Business context and reporting period
Entity warning: The supplied filing is Discovery Communications, Inc.’s Form 10-Q for the quarter ended March 31, 2011—not a filing by Warner Bros. Discovery, Inc. The company described itself as a global nonfiction media and entertainment business, with U.S. Networks, International Networks, and Education and Other segments. Comparative 2010 results were recast for Antenna Audio as discontinued operations.
Financial results and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Revenue | $951 | $869 | Up 9% |
| Distribution revenue | $480 | $445 | Up 8% |
| Advertising revenue | $392 | $348 | Up 13% |
| Operating income | $507 | $282 | Up 80%; includes a $129 disposition gain |
| Adjusted OIBDA | $427 | $365 | Up 17%; non-GAAP measure |
| Net income attributable to company stockholders | $305 | $169 | Up 80% |
| Diluted EPS | $0.74 | $0.39 | Up 90% |
| Operating cash flow | $217 | $126 | Up $91 |
| Cash and cash equivalents, quarter-end | $453 | $691 | Compared with March 2010; $466 at Dec. 31, 2010 |
| Debt, net carrying amount | $3,612 | Not stated here | $21 current and $3,591 noncurrent; no revolver borrowings |
| Current assets / current liabilities | $1,629 / $654 | Not stated here | Working capital $975 at quarter-end |
Revenue growth was driven by distribution rate and subscriber gains and stronger advertising pricing and sell-through. Adjusted OIBDA margin was approximately 44.9%, versus 42.0% in Q1 2010. Reported operating margin was approximately 53.3%, but is elevated by the one-time $129 million gain; excluding that gain, operating income was approximately $378 million.
Material changes versus the prior comparable period
- U.S. Networks revenue rose 8% to $587 million and Adjusted OIBDA rose 14% to $334 million. International Networks revenue rose 14% to $323 million and Adjusted OIBDA rose 18% to $144 million. Education and Other revenue was $41 million, up 11%.
- Discovery contributed its domestic Discovery Health network to 50%-owned OWN on January 1, 2011, recognized a $129 million pretax gain, and ceased consolidating the network. Q1 2010 included $18 million of Discovery Health revenue and $7 million net income.
- SG&A declined $15 million, mainly reflecting a $27 million reduction in stock-based compensation, partly offset by higher employee, international expansion, and foreign-exchange costs.
- Interest expense fell $9 million to $49 million, primarily because interest-rate swaps no longer generated the prior-year expense. The effective tax rate increased to 32% from 21%; the prior-year rate benefited from a $28 million foreign tax reserve reversal.
- Operating cash flow improved, while cash fell $13 million during the quarter. Investing used $70 million, including $57 million of funding to equity-method investees. Financing used $168 million, including $167 million for share repurchases.
Outlook, risks, contingencies, and unusual items
- Management said existing cash, operating cash generation, and available borrowing capacity should meet anticipated operating cash needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Available capital resources were approximately $1.4 billion: $450 million cash (excluding cash held by consolidated joint ventures) and about $999 million unused revolver capacity after letters of credit. The $1.0 billion revolving facility expires in October 2013; the company reported covenant compliance and no defaults.
- The company expected significant further joint-venture funding and said it expected to recoup funded amounts. Its stated estimated risk of loss on equity-method VIE investments was approximately $820 million, including carrying value and unfunded contractual commitments; actual funding could exceed commitments.
- OWN had received $216 million of funding, including accrued interest, as of March 31. Harpo may require Discovery to purchase its OWN interest beginning in 2016, subject to fair value and contractual caps; no liability was recorded. The filing cautioned that OWN’s early-stage results could differ from assumptions used in valuing the contributed network.
- Discovery’s maximum remaining exposure under its Hub operating-performance guarantee was below $200 million; management considered failure to meet the target remote. It also committed up to $15 million of funding to The Hub, none funded by quarter-end.
- Management identified risks including advertising and affiliate collections, economic and competitive conditions, audience and technology shifts, joint-venture performance, international currency and political risks, access to capital, regulatory matters, litigation, and affiliate agreement renewals. It reported no material change in risk factors from the 2010 Form 10-K and no expected material effect from routine legal proceedings.
Important facts for investors to verify
- Confirm the filing entity and period: this is Discovery Communications, Inc., Q1 2011, rather than Warner Bros. Discovery, Inc.
- Assess underlying earnings excluding the $129 million OWN-related gain and consider Adjusted OIBDA alongside GAAP operating income and cash flow.
- Review OWN’s funding needs, valuation assumptions, loss allocation, and Harpo’s put right, as well as Discovery’s Hub guarantee and broader joint-venture exposure.
- Check debt maturities, revolver availability, covenant terms, and the effect of ongoing share repurchases on cash and leverage.
- Evaluate whether subscriber and advertising growth, especially internationally, continued beyond this quarter and whether higher expansion costs affected margins.