Business context and reporting period
This is Discovery, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed February 27, 2020. The supplied company metadata says Warner Bros. Discovery, Inc.; however, the filing is for Discovery, Inc. and does not report results for Warner Bros. Discovery. Discovery was a global media company operating U.S. Networks and International Networks, distributing programming through pay-TV, free-to-air and broadcast channels, digital platforms, licensing, and direct-to-consumer services. The filing covers the full year, with unaudited fourth-quarter data also included.
Financial performance and liquidity
Amounts below are in U.S. dollars. Year-over-year reported comparisons are affected by the March 2018 Scripps Networks acquisition; management also presents pro forma comparisons intended to show the combined businesses.
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Revenue | $11.144 billion | $10.553 billion | Up 6% reported; up 2% on a pro forma combined, constant-currency basis |
| Operating income | $3.009 billion | $1.934 billion | Up 56%; 2018 included substantially higher restructuring and other charges |
| Net income attributable to Discovery | $2.069 billion | $594 million | Up $1.475 billion |
| Diluted EPS | $2.88 | $0.86 | 2019 benefit included a significant one-time tax item |
| Adjusted OIBDA | $4.671 billion | $4.188 billion | Up 12% reported; up 14% constant currency on a pro forma combined basis |
| Operating margin | 27.0% | 18.3% | Calculated as operating income divided by revenue |
| Adjusted OIBDA margin | 41.9% | 39.7% | Calculated; Adjusted OIBDA is a non-GAAP measure |
| Operating cash flow | $3.399 billion | $2.576 billion | Increase primarily reflected higher net income excluding non-cash items, partly offset by working-capital movements |
| Cash and cash equivalents | $1.552 billion | $986 million | At December 31 |
| Total debt, face amount | $15.544 billion | $16.918 billion | $609 million current at year-end 2019; debt net of unamortized items was $15.419 billion |
| Current assets / current liabilities | $5.217 billion / $3.239 billion | $4.231 billion / $3.997 billion | 2019 current ratio approximately 1.61 |
2019 quarterly revenue was $2.707 billion, $2.885 billion, $2.678 billion, and $2.874 billion in Q1 through Q4, respectively. Q4 operating income was $705 million and net income attributable to Discovery was $476 million; diluted EPS was $0.67.
Revenue mix in 2019 was 54% advertising, 43% distribution, and 3% other. U.S. Networks generated $7.092 billion of revenue and $4.117 billion of Adjusted OIBDA; International Networks generated $4.041 billion and $1.057 billion, respectively. U.S. Networks portfolio subscribers declined 5%, while subscribers to fully distributed networks declined 3%.
Material changes versus the prior comparable period
- Reported revenue rose 6%, but pro forma combined revenue was essentially flat reported and up 2% excluding foreign exchange. On that pro forma constant-currency basis, advertising grew 3% and distribution grew 5%; other revenue fell 47%, principally because of Olympic sports-rights sublicensing in 2018.
- U.S. Networks Adjusted OIBDA rose 18% reported and 10% on a pro forma combined basis, supported by pricing and affiliate-rate increases and lower content costs. International Networks Adjusted OIBDA fell 2% reported, but rose 5% pro forma excluding foreign exchange.
- Operating cash flow increased by $823 million. Investing cash outflow fell to $438 million from $8.593 billion, largely because 2018 included the Scripps acquisition. Financing cash outflow was $2.357 billion, including debt repayments, $633 million of stock repurchases, and distributions to noncontrolling interests.
- Debt declined from $16.918 billion to $15.544 billion at face amount. The company issued $1.5 billion of long-term notes and used proceeds in part to redeem or repurchase existing notes. It reported no borrowings under its $2.5 billion revolving facility or commercial-paper program at year-end.
Outlook, commentary, risks, and unusual items
- Management said it expected cash on hand, operating cash flow, and revolving-credit availability to fund needs for the next 12 months. The filing provides no specific revenue, earnings, or cash-flow guidance.
- The company recorded a $445 million one-time, non-cash deferred tax benefit from legal-entity restructurings; the reported effective tax rate was 4%, versus 33% in 2018. This materially boosted 2019 net income and is not a recurring operating result.
- A $155 million goodwill impairment was recorded for the Asia-Pacific reporting unit amid moderating growth expectations, underperforming sports investments, regional volatility, and lower peer-company valuation multiples. Europe goodwill was $1.9 billion with 19% estimated headroom, which management said it would monitor.
- Restructuring and other charges were $26 million in 2019 versus $750 million in 2018. The 2018 amount included content impairments and Scripps integration-related costs. A $29 million withholding-tax-claim accrual reversal reduced 2019 SG&A; a separate $28 million debt-extinguishment loss was recorded.
- Key risks include cord-cutting and streaming competition, declining traditional subscribers, advertising-market volatility, and reliance on distributors. More than 95% of U.S. distribution revenue came from the top 10 distributors, whose agreements expire at various times from 2020 through 2024. The company also cited content-audience uncertainty, foreign-exchange exposure, cybersecurity and privacy risks, regulatory changes, and integration and leverage risks.
- Debt service and committed spending are substantial: contractual obligations totaled $31.984 billion, including $15.544 billion of debt principal, $8.598 billion of interest, and $5.230 billion of content commitments. A $600 million senior-note maturity was due in June 2020. The company also had $442 million of redeemable noncontrolling interests and $375 million of unrecognized tax benefits.
- After year-end, the board authorized up to an additional $2 billion of share repurchases, to follow completion of the existing $1 billion authorization. The company paid no cash dividends and stated it had no present intention to do so.
- Management and the auditor reported effective internal control over financial reporting. PwC’s critical audit matters included uncertain-tax-position reserves and goodwill impairment valuations.
Important facts for investors to verify
- Confirm that the issuer is Discovery, Inc., not Warner Bros. Discovery, Inc., and distinguish full-year results from Q4 figures.
- Review reported versus pro forma combined results and the effect of the Scripps acquisition on comparisons.
- Assess how much of 2019 earnings growth came from the $445 million non-cash tax benefit and lower prior-year restructuring charges.
- Verify debt maturities, interest burden, covenant compliance, and capacity to meet content and other contractual commitments.
- Track subscriber declines, distributor renewals and carriage terms, advertising performance, and the profitability of DTC investments.
- Evaluate the assumptions behind the Asia-Pacific impairment and Europe goodwill headroom, as well as tax uncertainties and foreign-exchange exposure.