Discovery, Inc. Form 10-Q Summary
Entity and period: This filing is for Discovery, Inc., not Warner Bros. Discovery, Inc. It reports the quarter and six months ended June 30, 2020; financial statements are unaudited. Discovery operated U.S. Networks and International Networks businesses.
Financial performance
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Revenue | $2.541 billion, down 12% year over year | $5.224 billion, down 7% |
| Advertising revenue | $1.273 billion, down 21% | $2.675 billion, down 12% |
| Distribution revenue | $1.225 billion, up 2% | $2.448 billion, up 1% |
| Operating income | $717 million, down 21%; 28.2% operating margin | $1.496 billion, down 11% |
| Adjusted OIBDA | $1.127 billion, down 12%; 44.4% of revenue | $2.240 billion, down 8% |
| Net income attributable to Discovery | $271 million, versus $947 million | $648 million, versus $1.331 billion |
| Diluted EPS | $0.40, versus $1.33 | $0.95, versus $1.86 |
Six-month operating cash flow was $1.326 billion, compared with $1.216 billion a year earlier. Investing activities used $154 million and financing activities used $998 million. Cash and cash equivalents were $1.683 billion at June 30; cash, cash equivalents and restricted cash totaled $1.738 billion.
Total debt was $15.414 billion gross ($15.283 billion net of unamortized discounts, premiums and issuance costs), including $339 million current. The company reported $2.499 billion of unused revolving-credit and commercial-paper capacity, plus $22 million unused under a program financing line. Total liabilities were $21.289 billion.
Material changes and drivers
- COVID-19-related weakness in advertising demand was the principal driver of revenue pressure, particularly in International Networks. International Networks Q2 revenue fell 23% and Adjusted OIBDA fell 33%; U.S. Networks revenue fell 6% and Adjusted OIBDA fell 6%.
- Distribution revenue was comparatively resilient: U.S. Networks distribution revenue rose 7% in Q2, while International Networks distribution revenue declined 6%, partly reflecting currency, sports-event timing and discontinued distribution.
- Q2 costs of revenue fell 14% and SG&A fell 10%, reflecting lower activity and cost-saving measures. Segment Adjusted OIBDA remained $1.127 billion, but fell 12% year over year.
- Net income comparisons were also affected by taxes: 2019 included a one-time $455 million noncash deferred tax benefit from legal-entity restructuring; that benefit did not recur. The 2020 quarter also included a $38 million impairment charge, mainly a $36 million Asia-Pacific goodwill write-off.
- Q2 included a $71 million loss on extinguishment of debt. The company issued $2 billion of notes due 2030 and 2050, tendered $1.5 billion of notes due 2021–2023, and repaid its $500 million revolving-credit draw. Gross debt was $15.414 billion at quarter-end.
Outlook, risks and unusual items
- Management said the full financial impact of COVID-19 could not be reasonably estimated. It expected advertising, production and sports-related disruption to continue, while pursuing travel, marketing, production and other cost reductions.
- The Tokyo 2020 Olympic Games postponement shifts related revenue and significant expenses from 2020 to 2021. Third-party production partners were shut down during most of Q2.
- Management expected cash, operating cash generation and available credit to fund needs for the next 12 months. No specific revenue, earnings or margin guidance was provided.
- The revolving-credit agreement was amended to provide covenant flexibility. Maximum consolidated leverage limits were set at 5.50:1.00 for September 2020 through March 2021, then tighten to 5.00:1.00 in June 2021 and 4.50:1.00 from September 2021. The company reported covenant compliance at June 30.
- Europe goodwill headroom remained below 20% after impairment testing, though no charge was recorded; management said it would continue monitoring recoverability. The Asia-Pacific unit’s remaining $36 million goodwill was written off.
- Redeemable noncontrolling interests were $442 million, with certain put rights exercisable beginning in 2021. Management did not expect ordinary-course legal matters to have a material adverse effect. Tax audits and uncertain tax positions remain; reserves were $383 million.
Important facts for investors to verify
- Confirm advertising recovery, production restart progress and the timing of Olympic-related revenue and expenses.
- Review segment trends, especially the sharper International Networks declines and U.S. subscriber erosion; U.S. portfolio subscribers were 7% lower year over year excluding pandemic free previews.
- Track debt maturities, leverage covenant headroom, refinancing access and the effect of the covenant amendment.
- Assess Europe goodwill valuation sensitivity and any further impairment indicators as COVID-19 assumptions change.
- Reconcile cash generation with content investment, buybacks ($523 million repurchased in the first half), noncontrolling-interest distributions and put-right exposure.