Business context and reporting period
The filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The request metadata names Warner Bros. Discovery, Inc.; that does not match the issuer identified in this filing. Discovery operated U.S. Networks, International Networks, and Education and Other businesses.
Financial results
Amounts are in millions of dollars except per-share data. Quarterly comparisons are Q2 2011 versus Q2 2010; year-to-date comparisons are the six months ended June 30.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,067 | $963 | $2,018 | $1,832 |
| Operating income | $445 | $372 | $952 | $654 |
| Net income attributable to Discovery | $254 | $107 | $559 | $276 |
| Diluted EPS | $0.62 | $0.25 | $1.36 | $0.64 |
| Adjusted OIBDA (non-GAAP) | $510 | $455 | $937 | $820 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $431 | $90 |
- Q2 revenue rose 11%; distribution revenue increased 10% and advertising increased 14%. Management cited subscriber growth, contractual rate increases, improved advertising pricing and sellouts. Advertising included an $8 million nonrecurring benefit.
- Q2 operating margin was approximately 41.7%, versus 38.6% a year earlier; net margin was approximately 23.8%, versus 11.1%. Six-month operating margin was approximately 47.2%, versus 35.7%.
- Q2 segment revenue and Adjusted OIBDA: U.S. Networks $660 million and $395 million; International Networks $368 million and $173 million; Education and Other $39 million and $5 million. International Networks showed the strongest reported growth.
- Cash and cash equivalents were $1.095 billion at June 30, 2011, versus $466 million at year-end 2010. Current assets were $2.321 billion and current liabilities $614 million. The company reported approximately $2.1 billion in capital resources, including available revolver capacity.
- Long-term debt, net, was $4.257 billion, up from $3.618 billion at year-end; cash less net debt was approximately negative $3.162 billion. The company issued $650 million of 4.375% notes due 2021, receiving $641 million net proceeds. The $1.0 billion revolving facility was undrawn except for $1 million of letters of credit; the company reported covenant compliance.
- Six-month investing cash outflow was $109 million, including $82 million invested in or advanced to equity investees and $27 million of capital expenditures. Financing cash inflow was $299 million, including debt proceeds and offset by $377 million of share repurchases.
Material changes versus prior comparable period
- Six-month net income increased to $559 million from $283 million, while operating income rose to $952 million from $654 million. The 2011 comparison includes a $129 million pretax gain on contributing Discovery Health to OWN; this gain contributed to the year-to-date improvement.
- Reported revenue growth also reflects foreign exchange and the deconsolidation of Discovery Health after its contribution to OWN on January 1, 2011. Management’s comparable growth discussion excludes those effects; it cited underlying distribution growth of 8% and advertising growth of 16% for both the quarter and six-month period.
- Adjusted OIBDA increased 12% in Q2 and 14% year to date. Growth in International Networks was supported by distribution expansion and advertising, alongside increased programming and personnel costs.
- Six-month operating cash flow improved by $341 million, reflecting stronger revenue collections, lower tax payments and lower cash-settled award payments, partly offset by higher programming investment.
- Cash repurchases were $377 million year to date. At June 30, $518 million remained under the then-current authorization; after quarter-end, the board approved an additional $1 billion of authorization.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash generation and borrowing capacity should be sufficient for anticipated cash operating requirements for at least the next 12 months. No specific earnings or revenue guidance was provided in the supplied filing text.
- Discovery expected significant further funding for joint ventures, particularly OWN, and expected to recoup funded amounts. OWN funding, including accrued interest, was $242 million at June 30, above the stated $189 million commitment; the company said additional funding was expected.
- The company’s estimated loss exposure for equity-method VIE investments was approximately $845 million, including carrying values and unfunded contractual commitments. The Hub operating-performance guarantee had maximum remaining exposure below $185 million; management considered failure to achieve the guarantee unlikely. The Hub’s early operating results were below its initial long-term plan, and further valuation monitoring was planned.
- OWN and The Hub were early-stage ventures whose results could differ from assumptions used in valuations. Harpo’s put right over its OWN interest begins in 2016, with maximum put amounts ranging from $100 million to $400 million depending on exercise date; no liability was recorded.
- Management said routine legal claims were not expected to have a material adverse effect and reported no material change in risk factors or market-risk exposures. Risks identified include advertising and affiliate demand, competition and technology shifts, joint-venture performance, foreign exchange and political conditions, litigation, regulation, and access to capital.
Most important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for Discovery Communications, Inc., not an issuer named Warner Bros. Discovery, Inc.
- Separate recurring operating performance from the $129 million OWN-related gain and the $8 million nonrecurring Q2 advertising benefit.
- Assess continued OWN funding needs, recoverability of advances, and the potential exposure from the OWN put right and The Hub guarantee.
- Review debt maturity, interest costs, liquidity, and whether cash balances and revolver availability are accessible where needed.
- Compare reported revenue and segment trends with management’s underlying growth measures, accounting for Discovery Health deconsolidation and foreign exchange.