Filing summary
Entity and period: The supplied filing is Discovery, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. It is not a Warner Bros. Discovery filing, and the 10-K reports annual results rather than a standalone fourth-quarter report. Fourth-quarter results are separately provided below.
Business context and reporting period
Discovery operated global television networks and digital services, including Discovery Channel, TLC, HGTV, Food Network and Eurosport. It reported U.S. Networks, International Networks, and Education and Other. On March 6, 2018, Discovery acquired Scripps Networks for approximately $12.0 billion in cash and stock and assumed $2.5 billion of debt. The acquisition materially affects comparisons with 2017; Scripps results are included only from the acquisition date in reported 2018 results.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $10.553 billion | $6.873 billion |
| Operating income | $1.934 billion | $713 million |
| Net income (loss) available to Discovery, Inc. | $594 million | $(337) million |
| Diluted EPS | $0.86 | $(0.59) |
| Adjusted OIBDA, non-GAAP | $4.139 billion | $2.531 billion |
| Cash provided by operating activities | $2.576 billion | $1.629 billion |
| Cash used in investing activities | $(8.593) billion | $(633) million |
| Cash and cash equivalents at year-end | $986 million | $7.309 billion |
| Total debt, including capital leases | $17.170 billion | $14.913 billion |
Reported revenue rose 54%, principally reflecting the Scripps acquisition. On a pro forma combined basis, revenue increased 4% and Adjusted OIBDA increased 9% (reported pro forma figures; not GAAP and not necessarily indicative of future results). Distribution, advertising and other revenue represented 43%, 52% and 5% of 2018 consolidated revenue, respectively. Approximate reported operating and net margins were 18.3% and 5.6%; Adjusted OIBDA margin was 39.2%.
U.S. Networks generated $6.350 billion of revenue and $3.500 billion of Adjusted OIBDA; International Networks generated $4.149 billion and $1.077 billion, respectively. Segment figures include acquisition effects. For the U.S. portfolio, subscribers declined 4% year over year on a pro forma basis, while subscribers to fully distributed networks were consistent with the prior year.
Current assets were $4.231 billion and current liabilities $3.997 billion at year-end. Cash was $986 million, and the company had $225 million drawn on its $2.5 billion revolving credit facility, leaving $2.274 billion of unused capacity after letters of credit. Management said cash, operating cash flow and revolver availability should be sufficient for cash needs over the next 12 months. Debt included $1.860 billion classified as current; approximately $1.8 billion of senior notes were due in 2019.
Material changes and unusual items
- The acquisition added Scripps brands and substantially increased reported revenue, assets, goodwill, intangible assets, and debt. The acquisition contributed $3.494 billion of revenue and $203 million of net income available to Discovery in the periods consolidated in 2018.
- Restructuring and other charges were $750 million, including $405 million of content impairments tied to programming changes after the acquisition, as well as integration, severance, contract termination and lease-exit costs. The company expected further restructuring and integration expenses.
- Depreciation and amortization rose to $1.398 billion, mainly reflecting acquired intangible assets. Net interest expense rose to $729 million from $475 million, primarily because of higher debt.
- The company recorded an $84 million gain on sale of an 88% controlling stake in its Education Business; it retained 12%. The transaction generated $113 million in cash proceeds.
- FY 2017 included a $1.327 billion goodwill impairment charge. No goodwill impairment was recorded in 2018, though Asia-Pacific goodwill had only about 10% fair-value headroom in the annual test.
- FY 2018 operating cash flow increased, but cash fell by $6.323 billion, principally reflecting $8.565 billion of net cash used for business acquisitions. Investing cash outflow was $8.593 billion.
- Fourth-quarter 2018 revenue was $2.809 billion, operating income $711 million, net income $299 million, and net income available to Discovery $269 million; diluted EPS was $0.38. The supplied quarterly table does not give a directly comparable pro forma Q4 2017 result.
Outlook, risks and contingencies
Management emphasized investment in content, distribution, advertising, digital services and international growth. Discovery launched GOLFTV in 2019 under a 12-year international PGA Tour partnership and planned to invest more than $2 billion over the partnership, including rights and platform development. The filing does not provide numerical consolidated revenue or earnings guidance.
Key risks include cord-cutting and subscriber erosion, audience declines, competition from streaming and digital advertising, distributor concentration and carriage-renewal terms, content popularity and sports-rights costs, and execution of Scripps integration and expected synergies. Additional exposures include substantial debt and refinancing needs, foreign exchange volatility, Brexit uncertainty, cybersecurity and privacy regulation, and tax uncertainty. The company reported compliance with its credit-facility covenants at year-end. It disclosed $110 million of acquired foreign tax reserves and a $40 million indirect-tax liability related to an audit; management intended to contest the latter and considered material additional loss remote. Management did not expect ordinary-course litigation to materially affect financial position, results or cash flows.
Most important facts for investors to verify
- Confirm the issuer: this is Discovery, Inc., not Warner Bros. Discovery, and the reporting period is full-year 2018.
- Separate acquisition-driven reported growth from underlying performance; assess the pro forma comparisons and their non-GAAP limitations.
- Track debt maturities, refinancing and cash generation against the $17.170 billion reported debt balance and $986 million cash balance.
- Evaluate whether restructuring, content impairments and integration spending subside, and whether projected Scripps synergies materialize.
- Monitor U.S. subscriber trends, carriage renewals, advertising audiences and the economics of streaming and sports-rights investments.
- Review tax exposures, redeemable noncontrolling-interest put rights, and the limited Asia-Pacific goodwill valuation headroom.