Business context and reporting period
This is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2015, comparing the three months ended March 31, 2015 with the same period in 2014. The supplied filing is for Discovery Communications, not Warner Bros. Discovery; the company name in the request does not match the filing. Discovery operated U.S. Networks, International Networks, and Education and Other businesses.
Financial performance
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $1,537 | $1,411 | +9% |
| Operating income | $482 | $434 | +11% |
| Net income attributable to Discovery | $250 | $230 | +9% |
| Diluted EPS | $0.37 | $0.33 | +12% |
| Adjusted OIBDA | $568 | $525 | +8% |
| Cash provided by operations | $63 | $241 | Down $178 |
Distribution revenue rose 15% to $758 million; advertising was essentially flat at $687 million; and other revenue increased 42% to $92 million. Operating margin was approximately 31.4%, versus 30.8% a year earlier. Adjusted OIBDA margin was approximately 37.0%, versus 37.2%. Higher content costs and lower income from equity investees partly offset revenue growth. Content expense increased to $460 million from $377 million, including content amortization of $403 million versus $344 million.
By segment, U.S. Networks revenue was $749 million (+6%) and Adjusted OIBDA was $425 million (+10%). International Networks revenue was $735 million (+10% reported), but Adjusted OIBDA declined 2% to $215 million. Excluding foreign exchange and acquired businesses, International Networks revenue declined 6% and Adjusted OIBDA declined 3%. Education and Other revenue was $54 million and Adjusted OIBDA was $5 million.
Cash, debt, and liquidity
Cash and cash equivalents were $321 million at March 31, 2015, down from $367 million at year-end. Operating cash flow was $63 million; investing activities used $78 million; financing activities provided $12 million; and foreign-exchange movements reduced cash by $43 million. Management attributed the operating cash-flow decline mainly to higher cash taxes, content investment, working-capital timing, and interest payments.
Total debt, net of discount, was $7.489 billion, compared with $7.153 billion at December 31, 2014. The quarter-end balance included $453 million of current debt, $7.036 billion of noncurrent debt, $428 million of commercial paper, and $145 million drawn under a $1.5 billion revolving facility. The company issued $300 million of 3.45% notes due 2025 and €600 million of 1.90% notes due 2027, and redeemed $850 million of 3.70% notes. It reported compliance with debt covenants and no defaults. Management expected cash, operating cash generation, and revolving-facility availability to cover needs for the next 12 months. A portion of cash—$134 million—was held by foreign subsidiaries and intended to remain permanently reinvested abroad.
Material changes, outlook, and risks
- Eurosport France acquisition: Discovery acquired an additional 31% interest on March 31, 2015, bringing its ownership to 51%. Its prior Eurosport International acquisition and other business combinations also affect year-over-year comparability; acquired businesses contributed $110 million of Q1 2015 revenue in the company’s comparison analysis.
- Distribution growth benefited from contractual rate increases and subscriber growth in some markets. In the U.S., the pay-TV subscriber base had declined slightly, and a top-10 U.S. distributor agreement was due to expire before June 30, 2015. A disruption or unfavorable renewal could reduce distribution and advertising revenue.
- TF1 may put its remaining Eurosport interest to Discovery during a 90-day window beginning July 1, 2015, at a stated floor of approximately €466 million (about $500 million at quarter-end), subject to working-capital adjustments. Other redeemable noncontrolling interests totaled $752 million on the balance sheet. These rights could require substantial cash.
- Discovery reported approximately $452 million of advances and a note receivable from OWN. It said there was no impairment and no further funding commitment, while noting it could provide additional funding if necessary and expected to recoup amounts funded.
- Market and regulatory exposures include approximately $33 million of Venezuelan bolivar-denominated assets, which could face further devaluation, and Russian rules requiring foreign owners to reduce ownership in Russian TV channels to 20% by January 1, 2016. Russia represented less than 2% of consolidated revenue.
- A former business partner alleged $75 million of losses in a threatened contract and business-tort claim. The company said a loss was not probable or reasonably estimable and recorded no accrual, but noted an adverse outcome could be material. It also disclosed ongoing ordinary-course legal matters.
- No numerical earnings or revenue guidance was provided in the supplied filing text. Management described content investment, distribution optimization, advertising, and expansion across platforms and markets as strategic priorities. The filing cautions that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Confirm the issuer and period: this filing is Discovery Communications’ Q1 2015 report, not a Warner Bros. Discovery filing.
- Check distributor renewal developments, particularly the U.S. top-10 agreement expiring before June 30, 2015.
- Assess the likelihood, timing, and funding implications of the TF1 Eurosport put right and other redeemable noncontrolling interests.
- Track operating cash flow, cash taxes, content spending, total debt, and reliance on commercial paper and revolving credit.
- Review developments in Venezuela and Russia, the $75 million threatened claim, and recoverability of the OWN receivable.