impairment/amortization charges increased; reported costs of revenue rose 15%.
- Net income included a $129 million pretax gain from contributing the domestic Discovery Health network to OWN and a $112 million tax benefit from previously unrecognized foreign tax credits. The effective tax rate was 27%, versus 31% in 2010.
- FY 2010 included a $136 million loss on extinguishment of debt related to refinancing. The 2011 comparison is also affected by no longer consolidating Discovery Health after its contribution to OWN; management provided comparative discussion accounting for that change.
- In 2011, Discovery repurchased 27 million Series C shares for $997 million. Remaining repurchase authorization was $898 million at year-end; a further $103 million of repurchases occurred through February 10, 2012. No cash dividends had been paid, and none were planned at that time.
- Reported Q4 2011 revenue was $1,122 million, operating income $421 million, and net income available to stockholders $336 million. The quarter included the $112 million tax benefit.
Liquidity, outlook, risks and contingencies
- Management stated that cash, operating cash flow, and available borrowing capacity should cover anticipated operating requirements for at least 12 months. It planned to continue significant investment in content.
- For 2012, management expected approximately $215 million of interest payments and capital lease obligations and $60 million of capital expenditures. It also expected tax payments to increase significantly following expiration of a tax provision allowing immediate deduction of certain domestic programming costs. No specific revenue or earnings guidance was provided.
- Discovery expected to continue providing significant funding to equity-method investees, particularly OWN. Its OWN note receivable, including accrued interest, was $312 million; OWN’s early results were below its initial business plan. Discovery said future OWN losses could exceed its equity balance and could result in Discovery recognizing 100% of future losses under the described circumstances.
- Harpo held a right to require Discovery to purchase its OWN interest at fair value beginning in 2016; no liability was recorded. Discovery also guaranteed certain performance levels for The Hub through 2015; maximum potential exposure was less than $160 million at year-end, declining to zero during 2015.
- Contractual obligations totaled $8,285 million, including $4,150 million of debt principal, $2,702 million of debt interest, and $402 million of content purchase obligations. Separate funding commitments to equity-method investees were up to $234 million, of which $209 million had been funded. The filing said there were no material off-balance-sheet arrangements.
- Key risks include dependence on audience acceptance and advertising demand; distributor concentration and negotiations (about 90% of U.S. distribution revenue came from the top 10 distributors); three major U.S. distribution agreements expiring at the end of 2012; competition and changing digital viewing behavior; leverage; foreign exchange and international-market exposure; piracy; and the performance and funding needs of ventures such as OWN.
- Management said routine litigation was not expected to materially affect financial position, results, or liquidity. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Correct issuer and period: Confirm whether the intended security is Discovery Communications, Inc. in 2011, rather than Warner Bros. Discovery, Inc.; the supplied filing does not match the request metadata.
- Earnings quality: Separate recurring operating performance from the $129 million OWN contribution gain and $112 million tax benefit; assess the effect of Discovery Health deconsolidation and the growth in content costs.
- Distribution renewals: Track renewal terms and outcomes for the three large U.S. distributor agreements expiring at year-end 2012.
- OWN exposure: Verify ongoing funding, operating losses, repayment prospects on the $312 million note, and the contingent put right.
- Capital allocation and leverage: Review the impact of $997 million of buybacks on cash and debt, remaining repurchase plans, debt maturities and covenants, and the stated 2012 tax and funding needs.