Warner Bros. Discovery, Inc. annual report, FY2014

Filing identity and reporting period

Important identification issue: The supplied filing is Discovery Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed February 19, 2015. It is not a Warner Bros. Discovery filing. The filing includes unaudited fourth-quarter results, but reports primarily on the full fiscal year.

Discovery was a global media company operating U.S. and international television networks, digital distribution and websites, education products, and production studios. Its principal revenue sources were advertising and distribution fees. In 2014, it acquired control of Eurosport and Discovery Family.

Financial performance and liquidity

Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.

Reported revenue growth was boosted by acquired businesses and currency effects. Excluding foreign-currency effects and the specified newly acquired businesses, revenue increased 4% and Adjusted OIBDA was essentially unchanged. Reported operating margin was approximately 32.9%, versus 35.7% in 2013; Adjusted OIBDA margin was approximately 39.8%, versus 43.4%.

Fourth quarter: Revenue was $1,676, compared with $1,537 in Q4 2013; operating income was $476, versus $522; net income was $235, versus $290; and diluted EPS was $0.38, versus $0.41. The filing’s quarterly table reports net income available to Discovery Communications, Inc. of $250 million in Q4 2014 and $289 million in Q4 2013.

Cash, debt and liquidity: Year-end cash was $367, down from $408. Cash used in investing was $568 and cash used in financing was $734. Debt was approximately $7.2 billion including capital leases; the balance sheet showed $1,107 current debt and $6,046 noncurrent debt. The company reported approximately $1.2 billion of available borrowing capacity under its revolving facility and commercial-paper program, and stated that cash, operating cash flow and facility availability were expected to cover needs for the next 12 months. An $850 million senior note maturity was due in June 2015. The company reported compliance with credit-facility covenants.

Material changes versus the prior year

• International Networks revenue rose 28% as reported and Adjusted OIBDA rose 18%; results included the consolidation of Eurosport and SBS Nordic. Excluding the specified acquisitions and currency effects, International Networks revenue grew 8% and Adjusted OIBDA grew 9%.
• U.S. Networks revenue was broadly flat at $2,950 million and Adjusted OIBDA fell 2% to $1,680 million, largely reflecting higher content spending.
• Advertising revenue increased 13% company-wide; distribution revenue increased 12%. On the stated acquisition- and currency-adjusted basis, advertising grew 7% and distribution grew 2%.
• Costs of revenue increased 26% as reported, including higher content investment and acquired operations. Restructuring and other charges increased to $90 million from $16 million, including content impairments tied to the Discovery Family rebrand and cancellation of certain series.
• Cash from operations rose modestly, while content investment increased by $257 million. Stock repurchases used $1,422 million in cash during 2014.
• Foreign-currency translation adjustments reduced other comprehensive income by $399 million; the filing also identifies foreign-exchange exposure, including uncertainty around repatriating Venezuelan cash.

Outlook, risks and unusual items

• The filing provides no specific numeric revenue, earnings or cash-flow guidance. Management describes priorities including continued content investment, distribution and advertising growth, digital expansion, localization, and integration of acquisitions.
• Key business risks include changing audience preferences and viewing platforms, intense competition, reliance on distributor carriage agreements and affiliate fees, distributor consolidation and advertising-market sensitivity.
• International risks include currency volatility, local regulation and political or economic developments. Russian rules effective in 2015 restrict advertising on pay-TV channels, and a separate law requires foreign owners of Russian TV channels to reduce ownership to 20% or less by January 1, 2017; management expected adverse effects.
• Debt service, refinancing the 2015 maturity, and possible cash needs from noncontrolling-interest put rights are relevant. The company recorded $747 million of redeemable noncontrolling interests, including a $558 million TF1 put related to Eurosport.
• Content purchase obligations totaled $1,765 million in the contractual-obligations table, with $933 million due in less than one year. Total listed contractual obligations were $14,589 million; timing or amount of certain put, tax and other obligations is uncertain.
• Ordinary-course lawsuits and claims were disclosed; management did not expect their resolution to materially adversely affect consolidated financial position, future results or liquidity. The auditor gave an unqualified opinion and found internal control over financial reporting effective, while Eurosport was excluded from the first-year control assessment.

Most important facts for an investor to verify

1. Confirm the intended issuer: this is Discovery Communications, Inc., not Warner Bros. Discovery, and the reporting period is FY 2014.
2. Separate organic performance from acquisition and foreign-exchange effects, particularly for International Networks and consolidated revenue growth.
3. Review the 2015 $850 million debt maturity, refinancing plans, debt covenants and actual available liquidity.
4. Assess potential cash exposure and timing under the Eurosport, Discovery Family, Discovery Japan and OWN-related put rights.
5. Track whether content investment, restructuring and acquired-business integration translate into sustained operating cash flow and margins.
6. Evaluate the effects of Russian ownership and advertising restrictions, currency exposure, and the company’s international cash-repatriation constraints.