Business context and reporting period
This is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016—not a filing under the Warner Bros. Discovery name. Discovery operated U.S. Networks, International Networks, and Education and Other businesses, distributing television and other content across pay-TV, free-to-air, digital, and licensing platforms. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1,708 | $1,654 | $3,269 | $3,191 |
| Operating income | $586 | $557 | $1,075 | $1,039 |
| Net income attributable to Discovery | $408 | $286 | $671 | $536 |
| Basic/diluted EPS | $0.66/$0.66 | $0.44/$0.44 | $1.08/$1.08 | $0.82/$0.81 |
| Adjusted OIBDA | $706 | $680 | $1,283 | $1,248 |
| Cash from operations | Not separately presented for the quarter | $391 | $394 |
- Q2 revenue increased 3%; operating income rose 5% and Discovery-attributable net income rose 43%. Six-month revenue increased 2%, operating income 3%, and attributable net income 25%.
- Operating margin was approximately 34.3% in Q2 2016 versus 33.7% in Q2 2015; six-month margin was approximately 32.9% versus 32.6%. Adjusted OIBDA margin was approximately 41.3% versus 41.1% in Q2 and 39.2% versus 39.1% for six months.
- At June 30, cash was $185 (down from $390 at year-end 2015); current assets were $2,548 and current liabilities $1,442. Net cash from operations was $391, investing used $49, and financing used $577 in the first half.
- Debt was $8,010 gross, or $7,939 net of unamortized discount and issuance costs, compared with $7,801 gross at year-end. Cash was $185. The $2.0 billion revolving facility had $480 drawn; commercial paper outstanding was $106. The filing reported $1,598 of unused capacity, including the facility and cash presentation in its capital-resources table.
Material changes versus the prior comparable period
- Distribution revenue rose 5% in Q2 and the first half as reported; on a constant-currency basis, it rose 9% in Q2 and 10% for six months. Advertising was flat as reported in both periods, but grew 1% and 2%, respectively, excluding currency effects.
- U.S. Networks grew: Q2 revenue was up 7% and Adjusted OIBDA up 10%; six-month revenue and Adjusted OIBDA each rose 7% and 10%, respectively. International Networks revenue declined 1% in Q2 and 2% for six months, while Adjusted OIBDA fell 6% and 10% as reported. Excluding currency and specified portfolio changes, International Adjusted OIBDA rose 4% in Q2 and 2% for six months.
- Content costs increased, particularly from sports rights and content spending; total content expense was $1,002 for six months versus $935. Interest expense rose to $176 from $166 in the first half, partly following a $500 issuance of 4.90% notes due 2026.
- First-half operating cash flow was nearly unchanged despite improved operating results, reflecting higher content spending and working-capital timing. Financing cash use increased, including $750 of stock repurchases versus $524 a year earlier.
Outlook, commentary, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management expected cash, operating cash generation, and revolving-credit availability to be sufficient for cash needs over the next 12 months.
- On April 28, 2016, Discovery committed to a cost-savings plan involving significant employee terminations, with further non-personnel cost reductions under evaluation. First-half restructuring charges were $45; the accrued restructuring liability was $56 at June 30.
- Q2 other income included $41 of foreign-currency gains; first-half other income included $37 of such gains. Management attributed the year-over-year improvement in other income largely to revaluation gains on international monetary assets and liabilities, compared with prior-period losses. The first-half effective tax rate fell to 23% from 33%, including the effect of resolving multi-year state tax positions.
- The $13 first-half gain on disposition reflected final contingent consideration from the 2015 sale of the Northern European radio business. Discovery also recorded a $60 unrealized loss on its Lionsgate investment during the first half; it concluded the loss was not other-than-temporary and said it would continue monitoring the investment.
- Key risks include distributor concentration and contract renewals, audience and advertising trends, foreign-exchange volatility, content and sports-rights costs, equity-method investee performance, and execution of cost savings. Management identified Brexit as a new risk that could affect European subscribers, distribution, licensing, employees, regulation, and currency exposure. The company reported compliance with credit-facility covenants and no material expected adverse effect from current legal matters.
Most important facts for investors to verify
- Confirm the issuer identity: this 2016 filing is for Discovery Communications, Inc., not Warner Bros. Discovery, Inc.
- Assess whether U.S. Networks’ growth can offset reported weakness in International Networks, including currency and portfolio effects.
- Monitor content and sports-rights spending, restructuring costs, and whether the announced savings plan delivers the expected efficiencies.
- Review debt, refinancing and interest-rate exposure, available facility capacity, and the substantial use of cash for repurchases.
- Track distributor renewals, Brexit-related effects, the Lionsgate investment’s value, and the collectability and repayment terms of the $348 OWN note receivable and advances.