Filing and reporting period
The supplied filing is Discovery Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed February 14, 2017—not a Warner Bros. Discovery filing or a standalone 2016 Q4 report. The company’s reported business was global television networks and digital media, with additional education products and production studios. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $6.497 billion | $6.394 billion | +2% |
| Operating income | $2.058 billion | $1.985 billion | +4% |
| Net income attributable to Discovery | $1.194 billion | $1.034 billion | +15% |
| Diluted EPS | $1.96 | $1.58 | +24% |
| Adjusted OIBDA | $2.426 billion | $2.398 billion | +1% |
| Cash from operating activities | $1.373 billion | $1.277 billion | +$96 million |
| Cash used in investing activities | $256 million | $301 million | Outflow decreased |
| Cash used in financing activities | $1.177 billion | $902 million | Outflow increased |
Revenue comprised distribution $3.213 billion (+5%), advertising $2.970 billion (-1%), and other $314 million (-2%). The reported operating margin was approximately 31.7%, versus 31.0% in 2015; net margin was approximately 18.7%, versus 16.4%. Adjusted OIBDA margin was approximately 37.3%, versus 37.5%. Adjusted OIBDA is a non-GAAP measure and excludes specified items; it is not a substitute for GAAP earnings or cash flow.
At December 31, 2016, cash was $300 million, current assets $2.599 billion and current liabilities $1.561 billion (current ratio approximately 1.66). Debt, including capital leases, was $7.990 billion gross and $7.923 billion net of discount and issuance costs; cash less net debt was approximately $7.623 billion. Total assets were $15.758 billion and equity $5.167 billion. Management reported compliance with credit-facility covenants.
Segment results
- U.S. Networks: revenue $3.285 billion (+5%); Adjusted OIBDA $1.922 billion (+8%). Distribution growth from contractual rate increases and advertising growth from pricing and inventory management were partly offset by slight subscriber declines and lower ratings.
- International Networks: revenue $3.040 billion (-2% reported; +4% excluding foreign exchange); Adjusted OIBDA $848 million (-12% reported; -4% excluding foreign exchange). Higher sports-rights and production costs weighed on performance.
- Education and Other: revenue $174 million (+1%); Adjusted OIBDA loss of $10 million, versus a $2 million loss, reflecting investment in digital textbooks.
Material changes and notable items
- Distribution revenue rose, while advertising revenue was nearly flat; foreign exchange reduced reported international results.
- Content expense increased to $2.045 billion from $1.940 billion, including $1.701 billion of content amortization. Management cited greater investment in sports rights and associated production, and content impairments in Northern Europe.
- Interest expense increased to $353 million from $330 million, partly following issuance of $500 million of 4.90% senior notes due 2026.
- The effective tax rate fell to 27% from 33%, supporting higher net income; the filing attributes the change to tax-position resolutions, foreign tax effects and renewable-energy tax credits.
- Cash declined by $90 million during 2016. The company repurchased $895 million of Series C common stock and repurchased $479 million of Series C convertible preferred stock from Advance/Newhouse.
- Unusual items included a $50 million pretax gain from contributing Seeker and SourceFed to Group Nine Media, a $13 million gain related to final contingent consideration on the radio-business sale, and a $62 million other-than-temporary impairment of the Lionsgate investment. Foreign-currency remeasurement was a $75 million gain, compared with a $103 million loss in 2015.
Outlook, risks and contingencies
The filing gives no quantified revenue, earnings or cash-flow guidance. Management said cash, operating cash generation and revolving-credit availability were expected to meet cash needs for the next 12 months. The company had a $2.0 billion revolving facility, with $550 million drawn, plus $48 million of commercial paper outstanding at year-end.
Management identified rapid changes in viewing and distribution, cord-cutting and digital competition, audience and advertising uncertainty, distributor consolidation and carriage-renewal terms, content acceptance and costs, foreign-exchange exposure, regulation, cybersecurity and international political or economic developments as significant risks. Brexit was specifically noted as a potential source of market, currency, regulatory and operating disruption. The company had committed $3.598 billion for content purchases, including $939 million due in less than one year; these commitments include content that may not ultimately be produced. It had also acquired exclusive European Olympic broadcast rights for four Games from 2018 to 2024 for €1.3 billion (about $1.5 billion at year-end exchange rates).
Other exposures include $243 million of recorded redeemable noncontrolling interests and an unrecorded Harpo put right relating to OWN; the company stated it could not predict the timing or amount of any eventual payment under the recorded redeemable interests. Unrecognized tax benefits were $117 million. Management said ordinary-course litigation was not expected to materially affect consolidated financial position, results or liquidity. No material off-balance-sheet arrangements were reported. Management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Confirm the issuer and period: the supplied document is Discovery Communications’ FY 2016 10-K, not Warner Bros. Discovery’s filing or a Q4-only report.
- Review the full statements and notes for debt maturities, covenant definitions, interest-rate exposure, and capacity actually available under the revolving facility.
- Assess whether International Networks’ underlying revenue growth can offset reported foreign-exchange pressure and higher sports-content costs.
- Examine content commitments and the economics of the Olympic rights investment, including future cash requirements and expected returns.
- Check the sensitivity of Europe goodwill to exchange rates and assumptions: the Europe reporting unit had the lowest disclosed headroom, 12%, against $2.2 billion of goodwill.
- Evaluate the sustainability of earnings growth after the lower tax rate and the cited gains and impairment, and distinguish GAAP results from Adjusted OIBDA.