Filing summary
Issuer identification: The supplied filing is Discovery Communications, Inc.’s Form 10-Q, not a filing by Warner Bros. Discovery, Inc. It covers the quarter and nine months ended September 30, 2009; filed November 3, 2009. Amounts are U.S. dollars in millions except per-share data.
Business context and reporting period
Discovery operated U.S. Networks, International Networks, and Commerce, Education, and Other, with programming and related businesses in the U.S. and approximately 170 other countries. The 2008 comparatives were recast and include the combined DHC and DCH results as if the September 2008 Newhouse Transaction had occurred on January 1, 2008.
Financial performance and condition
- Revenue: Q3 revenue was $854, up 1% year over year; nine-month revenue was $2,552, up 1%. Q3 distribution, advertising, and other revenue were $426, $341, and $87, respectively.
- Profit and margins: Q3 operating income was $215, down 27%, and income available to common stockholders was $95, or $0.22 per share, versus $134, or $0.44, including discontinued operations, in Q3 2008. Nine-month operating income was $943, up 22%; income available to stockholders was $397, or $0.94 per share, versus $211, or $0.74. Operating margin was approximately 25% for Q3 2009 versus 35% in Q3 2008, and approximately 37% for nine-month 2009 versus 30% in 2008.
- Segment measure: Adjusted OIBDA, a non-GAAP measure, rose 17% to $364 for Q3 and 13% to $1,074 for nine months. U.S. Networks drove the gains; International Networks’ reported revenue fell, largely due to currency impacts.
- Cash flow: Nine-month cash from operations was $358, down from $423. Investing activities provided $279, including $300 received in the Hasbro transaction. Financing activities used $343. Cash increased $301 to $401; capital expenditures were $43.
- Debt and liquidity: Debt, net of discount, was $3,511, including $3,472 long-term and $39 current; cash was $401. Approximate net debt was $3.1 billion. The company reported $2.0 billion of liquidity, including $1.6 billion available on its revolver, and stated it was compliant with debt covenants. Current assets of $1,417 compared with current liabilities of $762.
Material changes versus the prior comparable period
- U.S. Networks revenue rose 5% in Q3 and 4% for nine months; segment Adjusted OIBDA increased 18% and 12%, respectively.
- International Networks revenue declined 2% in Q3 and 4% for nine months as reported. Excluding unfavorable currency effects, management said revenue increased 6% and 7%, respectively; cost savings supported higher Adjusted OIBDA.
- Q3 SG&A rose to $338 from $224, principally reflecting $98 of share-based compensation expense versus a $65 benefit a year earlier, as well as OWN consolidation. The nine-month comparison was also affected by share compensation and OWN.
- On May 22, Discovery transferred Discovery Kids into a 50-50 Hasbro joint venture, ceased consolidating its operating results, and recognized a $252 gain. Q3 2008 included $40 of after-tax discontinued-operations income; 2009 did not.
Outlook, risks, contingencies, and unusual items
- Management expected existing cash and operating cash flow to cover anticipated needs for at least 12 months. For 2009 it forecast cash taxes of approximately $475, capital expenditures of $50–$55, interest expense of $240–$260, and at least $1.3 billion of debt repayments. These are management expectations, not guarantees.
- Discovery issued $500 of 5.625% senior notes due 2019 and borrowed $500 under Term Loan C in 2009, using proceeds principally to repay earlier-maturing debt. Most debt was variable-rate; interest-rate swaps were used to hedge exposure.
- Key risks cited include economic weakness and reduced advertising spending, affiliate renewals and subscriber trends, currency movements, competition and technology changes, access to capital, and joint-venture relationships. Management warned that refinancing or additional liquidity could become more costly or unavailable.
- Potential obligations include up to $100 of committed OWN funding through September 2011, of which $27 had been funded, and BBC put rights associated with certain ventures. The recorded redeemable interest was $49; a negotiated purchase could cost substantially more. A Hasbro performance guarantee had remaining maximum exposure below $265, which management considered unlikely to cause a material adverse impact.
- Unusual items included $26 of impairment charges for intangible assets and software, $21 of nine-month restructuring charges, and the $252 Hasbro-related gain. Management reported routine litigation and believed pending matters would not materially affect financial condition, results, or liquidity. No material subsequent events were reported through filing.
Important facts for investors to verify
- Confirm the issuer: this filing is for Discovery Communications, Inc.; the request’s Warner Bros. Discovery identification does not match the document.
- Assess underlying earnings apart from the $252 Hasbro gain, volatile mark-to-market share compensation, and 2008 discontinued-operation results.
- Review the timing and funding of debt maturities, the availability of the revolver, and covenant restrictions on subsidiary distributions.
- Track currency-adjusted International Networks performance, advertising trends, and the impact of the Discovery Kids deconsolidation and commerce-model transition.
- Monitor OWN funding and launch plans, BBC put-right negotiations, and the assumptions behind recorded impairments and contingent exposures.