Filing identity and period
Important entity mismatch: The supplied filing is Discovery Communications, Inc.’s Form 10-Q, not a filing by Warner Bros. Discovery, Inc. It covers the quarter and nine months ended September 30, 2013; financial amounts below are in millions of dollars unless otherwise stated.
Discovery operated U.S. Networks, International Networks and Education, with television, digital distribution and education businesses. The interim statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,375 | $1,076 | $3,998 | $3,287 |
| Operating income | $499 | $438 | $1,477 | $1,374 |
| Adjusted OIBDA | $597 | $498 | $1,763 | $1,550 |
| Net income attributable to Discovery stockholders | $255 | $205 | $786 | $719 |
| Diluted EPS | $0.71 | $0.55 | $2.16 | $1.88 |
| Cash provided by operating activities | Not provided for quarter | Not provided for quarter | $930 | $771 |
Revenue grew 28% in Q3 and 22% in the nine-month period. Adjusted OIBDA rose 20% and 14%, respectively. Operating margin was approximately 36.3% in Q3 and 36.9% for nine months, versus 40.7% and 41.8% a year earlier; adjusted OIBDA margin was approximately 43.4% and 44.1%, versus 46.3% and 47.2%. Higher acquisition-related amortization and operating costs affected the comparisons.
For the nine months, distribution revenue was $1,896, advertising revenue $1,922 and other revenue $180. Reported segment revenue was $2,212 for U.S. Networks, $1,716 for International Networks and $73 for Education. Segment Adjusted OIBDA was $1,274, $681 and $13, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $439 at September 30, 2013, down from $1,201 at year-end 2012.
- Net cash from operations was $930; investing used $1,941 and financing provided $254 during the first nine months. The investing outflow included $1,832 for acquisitions, primarily SBS Nordic.
- Debt, net of discount, was $6,508, including $6,485 noncurrent and $23 current. The company issued $1.2 billion of senior notes in March; reported debt increased from $5,243 at year-end.
- The $1.0 billion revolving credit facility was undrawn, with $999 available after outstanding letters of credit. Management said cash, operating cash flow and revolver availability should cover needs for the next 12 months. The company reported compliance with debt covenants.
- Cash less debt, net of discount, was approximately $6,069 of net debt. Of cash, $230 was held by foreign subsidiaries intended to be permanently reinvested outside the U.S.
Material changes and unusual items
- The April acquisition of SBS Nordic for approximately $1.8 billion expanded International Networks. Acquired businesses contributed $380 of nine-month revenue; reported nine-month revenue growth excluding newly acquired businesses was 10%, and Adjusted OIBDA growth on that basis was 9%.
- International Networks’ reported growth also reflects the consolidation of Discovery Japan. Discovery recorded a $92 remeasurement gain on its previously held stake and a $56 loss on foreign-exchange derivatives associated with the SBS Nordic purchase.
- Depreciation and amortization rose to $190 for nine months from $87, primarily due to acquired intangible assets. Content expense was $921 for nine months, up from $688.
- The company recognized a $19 pretax gain on the sale of Petfinder. Q3 2012 and the first nine months of 2012 included losses from discontinued operations of $9 and $11, respectively.
- In the first nine months, Discovery repurchased $713 of common stock and $256 of preferred stock. It had $805 of remaining common-stock repurchase authorization at September 30, 2013.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management described ongoing investment in content, international expansion and distribution across digital platforms.
- Distribution agreements are a significant risk: the top 10 U.S. distributors generated about 90% of U.S. Networks’ distribution revenue, and the top 10 international distributors generated about 50% of International Networks’ distribution revenue. Nonrenewal or less favorable renewal terms could reduce affiliate and advertising revenue.
- Discovery had $498 of advances and a note receivable from OWN and expected to provide further funding if needed, despite having no further contractual funding commitment. OWN’s results had been below its initial business plan; management reported no impairment for the period.
- Discovery’s maximum potential exposure under its performance guarantee for The Hub was less than $70 at September 30, 2013 and was expected to decline to zero during 2014. Management considered a payment unlikely.
- Other risks include acquisition integration, foreign currency movements, advertising demand, changing viewing and distribution technologies, and performance of equity-method investees. Management stated that routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended issuer: this is Discovery Communications, Inc., not Warner Bros. Discovery, Inc.
- Assess how much reported growth came from acquisitions, currency movements and the Discovery Japan consolidation versus underlying operations.
- Review SBS Nordic integration, acquired intangible-asset amortization and acquisition-related financing costs.
- Monitor leverage, cash levels, content investment and capital returns, including common and preferred stock repurchases.
- Track OWN funding and recoverability, distributor renewals, and the Hub guarantee exposure.