Filing summary
Entity note: The supplied filing is Discovery, Inc.’s Form 10-Q, not a filing by Warner Bros. Discovery, Inc. It covers the quarter ended June 30, 2019, and was signed August 6, 2019. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Discovery operated U.S. Networks, International Networks, and Other, with content distributed through television, digital services, and licensing. Its portfolio included brands added through the 2018 Scripps Networks acquisition. The statements are unaudited. Comparisons with 2018 are affected by the timing of that acquisition and the 2018 sale of the Education Business.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $2,885 | $2,845 | $5,592 | $5,152 |
| Operating income | $911 | $650 | $1,685 | $854 |
| Net income available to Discovery | $947 | $216 | $1,331 | $208 |
| Diluted EPS | $1.33 | $0.30 | $1.86 | $0.31 |
| Adjusted OIBDA | $1,281 | $1,222 | $2,440 | $1,931 |
- Q2 revenue increased 1%; advertising rose 4% and distribution rose 2%, while other revenue fell 38%. Q2 operating margin was approximately 31.6%, versus 22.8% a year earlier; Adjusted OIBDA margin was approximately 44.4%, versus 42.9%.
- Q2 Adjusted OIBDA increased 5% as reported (7% excluding foreign-exchange effects). U.S. Networks OIBDA rose 15% to $1,126; International Networks declined 15% to $286.
- For the first half, reported revenue increased 9% and Adjusted OIBDA increased 26%. On a pro forma combined basis, first-half revenue declined 3%; management reported growth in combined advertising and distribution, offset by a sharp decrease in other revenue, principally reflecting 2018 Olympics rights sublicensing.
- Cash from operations was $1,216 in the first half, versus $716 in 2018. Capital expenditures were $122, implying operating cash flow less capital expenditures of about $1,094. Investing used $220 and financing used $643. Cash increased $335 to $1,321.
- At June 30, cash was $1,321 and total debt was $16,641, including $16,509 net of unamortized discounts, premiums, and issuance costs. Cash less gross debt was approximately negative $15,320. Current assets were $4,932 and current liabilities $3,874 (current ratio approximately 1.27). The company reported no revolver borrowings and $176 of commercial paper outstanding.
Material changes versus the prior comparable period
- Q2 operating income rose 40%, helped by lower restructuring charges ($7 versus $187), lower depreciation and amortization, and lower content costs. The 2018 comparison included an $84 gain on disposition, which did not recur.
- Q2 net income included a $271 income-tax benefit, driven principally by a one-time, non-cash $455 deferred tax benefit from legal-entity restructurings. The resulting Q2 effective tax rate was negative 38%; reported earnings growth therefore does not solely reflect operating performance.
- First-half reported comparisons include Scripps Networks for a longer period in 2019 than in 2018. Against pro forma combined 2018 results, management reported first-half revenue down 3%; it cited lower content costs and integration synergies as contributors to improved profitability.
- Cash from operations increased, while 2018 investing cash use was unusually high because of the Scripps Networks acquisition. First-half 2019 debt activity included $1.5 billion of new long-term notes and significant principal repayments.
Outlook, commentary, risks, and unusual items
- Liquidity outlook: Management expected cash, operating cash generation, and revolver availability to fund needs for the next 12 months. The $2.5 billion revolving facility was undrawn at quarter-end, subject to commercial-paper usage and covenant terms.
- Debt refinancing: New 2029 and 2049 notes funded redemption or repurchase of about $1.3 billion of notes, producing a $23 loss on extinguishment. Another $900 million of senior notes was due in September 2019. The filing reports covenant compliance at June 30.
- Operating risks: Management highlighted changing television viewing and distribution, subscriber declines, competition and technology shifts, advertising demand, and the risk of distributor renewals on less favorable terms or service interruptions. The 10 largest U.S. distributors generated approximately 96% of U.S. Networks distribution revenue.
- International and asset risks: Foreign exchange, political and regulatory uncertainty, and Brexit could affect international operations. Asia-Pacific goodwill was $190, with only 10% headroom in the prior quantitative impairment test; management reported no new impairment indicator at quarter-end and said it would continue monitoring the unit.
- Tax and legal matters: Uncertain tax position reserves were $442; the filing says up to $110 could decrease within 12 months, though audit outcomes and timing were uncertain. Management did not expect routine legal matters to have a material adverse effect. A withholding-tax claim settlement reduced SG&A by approximately $29 in the first half.
- Other notable items: Discovery dissolved its UKTV joint venture with BBC, taking control of three lifestyle channels and receiving cash and a BBC note receivable; it also acquired Golf Digest and increased its stake in Play Sports Group. A Magnolia joint venture closed after quarter-end, with Discovery expecting a 75% interest. The filing provides no numerical full-year earnings or revenue guidance.
Important facts for investors to verify
- Confirm the issuer: the filing is for Discovery, Inc., not Warner Bros. Discovery, Inc.
- Separate recurring operating results from the $455 non-cash tax benefit and the $29 tax-claim settlement benefit.
- Review upcoming debt maturities, refinancing costs, leverage, and the extent to which operating cash flow can support debt reduction and content investment.
- Assess subscriber and audience trends, distributor renewal exposure, and whether U.S. Networks’ gains can offset pressure in International Networks.
- Check whether reported synergy and cost reductions persist, and monitor Asia-Pacific goodwill headroom, tax audits, and international/Brexit exposure.