Filing summary
Entity and period: The supplied filing is Discovery Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed February 14, 2013. It is not a Warner Bros. Discovery filing, and it reports an annual period—not a standalone 2012 fourth-quarter filing. Dollar figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Discovery was a global media company distributing nonfiction and other television content through U.S. and international networks, digital platforms, and education products. Its segments were U.S. Networks, International Networks, and Education. Distribution fees and advertising generated 49% and 46% of 2012 revenue, respectively; other revenue was 5%.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $4,487 | $4,168 | +8% |
| Operating income | $1,855 | $1,803 | +3% |
| Net income attributable to Discovery stockholders | $943 | $1,132 | -17% |
| Diluted earnings per share | $2.48 | $2.80 | -11% |
| Cash provided by operating activities | $1,099 | $1,100 | Approximately flat |
| Adjusted OIBDA | $2,095 | $1,916 | +9% |
Operating margin was approximately 41.3% and net margin approximately 21.0% in 2012. Adjusted OIBDA margin was approximately 46.7%; this is a non-GAAP measure and excludes specified items, so it is not directly equivalent to operating margin.
- Revenue grew in both core segments: U.S. Networks revenue rose 5% to $2,748 million and International Networks rose 13% to $1,637 million. Education revenue increased 11% to $105 million.
- Distribution revenue increased 7% to $2,206 million; advertising revenue increased 10% to $2,037 million. Management attributed growth to contractual rate increases, subscriber growth, stronger advertising pricing, and international expansion.
- Cash and cash equivalents were $1,201 million at year-end, versus $1,048 million a year earlier. Current assets were $2,730 million and current liabilities $946 million.
- Debt, including capital leases, was approximately $5,260 million gross ($5,243 million net of discount); the filing’s risk discussion describes consolidated debt as approximately $5.2 billion. The $1.0 billion revolving facility had no borrowings and approximately $999 million of unused capacity after letters of credit. The company reported compliance with debt covenants.
- Total assets were $12,930 million; total liabilities were $6,637 million. Interest expense was $248 million, up from $208 million.
Material changes and unusual items
- Net income declined despite higher revenue and operating income. The effective tax rate increased to 37% from 27%; 2011 included a $112 million tax benefit from foreign tax credits and a $129 million pretax gain on contributing Discovery Health to OWN.
- Other expense increased to $89 million, principally reflecting larger equity-method investee losses. Discovery began recording 100% of OWN’s incremental losses after accumulated losses exceeded its equity contribution; the company reported a $482 million note receivable and advances to OWN at year-end, and expected to provide further funding.
- Discovery issued $1.0 billion of senior notes in 2012, with maturities in 2022 and 2042. It repurchased $1.38 billion of common stock during the year; $1.5 billion remained authorized for repurchases at year-end. The company stated it had no present intention to pay cash dividends.
- The company acquired a 20% interest in Eurosport and related pay-TV networks for $264 million, and acquired Switchover Media and other businesses. A planned acquisition of SBS Nordic for approximately $1.7 billion was subject to regulatory approvals and expected to close in the first quarter of 2013; it was not completed as of year-end.
- The postproduction audio business was sold in September 2012, with its results presented as discontinued operations and a $6 million loss on sale reported. The company reported $11 million of after-tax losses from discontinued operations for 2012.
- Fourth-quarter 2012 revenue was $1,200 million, operating income $481 million, and net income attributable to Discovery stockholders $224 million. The filing does not provide a clear standalone fourth-quarter cash-flow figure.
Outlook, risks, and contingencies
The filing provides no quantified revenue, earnings, or cash-flow guidance. Management described plans to keep investing in content and expanding distribution, including digital platforms and international markets. It anticipated significant cash needs for content, acquisitions, debt interest, share repurchases, and investment funding; it expected approximately $255 million of 2013 interest payments and planned to finance the SBS Nordic purchase with cash and borrowing capacity or other debt.
- Key business risks include audience and content uncertainty; competition from traditional media and digital platforms; changing viewing and advertising behavior; and distributor consolidation or unfavorable renewals. About 90% of U.S. distribution revenue came from the top 10 distributors, with major U.S. agreements expiring at various times from 2013 through 2020.
- Other risks include substantial debt and debt service, foreign currency and international-market exposure, piracy and intellectual-property disputes, regulation, and potential losses or additional funding needs at equity-method investees.
- Contractual obligations totaled $10,174 million, including $5,150 million of long-term debt principal, $3,381 million of related interest, and $547 million of content purchase obligations. Separately, the filing disclosed $20 million of equity-investee funding commitments and a Hub performance guarantee with a maximum potential exposure below $110 million at year-end, expected to decline to zero during 2014.
- Management said routine legal proceedings were not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Confirm the issuer and period: this is Discovery Communications’ FY2012 Form 10-K, not a Warner Bros. Discovery filing or a Q4-only report.
- Assess whether revenue and Adjusted OIBDA growth translate into durable earnings and cash generation, considering the higher tax rate, interest expense, content spending, and investee losses.
- Review the OWN exposure, including the $482 million receivable and advances, further expected funding, loss-allocation accounting, and repayment assumptions.
- Evaluate leverage and the funding plan for the planned SBS Nordic acquisition alongside repurchases and other investment commitments.
- Track distributor contract renewals, audience trends, advertising pricing, and foreign-exchange effects, particularly given distributor concentration and international exposure.