Business context and reporting period
Discovery, Inc. (Nasdaq: DISCA, DISCB and DISCK) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company is a global media business with U.S. Networks and International Networks segments. The filing is by Discovery, Inc.; it is not a 2019 filing under the Warner Bros. Discovery name. The March 2018 Scripps Networks acquisition materially affects year-over-year comparisons.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $2.707 billion | $2.307 billion |
| Operating income | $774 million | $204 million |
| Net income attributable to Discovery | $384 million | $(8) million |
| Diluted earnings per share | $0.53 | $(0.01) |
| Cash from operations | $542 million | $160 million |
| Cash and equivalents, quarter-end | $745 million | $986 million at Dec. 31, 2018 |
| Debt, net of discounts and issuance costs | $16.343 billion | $16.793 billion at Dec. 31, 2018 |
GAAP operating margin was approximately 28.6%, versus 8.8% a year earlier. Adjusted OIBDA, a non-GAAP measure, was $1.159 billion, up 63% reported; the corresponding margin was approximately 42.8%, versus 30.7%. The filing cautions that Adjusted OIBDA is not a substitute for GAAP measures.
Cash used in investing was $94 million, compared with $8.675 billion in Q1 2018, when the Scripps acquisition drove substantial outflows. Cash used in financing was $652 million, including $453 million of debt principal repayments and $163 million of distributions to noncontrolling interests. Current assets were $4.025 billion and current liabilities $3.475 billion. The company reported $1.387 billion of current debt, including $1.377 billion of senior notes due in 2019; it redeemed $411 million of notes during the quarter.
Material changes versus the prior comparable period
- Reported revenue rose 17%, primarily reflecting the inclusion of Scripps Networks for the full quarter in 2019, compared with only part of Q1 2018. On a pro forma combined basis, revenue declined 8% to $2.707 billion from $2.930 billion.
- On a pro forma combined basis, advertising revenue was down 2% reported (up 1% excluding foreign exchange) and distribution revenue was approximately flat reported (up 3% excluding foreign exchange). U.S. Networks subscribers were 4% lower overall year over year, and subscribers to fully distributed networks were 1% lower.
- International Networks pro forma revenue declined 21%, including weaker other revenue largely due to Olympics-related sublicensing in the prior-year quarter. Adjusted OIBDA increased 31% on a pro forma basis, with lower Olympics-related costs among the drivers.
- Operating income and net income improved substantially; the prior-year period included $241 million of restructuring and other charges, versus $5 million in Q1 2019. Q1 2019 results also included a $29 million reduction in SG&A from settlement of a withholding-tax claim.
- Depreciation and amortization increased 93% to $372 million, primarily reflecting acquired Scripps assets. Net income also reflects a higher tax expense: $153 million versus a $20 million benefit in Q1 2018.
Outlook, commentary, risks and unusual items
- Management expected cash on hand, operating cash flow and revolver availability to fund cash needs for the next 12 months. At quarter-end, the company had $745 million of cash, $225 million drawn on its $2.5 billion revolver, and $2.274 billion of unused capacity after accounting for borrowings and letters of credit. It reported covenant compliance and no default.
- Management expected a non-cash deferred tax benefit of approximately $450 million to $500 million, primarily in Q2 2019, related mainly to planned internal restructurings and deferred-tax changes. This is an expectation, not a reported Q1 result.
- After quarter-end, the board authorized up to $1 billion of share repurchases. The company also announced agreements with BBC to dissolve the UKTV joint venture, with approximately $240 million of payments expected to Discovery, and announced a Magnolia media joint venture in which Discovery expected to hold 75%.
- Key risks include substantial debt, upcoming 2019 maturities, distributor concentration and contract renewals, declining subscribers and linear audiences, advertising-market variability, foreign exchange and Brexit uncertainty, and execution of Scripps integration and cost savings. The Asia-Pacific reporting unit had only 10% goodwill headroom in the prior-year impairment assessment; management reported no new impairment indicators in Q1.
- The company adopted lease accounting in Q1, recognizing $355 million of operating lease liabilities and $242 million of finance lease liabilities at March 31. It also disclosed approximately $515 million of undiscounted payments for operating leases not yet commenced, primarily related to its planned headquarters move.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. The filing gives no quantified full-year revenue or earnings guidance.
Important facts for investors to verify
- Confirm the entity and security: this is Discovery, Inc.’s 2019 filing, not a Warner Bros. Discovery filing.
- Assess the underlying trend using pro forma combined results, distinguishing them from reported growth driven by the Scripps acquisition.
- Review the schedule and refinancing or repayment plan for 2019 debt maturities, alongside leverage, interest costs and revolver availability.
- Track subscriber, audience and advertising trends, distributor renewals, and whether reported cost savings and integration benefits persist.
- Check the realization, timing and cash implications of the forecast deferred-tax benefit, and monitor goodwill headroom and foreign-exchange exposure.
- Review the terms, closing status and financial effects of the UKTV transaction, Magnolia venture and new share-repurchase authorization.