Filing identity and reporting period
Important: The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017—not a filing under the Warner Bros. Discovery, Inc. name. The figures below summarize the filing as submitted and should not be attributed to a later Warner Bros. Discovery entity without verifying corporate history and comparability. Unless otherwise noted, amounts are in millions of dollars.
Discovery operated U.S. Networks, International Networks, and Education and Other businesses, distributing media content across pay-TV, free-to-air, broadcast, digital platforms, and licensing channels.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $1,613 | $1,561 | +3% |
| Operating income | $487 | $489 | Approximately flat |
| Net income | $221 | $269 | -18% |
| Net income available to Discovery | $215 | $263 | -18% |
| Diluted earnings per share | $0.37 | $0.42 | Down |
| Adjusted OIBDA | $603 | $574 | +5% |
| Cash from operating activities | $255 | $62 | Increased |
Distribution revenue rose 7% to $855; advertising revenue was unchanged at $687; other revenue declined 3% to $71. Operating margin was approximately 30.2% versus 31.3% a year earlier; net margin was approximately 13.7% versus 17.2%. Adjusted OIBDA margin was approximately 37.4% versus 36.8% (a non-GAAP measure).
Operating cash flow improved, but investing activities used $224 (including $188 of investment payments and $47 of property and equipment purchases), while financing activities used $84. Cash declined by $33 during the quarter to $267. The filing attributes much of the operating cash flow improvement to operating performance, lower cash taxes due mainly to timing, and a smaller adverse foreign-currency effect.
At March 31, 2017, total debt was $8,160 before $58 of unamortized discounts and issuance costs; reported debt net of those costs was $8,102, including $132 current and $7,970 noncurrent. Cash was $267. The company had $575 outstanding on its revolving credit facility and $102 of commercial paper; reported unused revolving capacity was $1,322 after outstanding commercial paper and letters of credit. The company reported compliance with credit covenants.
Total assets were $15,862 and total liabilities were $10,278. The effective tax rate was 20%, compared with 29% in Q1 2016; the 2017 rate benefited principally from renewable-energy investment tax credits.
Material changes and segment results
- U.S. Networks revenue rose 3% to $829 and Adjusted OIBDA rose 6% to $501. Distribution growth from contractual rate increases was partly offset by slight subscriber declines; advertising gains from pricing were partly offset by lower audience delivery.
- International Networks revenue rose 5% to $747 and Adjusted OIBDA rose 7% to $194. Excluding foreign-exchange effects, revenue increased 8% and Adjusted OIBDA 4%. Distribution growth reflected rate increases and subscriber gains, while content costs rose, particularly for sports rights and production.
- Education and Other revenue declined 16% to $37; Adjusted OIBDA was a loss of $6 versus a loss of $1. Management cited increased education investment and studio activity timing.
- Net income was pressured by a $54 debt-extinguishment loss, equity-investee losses of $53 versus $8 a year earlier, higher interest expense, increased restructuring charges ($24 versus $6), and the absence of the prior-year $13 disposition gain. These items outweighed revenue growth and lower tax expense.
- Advertising was flat as reported, but increased 2% excluding foreign-exchange effects. Total revenue increased 5% on that basis, compared with 3% reported.
Outlook, commentary, risks, and unusual items
- No specific quarterly or full-year financial guidance is provided in the supplied filing text. Management said cash, operating cash generation, and revolving-credit availability were expected to be sufficient for cash needs over the next 12 months.
- On March 13, 2017, the company issued $650 in senior notes and used the proceeds to repurchase $600 principal amount of older notes, recognizing a $54 pretax extinguishment loss, including $50 of premiums to par.
- The company invested $181 in solar-project entities during the quarter, recognized $83 of related equity-method losses, and recorded $56 of associated tax benefits. It disclosed $61 of future funding commitments for these investments, cancelable only in limited circumstances.
- On April 28, 2017, after quarter-end, the company sold production studios Raw and Betty to All3Media. The filing said a small gain was expected to be reflected in the quarter ending June 30, 2017.
- Management identified distributor renewals and potential service disruptions as risks. More than 90% of U.S. Networks distribution revenue came from its ten largest U.S. distributors; major distribution agreements expired at various times from 2017 through 2021. Subscriber declines may also weaken advertising revenue.
- Other stated risks include changing television viewing and distribution technology, advertising demand, foreign exchange and political or regulatory developments, Brexit-related uncertainty, equity-investee performance, litigation, and access to capital markets. Management said existing risk factors had not changed materially and routine legal matters were not expected to have a material adverse effect.
- Stock repurchases were $200 in cash during the quarter, and the company had $1.0 billion of remaining authorization under a program set to expire October 8, 2017. A further preferred-stock repurchase of approximately $59 was expected around May 11, 2017.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm issuer identity and corporate succession: this is a 2017 Discovery Communications filing, not a Warner Bros. Discovery filing.
- Reconcile reported and adjusted performance, particularly Adjusted OIBDA versus GAAP operating income and the effects of debt-extinguishment and equity-investee losses.
- Review debt maturities, interest costs, revolver availability, and covenant headroom; assess leverage against the company’s cash generation.
- Assess whether distribution renewals, subscriber trends, and advertising ratings support the reported revenue trends, especially given distributor concentration.
- Evaluate the economics, tax benefits, losses, and remaining funding exposure of the solar investments, as well as OWN’s recoverability and any related put rights.
- Check subsequent reporting for the Raw and Betty sale, expected preferred-stock repurchase, and any changes to cash, debt, or repurchase activity.