Business context and reporting period
This is Discovery, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018—not a filing under the name Warner Bros. Discovery, Inc. Discovery operated U.S. Networks, International Networks, and Education and Other. The March 6, 2018 acquisition of Scripps Networks materially changed the business and makes reported year-over-year comparisons less like-for-like.
Financial results and liquidity
All amounts are in U.S. dollars; financial-statement amounts are in millions unless noted.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,592 | $1,651 | $7,744 | $5,009 |
| Operating income | $369 | $433 | $1,223 | $1,550 |
| Net income attributable to Discovery | $117 | $218 | $325 | $807 |
| Diluted EPS | $0.16 | $0.38 | $0.47 | $1.39 |
| Adjusted OIBDA | $1,044 | $575 | $2,955 | $1,895 |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $1,647 | $1,167 |
Q3 reported revenue rose 57%, largely reflecting Scripps; pro forma combined revenue was nearly flat at $2,593 million versus $2,582 million. On that pro forma basis, operating income was $438 million versus $498 million, down 12%. Nine-month pro forma combined revenue increased 6% to $8,367 million, while operating income declined 17% to $1,505 million. Pro forma net income attributable to Discovery was $510 million versus $815 million for the nine-month period.
Q3 operating margin was approximately 14.2% (2017: 26.2%); nine-month operating margin was approximately 15.8% (2017: 30.9%). These reported margins are affected by acquisition-related amortization and restructuring. Adjusted OIBDA is a company-defined non-GAAP measure: Q3 margin was approximately 40.3% of revenue and nine-month margin approximately 38.2%.
At September 30, cash and cash equivalents were $531 million, down from $7,309 million at year-end 2017, primarily because cash funded the Scripps acquisition. Net cash from operations of $1,647 million was outweighed by $8,549 million of investing outflows, including $8,565 million for acquisitions; financing provided $148 million. Total debt was $17,615 million before unamortized discounts and issuance costs, or $17,482 million net, compared with $14,913 million and $14,785 million, respectively, at year-end. Current debt was $1,653 million. The company reported $2,411 million of unused capacity across cash, revolving-credit/commercial-paper capacity, and the program financing line; the $2.5 billion revolver and commercial paper share capacity. The filing states cash, operating cash flow, and revolver availability are expected to cover needs for the next 12 months.
Material changes, outlook, and risks
- Scripps Networks was acquired for approximately $12.0 billion of consideration, including $8.8 billion cash and $3.2 billion stock; Discovery also assumed approximately $2.5 billion of Scripps debt. The acquisition added substantial goodwill and finite-lived intangibles and increased interest and amortization expense.
- Restructuring and other charges were $224 million in Q3 and $652 million for nine months, mainly integration, employee and contract terminations, and content write-offs following a strategic content review. Management expected further restructuring and integration expenses, including costs related to the New York headquarters relocation.
- Management reported nine-month pro forma growth in U.S. Networks Adjusted OIBDA of 5% and International Networks of 7%. It also cited U.S. portfolio subscriber declines: total portfolio subscribers were 5% lower year over year, and fully distributed network subscribers 2% lower. Management noted viewership declines in Europe.
- Approximately $1.8 billion of senior notes were due in 2019. The company was in compliance with revolving-credit covenants at quarter-end. It disclosed $5.9 billion of content commitments and $8.4 billion of total contractual minimum payments, including leases and other commitments.
- Key risks include traditional pay-TV subscriber erosion, distributor renewals and bargaining power, advertising demand and audience trends, integration and realization of Scripps synergies, substantial debt and refinancing needs, foreign-exchange exposure, and uncertainty in equity-method investments. U.S. distribution revenue is concentrated: about 97% came from the 10 largest U.S. distributors.
- The filing disclosed a $74 million indirect-tax claim recorded as a Scripps purchase-accounting adjustment; management said it intended to defend the matter and considered material loss beyond the recorded amount remote. Management did not believe ordinary-course legal proceedings would materially adversely affect the company. Harpo exercised an OWN put right in August; a November 6 agreement, after quarter-end, withdrew the notice and established revised terms for a subsequent redemption.
- No specific quantitative forward guidance was provided. Management described expectations and risks as forward-looking statements, not guaranteed outcomes.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing identifies Discovery, Inc., not Warner Bros. Discovery, Inc.
- Assess performance using the filing’s pro forma comparisons as well as reported results, and review the definitions and exclusions in Adjusted OIBDA.
- Review debt maturities, refinancing plans, covenant headroom, and the availability of revolver capacity after commercial-paper borrowings.
- Track subscriber, audience, distribution-renewal, and advertising trends, including the impact of integration and planned cost savings.
- Check subsequent disclosures on the OWN put, tax claim, remaining purchase-accounting adjustments, restructuring costs, and content commitments.