Discovery Communications, Inc. — FY2009 Form 10-K
Filing identity and period: The supplied filing is for Discovery Communications, Inc., not Warner Bros. Discovery, Inc. It covers the fiscal year ended December 31, 2009; the filing also provides unaudited fourth-quarter results. The company operated nonfiction television networks and digital, education, commerce, and sound-services businesses. Comparisons with 2008 reflect the Newhouse transaction presented as if completed on January 1, 2008, but certain business and accounting changes limit comparability.
Financial performance
| Metric | FY2009 | FY2008 | Change |
|---|---|---|---|
| Revenue | $3.516 billion | $3.443 billion | +2% |
| Distribution revenue | $1.713 billion | $1.640 billion | +4% |
| Advertising revenue | $1.428 billion | $1.396 billion | +2% |
| Other revenue | $375 million | $407 million | -8% |
| Operating income | $1.235 billion | $1.057 billion | +17% |
| Net income available to stockholders | $552 million | $317 million | +74% |
| Diluted EPS | $1.30 | $0.98 | Up from $0.98 |
| Adjusted OIBDA | $1.464 billion | $1.310 billion | +12% |
Reported operating margin was approximately 35.1%; net margin was approximately 15.7%. Adjusted OIBDA margin was approximately 41.6%, using the company’s non-GAAP measure. The $252 million Hasbro joint-venture gain materially boosted reported operating income; excluding that gain, operating income was approximately $983 million.
Fourth-quarter 2009 revenue was $964 million versus $904 million in fourth-quarter 2008. Operating income was $292 million versus $284 million, and net income was $156 million versus $115 million. Diluted EPS was $0.36 versus $0.25.
Cash flow, debt, and liquidity
- Cash provided by operating activities was $608 million, up from $569 million. Investing activities provided $266 million, including $300 million of Hasbro proceeds; financing activities used $356 million.
- Cash and cash equivalents were $623 million, compared with $100 million at year-end 2008. Capital expenditures were $57 million.
- Debt excluding capital leases was approximately $3.4 billion; the balance sheet reported $3.495 billion of long-term debt net, including the current portion. The $1.6 billion revolving facility was undrawn at year-end, bringing reported total liquidity to about $2.2 billion.
- Current assets were $1.680 billion and current liabilities $790 million (current ratio approximately 2.1). Total liabilities were $4.697 billion and total assets $10.965 billion.
- Management said cash and expected operating cash flow should cover anticipated needs for at least 12 months. The revolving facility expired in October 2010, and the company was assessing an extension or replacement.
Material changes, outlook, and risks
- Revenue growth reflected subscriber and contractual rate increases and stronger ratings/pricing, partly offset by foreign-exchange headwinds. Excluding currency effects and specified comparability items, distribution revenue rose 9% and advertising revenue 4%.
- Adjusted OIBDA increased 8% at U.S. Networks and 16% at International Networks. International revenue was adversely affected by $69 million of currency effects; adjusted OIBDA growth excluding currency effects was 24%.
- Share-based compensation shifted to a $228 million expense from a $66 million benefit in 2008, largely reflecting remeasurement of cash-settled awards as the Series A share price rose 117%. This weighed on reported SG&A and earnings comparability.
- Hasbro acquired 50% of the Discovery Kids venture for $300 million cash plus a tax-receivables agreement valued at $57 million. Discovery recorded a $252 million gain and retained a 50% equity-method interest; the network was scheduled to relaunch as The Hub in late 2010.
- Commerce moved to a licensing model in April 2009, reducing reported sales and direct operating costs. Management expected year-over-year reductions in commerce revenue and direct costs through the first quarter of 2010.
- Beginning in 2010, revised VIE accounting would deconsolidate OWN and Animal Planet Japan and account for them under the equity method; historical periods would be recast. Segment reporting would also shift Discovery Commerce into U.S. Networks. The filing provides no formal consolidated earnings or revenue guidance.
- OWN carried a Discovery funding commitment of up to $100 million through September 2011, with $35 million funded by year-end 2009; discussions with Harpo included possible increases to the commitment. The BBC’s put rights over certain ventures were carried at $49 million, but a negotiated acquisition could cost substantially more.
- Key risks include advertising cyclicality and weak economic conditions, distributor renewal and concentration, content cost and audience uncertainty, piracy and technology shifts, currency exposure, and leverage. Debt agreements impose financial tests and restrictions; the company reported covenant compliance at year-end. Routine litigation was not expected by management to have a material adverse effect.
The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the requested issuer: this filing is Discovery Communications, Inc., not Warner Bros. Discovery, Inc.
- Assess earnings quality by separating the $252 million Hasbro-related gain and the effects of share-based compensation, impairments, restructuring, and other non-operating items.
- Review the 2010 revolving-credit-facility renewal, debt maturities, covenant headroom, and cash available at the operating subsidiaries.
- Track OWN funding needs and BBC put-right negotiations, including any commitments beyond amounts accrued or disclosed.
- Reconcile post-2010 results to the retrospective OWN/APJ accounting and Discovery Commerce segment reclassification before comparing periods.