Filing summary
Company and period: The filing is Discovery, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2020. The supplied metadata names Warner Bros. Discovery, Inc., but that is not the registrant identified in this filing. Discovery operated U.S. Networks and International Networks, distributing television and digital content.
Financial results
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the three months ended March 31, 2019.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2,683 | $2,707 | Down 1%; flat excluding foreign exchange |
| Advertising revenue | $1,402 | $1,415 | Down 1%; flat excluding foreign exchange |
| Distribution revenue | $1,223 | $1,224 | Flat; up 1% excluding foreign exchange |
| Operating income | $779 | $774 | Up 1% |
| Operating margin | 29.0% | 28.6% | Up 0.4 percentage points |
| Adjusted OIBDA | $1,113 | $1,159 | Down 4% |
| Net income attributable to Discovery | $377 | $384 | Down 2% |
| Diluted EPS | $0.55 | $0.53 | Up from $0.53 |
| Cash from operations | $335 | $542 | Down $207 |
Adjusted OIBDA margin was 41.5%, versus 42.8% a year earlier. Management attributed the decline in operating cash flow primarily to working-capital needs, including content investment, higher operating costs for next-generation initiatives, and higher cash taxes.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $1,453; cash, cash equivalents, and restricted cash totaled $1,534.
- Total debt was $15,995 gross, or $15,874 net of unamortized discounts, premiums, and issuance costs. Noncurrent debt was $15,267, with $607 classified as current.
- The company drew $500 under its $2.5 billion revolving credit facility in March to increase liquidity. At quarter-end, $1,999 of facility capacity remained available, subject to the facility’s terms; no commercial paper was outstanding.
- Management said cash, operating cash generation, and available credit were expected to fund needs for the next 12 months. The company had $600 of senior notes due in June 2020 and $640 due in June 2021.
- Operating, investing, and financing activities provided (used) cash of $335, $(70), and $(259), respectively. Financing included the $500 revolver draw and $527 of stock repurchases.
Material changes and unusual items
- U.S. Networks revenue was $1,756, essentially flat, while Adjusted OIBDA fell 4% to $1,016. International Networks revenue declined 3% reported but was flat excluding foreign exchange; Adjusted OIBDA declined 5% reported and 2% excluding foreign exchange.
- U.S. Networks distribution revenue rose 2%, but portfolio subscribers were 6% lower year over year. International results reflected foreign-exchange headwinds and certain discontinued pay-TV distribution, partly offset by growth in licensing and next-generation offerings.
- Other expense was $58 versus $27 a year earlier, including $22 of unrealized losses on equity securities and $27 of net derivative losses. Equity-method investments recorded a $21 loss, compared with $11 of income in Q1 2019.
- Depreciation and amortization fell 12%, mainly because an advertising-revenue-backlog intangible from the Scripps acquisition had been fully amortized in Q1 2019. Restructuring and other charges rose to $15 from $5, primarily reflecting employee termination costs.
- Discovery repurchased 19.4 million Series C shares for $523, at an average $26.87 per share. Its board authorized an additional $2 billion of repurchases after completion of the existing $1 billion authorization.
- Comprehensive income attributable to Discovery was $77, down from $304, reflecting currency translation and derivative-related other comprehensive losses.
Outlook, commentary, and risks
- COVID-19 had not caused significant business disruption in Q1, but management said the pandemic’s future impact on results, financial position, and cash flows could not be reasonably estimated. Production partners had shut down, and cancelled or postponed sporting events were eliminating or deferring related revenue and costs.
- The Tokyo Olympics postponement was expected to shift Olympic-related revenue and significant expenses from 2020 to 2021. Management identified potential advertising declines, production delays, reduced subscriber or distribution revenue, and pressure on customers and business partners as risks.
- Management pursued travel, marketing, production, and other cost reductions, and said remote working had not materially affected operations to date. No specific earnings or revenue guidance was provided.
- On April 30, 2020, after quarter-end, the company amended its revolving-credit covenants, temporarily raising maximum permitted leverage thresholds and restricting certain cash payments unless leverage is at or below 4.50:1. The amendment also raised minimum interest-rate floors. The filing says the company was covenant-compliant at March 31.
- Management recorded no impairment of goodwill, other intangibles, deferred tax assets, programming assets, or receivables at March 31. It highlighted uncertainty around COVID-19 and the Europe reporting unit, whose goodwill headroom had been 19% in the October 2019 assessment.
- Tax audits and uncertain tax positions remain potential contingencies: reserves were $380, and the company said unrecognized tax benefits could decrease by as much as $129 within 12 months. Management did not expect routine legal matters to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Discovery, Inc., not Warner Bros. Discovery, Inc.
- Track subsequent advertising demand, production restarts, subscriber trends, and the timing and financial effects of the postponed Olympics.
- Review liquidity and refinancing of the $600 June 2020 maturity, the $640 June 2021 maturity, and compliance with the amended credit covenants.
- Assess whether the repurchase pace and distributions to noncontrolling interests remain appropriate given debt, cash flow, and pandemic uncertainty.
- Monitor the Europe reporting unit’s goodwill recoverability, foreign-exchange effects, and credit losses on advertising and distribution receivables.