Discovery Communications, Inc. — Form 10-Q Summary
Entity and period: The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2010, filed November 2, 2010. It is not a Warner Bros. Discovery filing; the company name in the request does not match the filing. Unless noted, amounts are in millions of dollars.
Business context and reporting period
Discovery operated U.S. Networks, International Networks, and Education and Other. Its principal businesses were nonfiction television networks and related digital, education, commerce, and sound-services operations. The filing presents the three and nine months ended September 30, 2010, compared with recast 2009 results. The recast reflects VIE accounting changes, Antenna Audio as discontinued operations, and a segment realignment.
Financial performance and position
| Metric | Three months 2010 | Three months 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $926 | $837 | $2,758 | $2,508 |
| Operating income | $312 | $221 | $966 | $969 |
| Adjusted OIBDA | $418 | $367 | $1,238 | $1,090 |
| Net income attributable to Discovery | $186 | $100 | $462 | $398 |
| Net income available to stockholders | $186 | $94 | $461 | $390 |
| Diluted earnings per share | $0.43 | $0.22 | $1.07 | $0.92 |
- Quarterly revenue rose 11%; distribution revenue increased 7% and advertising revenue 18%. Management attributed advertising growth to improved pricing, sellouts, and audience delivery. Nine-month revenue rose 10%.
- Quarterly Adjusted OIBDA increased 14%; nine-month Adjusted OIBDA increased 14%. Calculated Adjusted OIBDA margin was approximately 45.1% for Q3 2010 versus 43.8% a year earlier, and 44.9% for the nine-month period versus 43.5%.
- Quarterly operating income increased 41%. Nine-month operating income was nearly flat: 2009 included a $252 million gain related to the Discovery Kids/Hasbro joint venture, while 2010 included a $136 million debt-extinguishment loss.
- By segment, Q3 revenue and Adjusted OIBDA were: U.S. Networks $585 and $346; International Networks $304 and $130; Education and Other $38 and $1. International Networks’ nine-month Adjusted OIBDA rose 30%, while Education and Other’s fell 22%.
- Cash from operations was $445 for the nine months, compared with $384 in 2009. Investing used $114; financing provided $56. Cash increased to $1,016 from $623 at year-end 2009.
- At September 30, total debt was $3,613 net of discount, including $18 current and $3,595 long-term. Cash less reported debt was approximately $2,597. The company reported $2.57 billion of liquidity, including $1.02 billion cash and approximately $1.55 billion of undrawn revolver capacity at quarter-end.
- Total assets were $11,398; total equity was $6,695. Current assets were $2,137 and current liabilities $792.
Material changes, outlook, and risks
- In June 2010, Discovery issued $3.0 billion principal of fixed-rate notes, using proceeds and cash on hand to refinance approximately $2.88 billion of older debt. The refinancing generated the $136 million extinguishment loss; net interest expense declined year over year.
- After quarter-end, on October 13, the company replaced its $1.55 billion revolver with a $1.0 billion unsecured facility expiring October 2013, with an option to seek up to $1.0 billion of additional commitments. The facility includes leverage and interest-coverage covenants.
- Management expected cash and operating cash generation to meet anticipated cash needs for at least the next 12 months. It cautioned that access to additional borrowing or capital markets is not assured, particularly if performance weakens or credit markets deteriorate.
- The company authorized up to $1.0 billion in share repurchases and bought 1.12 million Series C shares for $38 million during the quarter; $962 million remained authorized. It also expected ongoing content investment, debt-service, and joint-venture funding needs.
- OWN funding commitment increased to $189 million; $107 million had been funded by September 30. Discovery stated repayment depended on OWN becoming profitable and having funds available. Aggregate future funding commitments to unconsolidated ventures were $558 million in the notes, while the MD&A separately describes $234 million of commitments for certain ventures; scope should be checked.
- Potential material exposures include a Discovery performance guarantee for The Hub, with remaining maximum exposure below $220 million, and BBC joint-venture put rights. The BBC interest redemption liability was recorded at $49 million; management said a negotiated acquisition could cost substantially more.
- Unusual items included $25 million of Q3 and year-to-date discontinued-operations income, including the Antenna Audio sale gain and reversal of a $12 million obligation after a tax refund; an $11 million impairment at Creative Sound Services; and content write-offs. The filing says management did not believe pending legal matters would materially affect results.
- Forward-looking risks include advertising and affiliate payment or renewal conditions, competition and distribution changes, technology and audience shifts, international currency and political risks, joint-venture relationships, litigation, regulation, and access to capital. Management reported effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Confirm the intended issuer: this filing is Discovery Communications, Inc., not Warner Bros. Discovery, and its 2010 results should not be attributed to the later company without tracing corporate history.
- Review the recast accounting and joint-venture treatment, especially OWN, Animal Planet Japan, and the Discovery Kids/Hasbro comparison.
- Assess the sustainability of advertising-led growth and Adjusted OIBDA, including the measure’s exclusions and content costs.
- Check debt terms, the post-quarter revolver replacement, covenant headroom, and cash available outside consolidated ventures.
- Reconcile joint-venture commitments and evaluate OWN funding and repayment prospects, The Hub guarantee, and BBC put-right exposure.
- Separate recurring earnings and cash generation from the debt-refinancing charge, discontinued-operation benefits, impairment, and other unusual items.