Filing and reporting period
Important identification mismatch: The supplied filing is Discovery Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2010, filed February 18, 2011. It is not a Warner Bros. Discovery filing. The filing also includes unaudited fourth-quarter data, summarized below; it is not a standalone Q4 report. Unless otherwise noted, figures are in millions of dollars.
Business context
Discovery operated global nonfiction television networks, digital media properties, education products and postproduction audio services. Its reportable segments were U.S. Networks, International Networks, and Education and Other. The company said its networks reached more than 1.6 billion cumulative subscribers in the U.S. and over 180 other countries and territories.
Financial performance
| Metric | FY 2010 | FY 2009, recast | Change |
|---|---|---|---|
| Revenue | $3,773 | $3,458 | +9% |
| Operating income | $1,360 | $1,274 | +7% |
| Adjusted OIBDA | $1,699 | $1,486 | +14% |
| Net income available to Discovery stockholders | $652 | $541 | +21% |
| Diluted earnings per share | $1.52 | $1.27 | — |
| Cash from operating activities | $668 | $642 | +$26 |
FY 2010 operating margin was approximately 36.0% (operating income divided by revenue); net margin was approximately 17.3% (net income available to stockholders divided by revenue). Adjusted OIBDA is a non-GAAP measure and should not be treated as a substitute for GAAP operating income, net income or cash flow.
Unaudited Q4 2010: Revenue was $1,015; operating income was $394; income from continuing operations was $200; net income available to stockholders was $191; and diluted EPS was $0.45. The quarter included a $3 loss from discontinued operations. The filing does not provide quarterly cash flow in the supplied text.
Revenue and segment trends
- Distribution revenue rose 6% to $1,807; advertising revenue rose 15% to $1,645; other revenue fell 4% to $321.
- U.S. Networks revenue grew 9% to $2,363 and Adjusted OIBDA grew 11% to $1,365, mainly on stronger advertising and distribution.
- International Networks revenue increased 11% to $1,251 and Adjusted OIBDA increased 22% to $545, led by advertising growth and subscriber gains.
- Education and Other revenue rose 3% to $153, while Adjusted OIBDA decreased 6% to $15.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $466, down from $623. Cash from investing activities was an outflow of $190, and cash used in financing was $641.
- Reported long-term debt, including capital leases and other obligations, was $3,626 gross and $3,618 net of discount; the filing separately describes approximately $3.5 billion of public senior notes. The current portion was $20.
- Available capital resources were approximately $1.5 billion: $454 of cash available to the company (excluding venture-restricted cash) and $999 of unused capacity under a $1.0 billion revolving facility. No revolver borrowings were outstanding.
- Current assets were $1,735 and current liabilities $785. The filing does not present a current ratio as a highlighted metric.
- The company generated $668 of operating cash flow despite $774 of cash outflow from changes in content rights. It paid $365 of cash interest, including refinancing-related amounts.
Material changes, outlook and risks
- In June 2010, Discovery refinanced most debt, issuing $3.0 billion of senior notes and repaying $2.9 billion of existing borrowings. It recorded a $136 debt-extinguishment loss, including $114 of make-whole premiums.
- In November, it paid $152 to acquire BBC Worldwide’s remaining interests in substantially all international Animal Planet and Liv ventures. It also sold Antenna Audio for $24 net cash proceeds, recording a $9 after-tax gain.
- Discovery repurchased $105 of common stock and $500 of Series C convertible preferred stock in 2010. Its common-stock repurchase authorization had $895 remaining at year-end.
- OWN launched January 1, 2011 as a 50-50 venture with Harpo after Discovery contributed the Discovery Health network. Management said a one-time gain or loss on the contribution could be recognized in Q1 2011; fair value had not yet been determined. OWN’s 2011 funding needs beyond existing commitments were estimated at approximately $50, excluding accrued interest.
- Management expected existing cash, operating cash flow and available borrowing capacity to meet anticipated cash needs for at least 12 months. It estimated 2011 interest, derivative and capital-lease payments of approximately $200 and capital expenditures of approximately $50. No formal earnings or revenue guidance was provided in the supplied filing text.
- Key risks include advertising-market weakness, audience and content uncertainty, renewal and pricing risk in distribution agreements, distributor concentration (over 90% of U.S. distribution revenue came from the top 10 distributors), content-cost inflation, competition and changing viewing technology, piracy, foreign-exchange and political exposure, and leverage and covenant constraints.
- Other exposures include up to $234 of venture funding commitments, of which $165 had been funded, and a remaining maximum exposure below $210 under a performance guarantee for The Hub. Management said routine litigation was not expected to materially affect financial position, results or liquidity.
- Results and comparisons were recast for changes in variable-interest-entity accounting, discontinued operations and segment presentation. The filing reports a $28 foreign-tax-reserve reversal, an $11 goodwill impairment and other refinancing and derivative effects in 2010; these items affect comparability.
Most important facts to verify
- Confirm the issuer and period: this is Discovery Communications’ FY 2010 10-K, not Warner Bros. Discovery’s filing.
- Review the audited statements and reconciliation of Adjusted OIBDA, particularly the debt-extinguishment charge and other nonrecurring tax, impairment and derivative items.
- Assess debt maturities, interest burden, revolver covenants and the company’s capacity to fund content investment, repurchases and venture commitments.
- Track OWN’s post-launch funding, performance, contribution valuation and any resulting gain or loss, alongside The Hub guarantee exposure.
- Evaluate whether advertising growth and subscriber gains persisted, and monitor major U.S. distribution-agreement renewals beginning in 2012.