01—Abstract
Summary
Summary of the 10-K filed February 26, 2009. Cited figures are marked; the original filing is the authoritative source.
This is Discovery Communications, Inc.'s 10-K for fiscal 2008, filed February 26, 2009.
The filer is Discovery Communications, not Warner Bros. Discovery, which did not exist under that name in 2009. The year was defined by the Newhouse Transaction, completed September 17, 2008, in which Discovery Holding Company (DHC) and Advance/Newhouse combined their interests in Discovery Communications Holding (DCH), and DHC spun off Ascent Media (AMC).
Because the transaction was accounted for as a non-substantive merger presented as of January 1, 2008, the 2008 results consolidate DCH in full, so year-over-year comparisons are against an as-adjusted 2007 base. On that basis, revenue rose 7% to $3.44 billiona, operating income rose 72% to $1.06 billion, and net income was $317 million, or $0.98 diluted EPS. Adjusted OIBDA was $1.31 billion, and cash from operations was $569 million.
The balance sheet is heavily leveraged following the transaction. Total debt was approximately $3.7 billionb against cash of $100 million, leaving roughly $1.3 billion of total liquidity. Goodwill of $6.9 billion, reflecting the investor basis pushed down in the merger, makes up most of the $10.5 billion asset base.
The company is a holding company dependent on subsidiary cash flows, and its credit facilities restrict dividends, so none are paid. Advance/Newhouse holds roughly 26%c of voting power through convertible preferred stock with consent rights, and John Malone holds about 23% of non-director voting power, so governance concentration is a central investor consideration. Operationally, U.S. Networks (about 60% of revenue) and International Networks (about 34%) drive results.
Distribution fees were 48%d of revenue and advertising 41%. Content amortization is the largest cost.
Management flagged near-term headwinds: the planned 2009 move of the commerce business to a royalty model will reduce reported revenue, the OWN joint venture with Oprah Winfrey requires up to $100 million of funding, and the company will first face the auditor attestation requirements of SOX Section 404 for fiscal 2009. The 47% effective tax rate, driven largely by deferred tax on the DCH investment, also depressed net margins.
02—Key points
Key Highlights
- Revenue grew 7% to $3,443 million in 2008, with distribution revenue up 11% to $1,640 million and advertising up 4% to $1,396 million.
- Operating income rose 72% to $1,057 million, helped by a $210 million swing in long-term incentive plan expense, which turned into a $69 million benefit as the stock price fell.
- Net income was $317 million ($0.98 diluted EPS), against a net loss of $68 million in 2007 on an as-adjusted basis. The effective tax rate was 47%.
- Total debt was approximately $3.7 billion at year-end, with $100 million of cash and about $1.3 billion of total liquidity. The company was in compliance with all debt covenants.
- The Newhouse Transaction (September 17, 2008) consolidated DCH and spun off AMC. Goodwill rose to $6.9 billion and total assets to $10.5 billion.
- Impairments and write-downs totaled about $30 million on HowStuffWorks intangibles and a $57 million other-than-temporary decline on the HSWi equity investment. The company has a $49 million redeemable-interest liability tied to BBC put rights.
- Governance concentration is significant: Advance/Newhouse holds about 26% of voting power and has consent rights over major corporate actions, and John Malone holds about 23% of non-director voting power.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Warner Bros. Discovery, Inc. kept $0.09.
- Revenue$3.38B100.0%
- Cost of revenue−$1.00B29.6%
- Gross profit$2.38B70.4%
- Operating costs−$1.32B38.9%
- Operating income$1.06B31.5%
- Interest, other & tax−$747.0M22.1%
- Net income$317.0M9.4%
Where FY2008 revenue went
$3.38B- SG&A: $1.07B, 32% of revenue
- Cost of revenue: $1.00B, 30% of revenue
- Interest, other & tax: $747.0M, 22% of revenue
- Net income: $317.0M, 9.4% of revenue
- Other operating costs: $241.0M, 7.1% of revenue
Kept 9.4% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 26, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $3.38B$76.00M | +4350.0% |
| Cost of Revenue | $1.00B$60.00M | +1570.0% |
| Gross Profit | $2.38B$16.00M | +14775.0% |
| SG&A Expenses | $1.07B$22.00M | +4786.4% |
| Operating Expenses | $2.32B$84.00M | +2659.5% |
| Operating Income | $1.06B-$8.00M | +13400.0% |
| Interest Expense | $256.00M$0 | — |
| Net Income | $317.00M-$68.00M | +566.2% |
| EPS (Basic) | $0.99$-0.24 | +512.5% |
| EPS (Diluted) | $0.98$-0.24 | +508.3% |
| Shares Outstanding (Diluted) | 322.00M281.00M | +14.6% |
05—Questions
Frequently Asked Questions
Why are 2008 results not directly comparable to 2007?
The Newhouse Transaction is presented as if it occurred on January 1, 2008, so 2008 consolidates DCH in full. The 2007 figures are DHC's historical results, which accounted for DCH under the equity method. The company provides an 'as adjusted' 2007 column that consolidates DCH on a comparable basis. That column is the appropriate base for year-over-year analysis, but it is not a GAAP-reported figure.
How much debt does the company carry, and when does it mature?
Total debt was about $3.7 billion at December 31, 2008, with $458 million classified as current. Major components include a $1.5 billion DCH term loan (secured by DCH assets), a $1.0 billion Term Loan A and $315 million drawn on the revolver, and several senior note series maturing from 2009 to 2015. Scheduled principal payments are roughly $445 million in 2009 and $893 million in 2010. The company disclosed plans to possibly refinance ahead of the 2010 maturity.
What are the main risks to revenue?
Key risks include a weaker advertising market, since advertising is cyclical and 41% of revenue; the loss of or less favorable renewal of affiliation agreements, since the top eight U.S. distributors account for over 90% of U.S. distribution revenue and agreements expire from 2010 to 2017; audience acceptance of programming; and piracy and changes in consumer viewing habits such as DVRs. Concentration among cable and satellite operators also gives distributors negotiating leverage.
What changes are expected in 2009?
The commerce direct-to-consumer business (DiscoveryStore.com and catalog) is moving to a third-party royalty model in the second quarter of 2009, which will reduce reported revenue and operating expenses. The Discovery Health channel is expected to be rebranded as OWN: The Oprah Winfrey Network in late 2009 or early 2010, a 50-50 venture with Harpo that requires up to $100 million of funding. The company also expects about $445 million in debt repayments, $225 million in interest, and $60 million in capital expenditures in 2009.
Who controls the company, and what does that mean for minority shareholders?
Advance/Newhouse holds convertible preferred stock with about 26% of voting power (excluding director elections), elects three directors, and has special consent rights over fundamental changes, mergers, and certain acquisitions and dispositions. John Malone controls about 32% of the vote for common-stock directors. Four Liberty Media directors sit on the board, and Liberty may compete with Discovery for opportunities. Charter provisions include multiple voting-share classes, a shareholder rights plan, and staggered board terms. Together these limit the ability of minority holders to influence or benefit from a change of control.
06—Continue