Business context and reporting period
The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016, filed November 1, 2016. It is not a Warner Bros. Discovery filing; investors should confirm the requested issuer and period. Discovery operated U.S. Networks, International Networks, and Education and Other businesses.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the prior-year periods.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,556 | $1,557 | $4,825 | $4,748 |
| Operating income | $458 | $505 | $1,533 | $1,544 |
| Net income | $225 | $283 | $909 | $822 |
| Net income available to Discovery | $219 | $279 | $890 | $815 |
| Diluted EPS | $0.36 | $0.43 | $1.44 | $1.24 |
| Adjusted OIBDA | $562 | $576 | $1,845 | $1,824 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $827 | $652 |
Q3 operating margin was approximately 29.4% versus 32.4%; nine-month operating margin was approximately 31.8% versus 32.5%. Adjusted OIBDA margin was approximately 36.1% versus 37.0% for Q3 and 38.2% versus 38.4% for the nine months. Adjusted OIBDA is a non-GAAP measure.
Liquidity, debt and cash flow
- Cash and cash equivalents were $224 at September 30, 2016, down from $390 at December 31, 2015.
- Net debt on the balance sheet was $7,996, compared with $7,735 at year-end 2015; total debt before discounts and issuance costs was $8,065. The $2.0 billion revolving facility had $545 outstanding, and commercial paper borrowings were $70.
- Current assets were $2,683 and current liabilities $1,522. Management said cash, operating cash generation and revolver availability were expected to cover cash needs for the next 12 months. The company reported compliance with credit-facility covenants and no defaults.
- For the nine months, operating cash flow of $827 was offset by $54 of investing outflows and $968 of financing outflows; cash declined by $166. Financing included $1,124 of stock repurchases and a $71 prepaid repurchase contract.
Material changes and notable items
- Q3 revenue was essentially flat. Distribution revenue grew 4% reported (7% excluding foreign exchange), while advertising revenue fell 4% reported (3% excluding foreign exchange).
- For the nine months, revenue rose 2% reported and 4% excluding foreign exchange. U.S. Networks revenue increased 6%, while International Networks revenue declined 2% reported; segment Adjusted OIBDA decreased 12% at International Networks and increased 8% at U.S. Networks.
- Q3 operating income fell 9% and net income available to Discovery fell 22%. Higher costs, interest expense and a $62 Lionsgate investment impairment contributed to pressure. Nine-month net income available to Discovery increased 9%, helped by lower income tax expense and other year-over-year items.
- Content expense for the nine months was $1,498, up from $1,406; management cited greater content spending, particularly sports rights, and somewhat faster amortization.
- Discovery repurchased $753 of common stock in the first nine months and separately paid $371 to repurchase and retire Series C convertible preferred shares. A further preferred-stock repurchase of approximately $108 was expected around November 3, 2016.
- After quarter-end, Discovery announced a plan to contribute $100 and its Seeker and SourceFed businesses for a 39% interest in Group Nine Media; the company expected a gain on deconsolidation.
Outlook, risks and contingencies
- No formal revenue or earnings guidance is provided in the supplied filing. Management described a cost-savings plan, including significant employee terminations, intended to streamline operations and support investment in digital services and content; additional non-personnel cost reductions were under evaluation.
- Management identified distribution-contract renewals and potential less favorable terms, subscriber and ratings declines, advertising-market volatility, changing viewing and distribution platforms, foreign-exchange movements, and higher content costs as risks. More than 90% of U.S. Networks distribution revenue came from its top 10 U.S. distributors.
- Brexit was identified as a risk to European distribution, licensing, staffing, regulation, currencies and subscriber demand. Management said it was monitoring potential effects.
- Discovery’s Lionsgate holding was written down to $100 from an adjusted cost basis of $133, with a $62 impairment charge recognized in Q3. Total decline in fair value since purchase was $95.
- Discovery’s OWN investment and advances/note receivable totaled $326, and the filing noted potential future funding despite no further funding commitment. Harpo held conditional put rights; the reported fair value of that put right was zero at quarter-end.
- Management said routine legal matters were not expected to have a material adverse effect. The filing also disclosed redeemable noncontrolling interests of $247 and related put rights.
Important facts for investors to verify
- Confirm issuer identity: this is Discovery Communications, Inc., not Warner Bros. Discovery, and confirm whether 2016 Q3 is the intended period.
- Review the drivers and sustainability of advertising weakness, ratings trends, and International Networks’ lower Adjusted OIBDA.
- Assess leverage, refinancing needs, interest costs and the cash impact of continued common- and preferred-stock repurchases.
- Verify the Lionsgate impairment, OWN recoverability and funding exposure, and potential cash obligations from noncontrolling-interest put rights.
- Track execution and costs of the restructuring plan, the Group Nine transaction, Brexit-related exposures, and upcoming distribution-contract renewals.