Warner Bros. Discovery, Inc. quarterly report, Q1 FY2014

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Business context and reporting period

The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2014—not a Warner Bros. Discovery filing. Discovery operated U.S. Networks, International Networks and Education businesses. Unless otherwise noted, figures are in U.S. dollars and millions.

Financial performance and condition

  • Revenue was $1.411 billion, up 22% year over year. Distribution revenue rose 13% to $657 million; advertising rose 36% to $689 million; other revenue was $65 million.
  • Operating income increased 4% to $434 million. Net income was $231 million, essentially unchanged; $230 million was available to Discovery stockholders. Basic and diluted EPS were $0.66, versus $0.64 and $0.63, respectively.
  • Adjusted OIBDA, a non-GAAP measure, was $525 million, up 5%. Operating margin was approximately 30.8%, versus 36.0% a year earlier; net margin was approximately 16.4%, versus 20.0% (calculated from reported figures).
  • Cash from operations was $241 million, versus $131 million. Capital expenditures were $28 million; operating cash flow less capital expenditures was $213 million, versus $105 million. Cash increased to $757 million, from $408 million at year-end.
  • Debt, net of discount, was $6.918 billion, up from $6.499 billion at year-end; cash less debt was approximately negative $6.161 billion. The company issued €300 million of 2.375% notes due 2022. Its $1.0 billion revolving facility was undrawn at quarter-end, with $999 million available after letters of credit. Current assets were $2.740 billion and current liabilities $1.253 billion (current ratio approximately 2.19).

Changes versus the prior-year quarter

  • Revenue growth reflected both organic gains and the consolidation of SBS Nordic, acquired in April 2013. Excluding SBS Nordic and foreign-exchange effects, consolidated revenue increased 7% and Adjusted OIBDA increased 1%.
  • International Networks revenue grew 51% as reported, including SBS Nordic; excluding the acquisition and currency effects, revenue rose 11% and segment Adjusted OIBDA rose 8%. U.S. Networks revenue increased 3% and Adjusted OIBDA 2%. Education revenue increased 19%, while Adjusted OIBDA fell 14% to $6 million.
  • Higher content costs and acquisition-related amortization contributed to expenses rising faster than revenue. Depreciation and amortization increased to $83 million from $32 million, primarily due to acquired intangible assets.
  • Interest expense rose to $81 million from $68 million. Pretax income declined 7%, while the effective tax rate fell to 34% from 39%. Other expense was $17 million, compared with $31 million of other income in 2013; the prior-year period included a $92 million Discovery Japan remeasurement gain and a $59 million derivative loss related to SBS Nordic hedging.

Outlook, commentary and risks

  • Management expected cash, operating cash generation and revolving-credit availability to cover needs for the next 12 months; it also expected continued investment in content, acquisitions, taxes, interest, and possible share repurchases. The filing provides no specific full-year earnings or revenue guidance.
  • The planned purchase of a controlling interest in Eurosport for approximately €253 million, or $343 million, was expected to close in the second quarter, subject to regulatory approval. TF1 retained put rights over its remaining interest. After quarter-end, Discovery agreed to sell HowStuffWorks for $45 million and expected a pretax gain of about $30 million, subject to closing conditions.
  • Key exposures include renewals of major U.S. distributor agreements beginning in 2014, concentration of U.S. distribution revenue among the top 10 distributors (about 90%), advertising and subscriber trends, international currency and political risks, and integration and performance of acquired businesses.
  • Discovery recorded a $10 million foreign-currency remeasurement loss on Venezuelan monetary assets and held approximately $11 million in bolivar-denominated assets exposed to potential further devaluation and uncertain repatriation. It also disclosed risks relating to OWN funding and recoverability, the Hub Network’s performance guarantee and potential impairment, and put rights associated with OWN and Eurosport. No material legal contingencies were recorded; management said routine proceedings were not expected to have a material adverse effect.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states that risk factors had not changed materially from the 2013 Form 10-K.

Most important facts to verify

  1. Confirm the issuer and filing identity: the source is Discovery Communications, Inc. (2014), despite the request metadata naming Warner Bros. Discovery.
  2. Assess organic performance separately from SBS Nordic’s contribution and foreign-exchange effects, particularly for International Networks.
  3. Review debt and capital allocation: debt increased, the company repurchased $266 million of common stock, and the Eurosport transaction and put rights could add future cash needs.
  4. Monitor distributor renewals, Venezuelan currency exposure, and the financial performance and recoverability of OWN and the Hub Network investment.
  5. Check completion and final terms of the Eurosport acquisition and HowStuffWorks sale, both described as pending or expected after quarter-end.