Discovery Communications, Inc. — 2010 Q2 Form 10-Q
Entity and period: The supplied filing is Discovery Communications, Inc.’s Form 10-Q for the quarter and six months ended June 30, 2010, not a Warner Bros. Discovery filing. Financial amounts below are in millions unless stated otherwise. Prior-year figures are recast.
Business context and reporting period
Discovery operated nonfiction television networks and related digital, education and other businesses. Its reportable segments were U.S. Networks, International Networks, and Education and Other. The company reported results for Q2 and the first six months of 2010 against the comparable 2009 periods.
Financial performance and position
- Revenue: Q2 revenue rose 11% to $963; six-month revenue rose 10% to $1,832. Q2 distribution revenue was $449 and advertising revenue $435. Advertising growth was the main driver, with distribution also higher.
- Profit: Q2 operating income was $372 versus $497; six-month operating income was $654 versus $748. The 2009 comparisons included a $252 gain on the Discovery Kids Network/Hasbro transaction. Q2 net income attributable to Discovery was $107 versus $179; six-month net income was $276 versus $298. Diluted EPS was $0.25 for Q2 and $0.64 for six months, versus $0.42 and $0.70.
- Adjusted OIBDA: Q2 was $455, up 18%; six-month OIBDA was $820, up 13%. Q2 margin was approximately 47% of revenue, compared with approximately 45% in 2009. This is a non-GAAP measure and should be considered alongside GAAP results.
- Cash flow: Six-month operating cash flow was $90 versus $337 in 2009. Investing used $99, compared with $277 provided in 2009, which included Hasbro proceeds. Financing provided $99, principally reflecting the refinancing. Cash increased $90 to $713.
- Liquidity and debt: At June 30, cash was $713 and reported debt, net of discount, was $3,611; current debt was $17. The company reported approximately $2.26 billion of total liquidity, including a $1.55 billion undrawn revolver that expires in October 2010. Management said it expected cash on hand and generated or available cash to meet anticipated operating needs for at least 12 months. The company was in compliance with debt covenants.
- Margins and costs: Higher advertising and distribution revenue supported segment OIBDA growth. SG&A rose to $304 in Q2 and $588 for six months; content and other costs also increased. GAAP operating margin was approximately 39% in Q2, below approximately 57% a year earlier, principally reflecting the prior-year disposition gain.
Material changes versus the prior comparable period
- Advertising revenue increased 19% in Q2 and 17% for six months; distribution revenue increased 6% in both periods. U.S. Networks and International Networks drove growth, while Education and Other revenue was slightly lower.
- International Networks revenue increased 15% in both periods; its six-month results included an $11 favorable foreign-exchange impact. U.S. Networks revenue rose 10% in Q2 and 8% for six months.
- The company issued $3.0 billion of senior notes in June and used proceeds plus cash to repay approximately $2.88 billion of term loans and older notes. The refinancing extended maturities and left substantially all outstanding debt at fixed rates, but generated a $136 debt-extinguishment loss.
- Cash-settled equity-award payments were $123 for six months, contributing to lower operating cash flow. The prior-year period also benefited from $300 of Hasbro proceeds and had different financing cash flows.
- Prior-period figures were recast for changes in VIE consolidation, presentation of Antenna Audio as discontinued operations, and segment realignment. The Discovery Kids Network was deconsolidated in May 2009, affecting comparability.
Outlook, management commentary, risks and unusual items
- Management expected liquidity to cover anticipated operating requirements for at least 12 months, but the revolver’s October 2010 expiry made replacement financing an important near-term consideration. Management was assessing options for a new facility.
- For 2010, management expected approximately $50 of capital expenditures and $200–$205 of interest, derivative-payment and capital-lease outlays. It also anticipated cash payments for equity awards; $123 had been paid in the first half.
- On July 28, 2010, after quarter-end, the board authorized up to $1 billion of common-stock repurchases, subject to available cash and market conditions.
- OWN was funded by Discovery under a commitment of up to $100 through September 2011; $74 had been funded by June 30. The partners were discussing the programming pipeline and a likely increase in Discovery’s funding commitment. Discovery also described substantial potential joint-venture funding exposure and a performance guarantee for the Hasbro venture.
- The BBC had put rights relating to certain joint-venture interests. The company carried a $49 redeemable noncontrolling-interest liability and noted that a negotiated acquisition could cost substantially more than the estimated put value.
- Other risks cited included advertising and affiliate trends, economic conditions, competition and technology shifts, foreign exchange, access to capital, joint-venture relationships and litigation. Management said routine legal proceedings were not expected to have a material adverse effect; risk factors were not materially changed from year-end.
- Unusual items included the $136 refinancing-related debt loss, derivative losses associated with discontinued hedge accounting, and the prior-year $252 Discovery Kids gain. A plan to sell Antenna Audio within a year was announced; its reported results were not significant.
Most important facts for investors to verify
- Confirm the filing entity: this document is for Discovery Communications, Inc., not Warner Bros. Discovery.
- Review the October 2010 revolver expiry, refinancing arrangements, covenant headroom and subsequent funding developments.
- Assess whether strong advertising and distribution growth translated into sustainable GAAP earnings and operating cash flow, given first-half operating cash flow of $90.
- Separate recurring performance from the prior-year $252 gain and current-year $136 debt-extinguishment loss; evaluate the company’s non-GAAP OIBDA reconciliation.
- Track OWN’s additional funding needs, BBC put negotiations, joint-venture commitments and the Discovery Kids performance guarantee.
- Verify the timing and funding of the authorized $1 billion repurchase program and its interaction with debt, liquidity and planned cash uses.