Business context and reporting period
The supplied filing is Discovery, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018, filed August 7, 2018. It is not a Warner Bros. Discovery filing; the registrant named in the document is Discovery, Inc.
Discovery operates U.S. and international television networks and digital content businesses. On March 6, 2018, it acquired Scripps Networks Interactive, substantially expanding its portfolio. Reported 2018 results include Scripps only from the acquisition date, so year-over-year reported comparisons are not like-for-like. The company also sold an 88% controlling stake in its Education Business on April 30, 2018.
Financial results and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $2,845 | $1,745 | $5,152 | $3,358 |
| Operating income | $650 | $630 | $854 | $1,117 |
| Net income attributable to Discovery | $216 | $374 | $208 | $589 |
| Diluted EPS | $0.30 | $0.64 | $0.31 | $1.01 |
| Adjusted OIBDA | $1,214 | $717 | $1,911 | $1,320 |
- Q2 GAAP operating margin was approximately 22.8%, versus 36.1% a year earlier; net income attributable to Discovery was approximately 7.6% of revenue, versus 21.4%. Acquisition-related amortization, restructuring, financing costs, and the enlarged business affect comparability.
- On a pro forma combined basis, revenue increased 3% and Adjusted OIBDA increased 1% in Q2 year over year. For the six-month period, pro forma revenue increased 8%, while operating income declined 18%. Adjusted OIBDA is a non-GAAP measure defined by the company and should not be treated as a substitute for GAAP results.
- Distribution and advertising revenue were $1,186 million and $1,563 million, respectively, in Q2. Excluding acquisition effects and foreign exchange, management reported distribution revenue growth of 3% and flat advertising revenue for the quarter.
- For the first six months, operating cash flow was $716 million, compared with $443 million in 2017. Investing cash outflow was $8,583 million, including $8,565 million for business acquisitions. Cash ended the period at $392 million, down from $7,309 million at year-end 2017.
- At June 30, total debt was $18,469 million before unamortized discounts, premiums and issuance costs; reported debt net of those items was $18,329 million. Cash was $392 million. Interest expense was $196 million in Q2 and $373 million for the six months.
- Current assets were $3,906 million and current liabilities $2,696 million. The company reported $1,940 million of unused capacity across its listed borrowing resources, including the revolving credit facility and commercial paper program. It said cash, operating cash flow and revolver availability should cover needs for the next 12 months.
- Segment Adjusted OIBDA for the six months was $1,635 million for U.S. Networks and $473 million for International Networks. On a pro forma combined basis, U.S. Networks Adjusted OIBDA rose 1%; International Networks’ was flat for the six months.
Material changes, outlook, and risks
- Scripps acquisition consideration was approximately $12.0 billion, including $8.6 billion cash consideration and $3.2 billion in stock; the company also assumed approximately $2.5 billion of Scripps debt. The acquisition added $1,066 million of revenue in Q2 and $1,446 million for the six months, as reported in the filing.
- Restructuring and other charges were $187 million in Q2 and $428 million for the six months, chiefly related to Scripps integration, employee and contract terminations, and content write-offs. Management expected additional integration and restructuring costs, including headquarters relocation costs and content-related costs.
- The sale of the Education Business generated an $84 million gain. The Silver Spring headquarters was classified as held for sale, with a $12 million impairment; the company announced plans to move its global headquarters to New York City in 2019.
- Management gave no specific earnings or revenue guidance. It cited expected continued investment in content and anticipated adequate liquidity for the next 12 months. The filing notes $1.8 billion of senior notes coming due in 2019.
- Key risks include high debt and borrowing costs, traditional pay-TV subscriber declines and changing viewing habits, advertising demand and audience delivery, distributor contract renewals, foreign exchange and international-market conditions, and the ability to achieve Scripps integration benefits. The U.S. Networks segment’s largest 10 U.S. distributors accounted for more than 96% of its distribution revenue.
- Harpo and other partners hold put rights over certain noncontrolling interests; redeemable noncontrolling interests totaled $410 million. A $74 million indirect-tax claim related to Scripps was accrued in purchase accounting; the company said it intended to contest the claim and believed material loss beyond the recorded amount was remote. Management said ordinary-course legal matters were not expected to materially harm results or financial position.
Important facts for investors to verify
- Confirm the issuer: this document identifies Discovery, Inc., not Warner Bros. Discovery, Inc.
- Review acquisition-adjusted and pro forma results alongside reported results; the acquisition makes headline year-over-year growth materially non-comparable.
- Track debt maturities, leverage and interest costs, especially 2019 maturities and the company’s ability to reduce acquisition-related debt.
- Assess whether distribution and advertising trends, subscriber declines, and international content costs support the company’s integration and synergy expectations.
- Monitor further restructuring charges, the $74 million tax claim, noncontrolling-interest put rights, and progress on the headquarters relocation.