Filing summary
Entity and period: The supplied filing is Discovery Communications, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed February 20, 2014. It is not a Warner Bros. Discovery filing. The filing reports annual results and unaudited quarterly data, including Q4; it is not a standalone Q4 report.
Business context
Discovery was a global nonfiction media company with U.S. Networks, International Networks, and Education segments. It generated revenue primarily from distribution fees and advertising. The company reported 2.2 billion cumulative viewers worldwide across its networks and content services.
Financial results
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $5.535 billion | $4.487 billion | +23% |
| Operating income | $1.998 billion | $1.855 billion | +8% |
| Adjusted OIBDA | $2.425 billion | $2.095 billion | +16% |
| Net income | $1.077 billion | $945 million | +14% |
| Diluted EPS | $2.97 | $2.48 | +20% |
| Cash from operating activities | $1.285 billion | $1.099 billion | +17% |
Reported revenue growth included acquired businesses. Excluding foreign exchange and newly acquired businesses, revenue rose 10% and Adjusted OIBDA rose 9%. On that basis, distribution revenue increased 9% and advertising revenue increased 12%. U.S. Networks revenue was $2.952 billion and International Networks revenue was $2.474 billion; Education revenue was $114 million.
Distribution, advertising, and other revenue represented 46%, 49%, and 5% of consolidated revenue, respectively. Operating margin was approximately 36.1% versus 41.3% in 2012; Adjusted OIBDA margin was approximately 43.8% versus 46.7%. Higher acquired-business costs, content expense, SG&A, and amortization contributed to the margin comparison.
Q4 2013: Revenue was $1.537 billion, operating income $521 million, income from continuing operations $290 million, and diluted EPS $0.81. In Q4 2012, the respective figures were $1.200 billion, $481 million, $224 million, and $0.61.
Cash, debt, and liquidity
- Cash and cash equivalents were $408 million at year-end, down from $1.201 billion. Investing activities used $1.987 billion, primarily reflecting acquisitions; financing activities used $85 million.
- Total debt, including capital leases, was $6.515 billion (net carrying amount $6.499 billion), compared with $5.260 billion a year earlier. Interest expense was $306 million, up 23%.
- The $1.0 billion revolving credit facility had no borrowings and approximately $999 million of unused capacity after letters of credit. Management said cash, operating cash flow, and facility availability were expected to cover needs for the next 12 months.
- Current assets were $2.410 billion and current liabilities $1.294 billion. Contractual obligations totaled $13.405 billion, including principal and interest on debt, leases, and purchase commitments.
Material changes, outlook, and risks
- Discovery acquired SBS Nordic for approximately $1.8 billion in cash in April 2013 and consolidated Discovery Japan after acquiring an additional 30% interest. These transactions materially affected reported comparisons and increased goodwill, intangible assets, and debt.
- Consolidation of Discovery Japan generated a $92 million remeasurement gain. Derivative losses related principally to the SBS Nordic acquisition hedge totaled $62 million in 2013; the hedge did not qualify for hedge accounting.
- In January 2014, Discovery agreed to increase its Eurosport International ownership from 20% to 51% for approximately €253 million ($343 million), subject to regulatory approvals. Closing was expected in Q2 2014; the agreement also includes potential future ownership and put arrangements.
- The filing provides no formal numerical revenue or earnings guidance. Management emphasized continued investment in content, international growth, and integration of acquisitions. It also approved an additional $1.5 billion share-repurchase authorization in February 2014.
- Key risks include audience and advertising uncertainty, competition from digital and on-demand services, distributor concentration and carriage renewals, acquisition integration, foreign exchange exposure, and substantial leverage. U.S. distribution revenue was highly concentrated among the top 10 distributors. The company also disclosed a $483 million balance of advances and note receivable from OWN, whose future performance remained uncertain.
- Management reported effective disclosure controls and internal control over financial reporting; the SBS Nordic acquisition was excluded from the year-one internal-control assessment. Management and the auditor said routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer and period: this is Discovery Communications’ FY 2013 10-K, not a Warner Bros. Discovery filing or a standalone Q4 filing.
- Separate organic performance from acquisition-driven growth, particularly for International Networks and advertising.
- Review debt maturities, interest costs, liquidity, and the funding implications of buybacks and the Eurosport transaction.
- Assess OWN’s operating trajectory, the recoverability and repayment of the $483 million receivable, and any further funding needs.
- Check the status and final economics of the Eurosport acquisition, regulatory conditions, and associated put rights.