Filing summary
Entity and period: The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2013—not a filing under the name Warner Bros. Discovery, Inc. Investors should verify the entity before relying on this summary. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and financial performance
Discovery operated U.S. Networks, International Networks, and Education, generating revenue mainly from television distribution fees and advertising. It also developed and sold curriculum-based education products and services.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1,156 | $1,085 | +7% |
| Operating income | $414 | $448 | -8% |
| Operating margin | 35.8% | 41.3% | -5.5 percentage points |
| Adjusted OIBDA | $498 | $508 | -2% |
| Net income attributable to Discovery stockholders | $231 | $221 | +5% |
| Diluted EPS | $0.63 | $0.57 | +$0.06 |
| Cash from operating activities | $131 | $248 | -$117 |
Advertising revenue rose 12% to $508; distribution revenue increased 1% to $583. International Networks revenue grew 17% to $444, while U.S. Networks revenue was nearly flat at $686. Education revenue increased 13% to $27. U.S. Networks Adjusted OIBDA declined 5% to $377; International Networks Adjusted OIBDA increased 8% to $184. Adjusted OIBDA is a non-GAAP measure defined by the company.
Operating costs rose 16% to $742, faster than revenue, including higher content and personnel costs and increased equity-based compensation. Interest expense increased to $68 from $55. Net income growth included a $92 gain from remeasuring Discovery’s previously held interest in Discovery Japan; it was partly offset by $59 of foreign-exchange derivative losses. The effective tax rate increased to 39% from 35%.
Cash, debt, and liquidity
Cash and cash equivalents were $2,360 at March 31, compared with $1,201 at year-end. The increase primarily reflected $1,186 of net proceeds from long-term debt issuance, rather than stronger operating cash generation. Investing activities used $150, including the Discovery Japan acquisition and foreign-exchange contracts. Financing activities provided $1,182.
Long-term debt, net, was $6,429, including $6,407 noncurrent and $22 current; cash less reported long-term debt was approximately $4,069. The company issued $1.2 billion of senior notes in March, with coupons of 3.25% and 4.875%, due in 2023 and 2043. A $1.0 billion revolving facility was undrawn apart from a $1 million letter of credit, and the company reported compliance with its covenants.
After quarter-end, the company used approximately $2.1 billion of cash for the $1.8 billion SBS Nordic acquisition and the $256 million preferred-stock repurchase. Management stated that remaining cash, operating cash generation, and revolver availability were expected to cover cash needs for the next 12 months. This is management’s assessment, not a formal earnings forecast.
Material changes, outlook, and risks
- On January 10, Discovery acquired an additional 30% of Discovery Japan, bringing its ownership to 80% and triggering consolidation. The resulting $92 gain was a significant, nonrecurring contributor to other income.
- On April 9, after the reporting date, Discovery acquired SBS Nordic’s television and radio operations for approximately $1.8 billion in cash. The filing does not provide a clear pro forma impact on revenue, earnings, or debt.
- Discovery agreed to repurchase 4 million Series C convertible preferred shares for $256 million; the transaction closed April 5. No common-stock repurchases occurred in Q1; the company said it resumed common-stock repurchases in Q2.
- Management cited continued investment in content and anticipated further funding of equity-method investees, including OWN. Advances and a note receivable from OWN totaled $505 million; Discovery said it expected to provide additional funding and seek repayment. No OWN impairment was recorded in the quarter.
- Risks include renewal of major distributor agreements on acceptable terms, dependence on distributors and advertising demand, foreign-currency exposure, integration and performance of acquisitions, and uncertainty around equity-method investees. U.S. major distributor agreements expire at varying dates beginning in 2013. The company reported that risk factors had not changed materially from its 2012 Form 10-K.
- The filing reports a Hub performance guarantee with a maximum potential exposure below $100 million at quarter-end, declining to zero during 2014; management considered an adverse outcome unlikely. It also reports put rights tied to OWN, Eurosport/TF1, and Discovery Japan/JCOM. Management said routine legal proceedings were not expected to have a material adverse effect.
Most important facts to verify
- Confirm the filing is for Discovery Communications, Inc., rather than Warner Bros. Discovery, Inc.
- Review the effect of the post-quarter SBS Nordic acquisition and preferred-stock repurchase on liquidity, debt, and future results.
- Assess the quality and repeatability of earnings, particularly the $92 million remeasurement gain, $59 million derivative loss, and higher operating costs.
- Track operating cash generation and content-rights spending, which contributed to lower year-over-year operating cash flow.
- Evaluate OWN’s funding, recoverability of the $505 million receivable and advances, and potential put-right obligations.
- Monitor distributor contract renewals, subscriber trends, advertising demand, and currency movements.