Business context and reporting period
Entity clarification: 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, 2014; the interim financial statements are unaudited. Discovery operated U.S. Networks, International Networks and Education businesses.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and ratios.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,568 | $1,375 | $4,589 | $3,998 |
| Operating income | $511 | $488 | $1,585 | $1,453 |
| Net income | $287 | $256 | $902 | $787 |
| Net income attributable to Discovery | $280 | $255 | $889 | $786 |
| Diluted EPS | $0.41 | $0.35 | $1.28 | $1.08 |
| Adjusted OIBDA (non-GAAP) | $634 | $586 | $1,853 | $1,739 |
| Cash from operations | Not separately provided | Not separately provided | $893 | $930 |
- Reported revenue rose 14% in Q3 and 15% year to date; operating income rose 5% and 9%, respectively. Adjusted OIBDA rose 8% and 7%.
- Q3 operating margin was about 32.6% versus 35.5% a year earlier; nine-month operating margin was about 34.5% versus 36.3%. Adjusted OIBDA margin was about 40.4% for Q3 and 40.4% year to date, compared with 42.6% and 43.5%.
- Results included acquired businesses, notably Eurosport. Excluding the businesses identified by management as newly acquired, revenue and Adjusted OIBDA each increased 3% in Q3 and 5% and 3%, respectively, year to date.
- Q3 revenue by segment: U.S. Networks $724 (down 1%); International Networks $818 (up 32%, including acquisitions); Education $27 (up 23%). Nine-month segment revenue was $2,209, $2,291 and $90, respectively.
- Management cited international advertising and distribution growth, including Latin America, CEEMEA and Western European free-to-air ratings. U.S. Networks’ Adjusted OIBDA was flat in both comparison periods; International Networks’ increased 25% in Q3 and 21% year to date, including acquisition effects.
Cash flow, debt and liquidity
- Operating cash flow was $893 for the first nine months, down from $930. Capital expenditures were $85, implying operating cash flow less capital expenditures of about $808, versus $854 in 2013.
- Cash used in investing was $529, substantially below the prior-year $1,941, when acquisition spending was much higher. Cash used in financing was $369, compared with $254 provided in 2013; 2014 included $1,067 of stock repurchases.
- At September 30, cash was $376; current assets were $2,584 and current liabilities $2,548 (about 1.01 current ratio). Debt was $7,164 gross and $7,148 net of discount, including $995 classified current. Net debt less cash was approximately $6,772.
- Debt included $850 of 3.70% notes due June 2015, $145 drawn on a revolving facility and $126 of commercial paper. The company reported $1,228 of unused capacity under the combined revolving credit/commercial paper arrangements, after outstanding borrowings and letters of credit.
- Management said cash, operating cash generation and revolving-credit availability were expected to fund needs for the next 12 months. The company reported compliance with debt covenants and no defaults.
Changes, outlook and material risks
- Acquisitions expanded international operations: Discovery raised its Eurosport interest to 51% in May and its Hub Network interest to 60% in September, consolidating both. It also acquired 50% of All3Media for about $147. The Hub was subsequently rebranded Discovery Family Channel.
- These transactions brought significant put rights and redeemable noncontrolling interests: $785 at quarter-end, including interests associated with Eurosport and the Hub. Exercise could require substantial future cash payments. A further Eurosport France acquisition was conditionally planned from 2015 for about $48, subject to regulatory matters.
- Management expected further acquisition-integration charges for employee and contract terminations and asset impairments. Restructuring and other charges were $11 in Q3 and $19 for nine months.
- Content expense was $419 in Q3 and $1,191 year to date, up from $332 and $921. Management attributed increases principally to greater content investment and acquired operations. Content rights net on the balance sheet rose to $2,407 from $2,160 at year-end.
- Currency translation reduced other comprehensive income by $219 for the nine months, including $187 in Q3. The company also disclosed uncertainty over repatriating Venezuelan cash and approximately $20 of bolivar-denominated assets exposed to possible further devaluation.
- Russia’s planned restrictions on advertising on pay cable channels, effective January 1, 2015, and a law requiring foreign owners of Russian television channels to reduce ownership to 20% or less by January 1, 2016, were identified as likely adverse to results. Russian operations represented less than 2% of consolidated revenue.
- Other risks included renewal of distributor agreements on acceptable terms, subscriber and audience trends, advertising demand, foreign exchange, regulation, acquisition integration, and access to capital. Major U.S. distributor contracts were due to expire at various times from 2014 through 2020; the top 10 U.S. distributors accounted for about 90% of U.S. distribution revenue.
- No quantified earnings or revenue guidance was provided in the supplied filing text. Management described continued content investment and capital allocation priorities, including repurchases; $1.0 billion of buyback authorization remained at quarter-end. The filing reported no current legal matters expected by management to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Confirm the issuer identity: this is Discovery Communications, Inc., not Warner Bros. Discovery, Inc.
- Separate organic performance from acquisition-driven growth, particularly in International Networks, and assess whether content and integration costs are keeping pace with revenue.
- Review near-term debt maturities, refinancing plans, available credit capacity and the company’s ability to sustain buybacks while funding content and acquisitions.
- Assess the potential cash burden and valuation terms of outstanding put rights and redeemable noncontrolling interests, especially Eurosport and the Hub.
- Monitor distributor renewals, U.S. subscriber trends, Russia-related regulatory changes, and Venezuelan currency and cash-repatriation exposure.