Business context and reporting period
The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2015—not a filing under the name Warner Bros. Discovery, Inc. The company operated U.S. Networks, International Networks, and combined Education and Other businesses.
Financial performance and position
All amounts are in millions of dollars unless stated otherwise. Third-quarter revenue was $1,557, down 1% year over year; distribution revenue rose 4% to $776, while advertising fell 4% to $699. Operating income was $505, down 1%, and net income available to Discovery was $279, essentially flat. Diluted EPS was $0.43 versus $0.41.
For the first nine months, revenue increased 3% to $4,748, but operating income declined 3% to $1,544 and net income available to Discovery fell 8% to $815. Diluted EPS was $1.24 versus $1.28. The effective tax rate was 31% for the quarter and 32% year to date, compared with 35% in both 2014 periods.
Third-quarter operating margin was approximately 32.4% versus 32.6% a year earlier; nine-month operating margin was approximately 32.5% versus 34.5%. Adjusted OIBDA, a non-GAAP measure, was $576 for the quarter, down 9%, and $1,824 year to date, down 2%.
Operating cash flow was $652 for the first nine months, down from $893. Investing activities used $26, compared with $529 used in 2014; financing activities used $699 versus $369. Cash ended at $262, down from $367 at year-end 2014. Total debt was $7,125 gross ($7,057 net of discount and issuance costs); the company also had $1,330 of unused capacity under its revolving credit facility and commercial-paper program. Management said available cash, operating cash flow, and revolver availability were expected to cover needs for the next 12 months.
Material changes versus the prior comparable period
- Distribution revenue growth was offset by lower advertising revenue. Excluding currency movements, Eurosport, Discovery Family consolidation, and the radio divestiture, management reported advertising growth, but reported results reflected foreign-exchange pressure and segment mix.
- U.S. Networks’ nine-month revenue rose 6% and Adjusted OIBDA rose 7%. International Networks’ reported revenue was flat, while Adjusted OIBDA declined 12%; excluding Eurosport, international revenue declined 9% and Adjusted OIBDA declined 10%.
- Content expense increased: nine-month content amortization was $1,210 versus $1,061, and total content expense was $1,406 versus $1,191. The company cited increased content investment.
- Cash from operations declined by $241, with management citing foreign-currency effects, increased content investment, higher taxes paid, and working-capital changes. Nine-month foreign-currency losses contributed to $78 of other expense, versus $11 of other income in 2014.
- The company issued $300 of 3.45% U.S.-dollar notes due 2025 and €600 million of 1.90% notes due 2027, and redeemed $850 of notes in March.
Outlook, commentary, risks and unusual items
- No specific quantitative earnings or revenue guidance is provided. Management described continued investment in content and expansion across distribution platforms as priorities.
- After quarter-end, on October 1, 2015, Discovery acquired TF1’s remaining 49% interest in Eurosport for $548; it had borrowed an additional $525 under its revolver to help fund the purchase. The acquisition affects subsequent leverage and results.
- The company committed €1.3 billion (approximately $1.5 billion at the reporting-date exchange rate) for European broadcast rights to four Olympic Games from 2018 through 2024, subject to specified country exclusions.
- Distribution agreements are a key risk: more than 90% of U.S. distribution revenue came from the top 10 distributors, and major U.S. agreements began expiring in 2016. Nonrenewal or less favorable renewals could hurt distribution and advertising revenue.
- Venezuela’s currency controls and exchange-rate changes created uncertainty over repatriation and valuation. Discovery recorded a $14 foreign-currency remeasurement loss on Venezuelan assets during the nine months and held about $25 of bolivar-denominated assets at quarter-end.
- A former business partner asserted claims for alleged losses of $116. The company did not consider a loss probable or reasonably estimable and recorded no accrual; it stated an adverse outcome could be material. The filing also reports $21 of content impairments within restructuring charges related to canceled series following legal circumstances involving talent.
- Other exposures include $394 of advances and a note receivable from equity-method investee OWN, potential put rights over certain noncontrolling interests, and the integration and performance of acquired businesses. The filing states the company was in compliance with debt covenants and that disclosure controls were effective.
Important facts for investors to verify
- Confirm the filing-entity mismatch: this is Discovery Communications, Inc.’s 2015 Form 10-Q, not a Warner Bros. Discovery filing.
- Assess underlying advertising and international trends separately from currency effects and Eurosport’s consolidation.
- Review the post-quarter Eurosport purchase financing and the company’s debt, liquidity, and planned share repurchases.
- Monitor Olympic rights obligations, U.S. distributor renewals, Venezuela exposure, OWN recoverability, and the $116 asserted legal claim.