01—Abstract
Summary
Summary of the 10-K filed February 22, 2010. Cited figures are marked; the original filing is the authoritative source.
Important correction: the filing provided is Discovery Communications, Inc.'s 10-K for fiscal year 2009 (NASDAQ: DISCA, DISCB, DISCK), not Warner Bros.
Discovery, Inc. Warner Bros. Discovery was formed in 2022. The document was signed February 19, 2010, and this analysis covers Discovery Communications as described in the filing.
Discovery reported 2009 revenue of $3.516 billiona, up 2% from $3.443 billion in 2008. Growth came mainly from U.S. Networks (up 4%) and International Networks (up 3%, or 10% excluding currency effects). Adjusted OIBDA rose 12% to $1.464 billion, driven by contractual distribution rate increases, subscriber growth, higher U.S. ratings and pricing, and cost reductions.
Operating income rose 17% to $1.235 billionb, but this figure includes a one-time $252 million gain from the Hasbro-Discovery Kids joint venture and a $205 million non-cash mark-to-market share-based compensation charge tied to a 117% rise in the Series A stock price. Net income attributable to Discovery was $560 million, or $1.30 per diluted share, versus $317 million, or $0.98, in 2008. The effective tax rate was 46%.
Balance sheet and liquidity are solid but leveraged. Cash was $623 millionc at year-end, with about $2.2 billion of total liquidity including $1.6 billion of undrawn revolver capacity. Total debt was about $3.4 billion, and operating cash flow was $608 million.
Management says it complies with all debt covenants. Key forward-looking items include the revolver expiring in October 2010, the deconsolidation of the Oprah Winfrey Network and Animal Planet Japan effective January 1, 2010 under new VIE accounting rules, the planned 2010 launch of The Hub, and 2010–2017 renewals of major U.S. distribution agreements, which account for over 90%d of U.S. distribution revenue.
02—Key points
Key Highlights
- Revenue grew 2% to $3.516 billion; International Networks grew 10% excluding currency effects, and U.S. advertising grew with ratings and pricing.
- Adjusted OIBDA rose 12% to $1.464 billion, reflecting higher distribution revenue, stronger advertising, and lower marketing and overhead costs.
- Net income attributable to Discovery was $560 million ($1.30 per diluted share), boosted by a $252 million gain from the Hasbro-Discovery Kids joint venture and offset by a $205 million share-based compensation charge tied to the stock price increase.
- Liquidity of about $2.2 billion, including $623 million cash and $1.6 billion undrawn revolver; total debt about $3.4 billion, with interest rate swaps hedging most variable-rate debt.
- Operating cash flow was $608 million, but cash taxes paid rose to $444 million, including $108 million tied to the Discovery Kids sale.
- Distribution revenue is concentrated: over 90% of U.S. distribution revenue comes from the top 10 distributors, with agreements expiring between 2010 and 2017.
- Governance risk: John Malone controls about 32% of the vote for common stock directors, and Advance/Newhouse holds about 26% of voting power through preferred stock with consent rights over major corporate actions.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Warner Bros. Discovery, Inc. kept $0.16.
- Revenue$3.46B100.0%
- Cost of revenue−$1.04B30.2%
- Gross profit$2.41B69.8%
- Operating costs−$1.14B33.0%
- Operating income$1.27B36.8%
- Interest, other & tax−$725.0M21.0%
- Net income$549.0M15.9%
Where FY2009 revenue went
$3.46B- SG&A: $1.19B, 34% of revenue
- Cost of revenue: $1.04B, 30% of revenue
- Interest, other & tax: $725.0M, 21% of revenue
- Net income: $549.0M, 16% of revenue
Kept 16% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 22, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $3.46B$3.38B | +2.2% |
| Cost of Revenue | $1.04B$1.00B | +4.2% |
| Gross Profit | $2.41B$2.38B | +1.4% |
| SG&A Expenses | $1.19B$1.07B | +10.5% |
| Operating Expenses | $2.18B$2.32B | −5.8% |
| Operating Income | $1.27B$1.06B | +19.7% |
| Interest Expense | $248.00M$256.00M | −3.1% |
| Net Income | $549.00M$317.00M | +73.2% |
| EPS (Basic) | $1.28$0.99 | +29.3% |
| EPS (Diluted) | $1.27$0.98 | +29.6% |
| Shares Outstanding (Basic) | 423.00M— | — |
| Shares Outstanding (Diluted) | 425.00M322.00M | +32.0% |
05—Questions
Frequently Asked Questions
Why did operating income rise 17% when revenue grew only 2%?
Operating income includes a one-time $252 million gain from forming the 50-50 Hasbro-Discovery Kids joint venture. Excluding that gain, operating income would have been about $983 million, below 2008's $1.057 billion. The main drag was a $205 million mark-to-market share-based compensation expense, and programming write-offs also rose. Adjusted OIBDA, which excludes these items, grew 12%, which better reflects underlying operating performance.
How exposed is Discovery to the loss of major distributors?
Very exposed in the U.S. Over 90% of U.S. distribution revenue comes from the top 10 distributors, and affiliation agreements with the major cable and satellite operators expire at various times from 2010 to 2017. The filing states that failure to renew, or renewal on less favorable terms, may have a material adverse effect. Consolidation among cable and satellite operators gives the largest distributors more negotiating leverage.
What are the main refinancing and liquidity risks?
The $1.6 billion revolving credit facility expires in October 2010, and management says it is assessing options to extend or replace it. Debt is about $3.4 billion, with covenants limiting leverage and interest coverage. Management says it expects to remain in compliance even with a 50% reduction in operating performance, and it has about $1.6 billion of undrawn capacity. Credit market conditions could raise borrowing costs or limit access to new financing.
How will the 2010 accounting change for OWN and Animal Planet Japan affect reported results?
Beginning January 1, 2010, Discovery will stop consolidating the Oprah Winfrey Network and Animal Planet Japan and account for them under the equity method. The filing says the impact on 2009 and 2008 is not material to financial position or net cash flows. Revenue and operating losses deconsolidated for 2009 were about $11 million and $30 million, respectively. Discovery must absorb OWN's losses up to its $100 million funding commitment, and $17 million of 2009 OWN losses allocated to Harpo will be recorded in non-operating income.
Why did share-based compensation swing so much, and will it recur?
Most of Discovery's equity-based compensation is cash-settled and remeasured each period against the Series A stock price, which rose 117% in 2009. That produced $205 million of expense in 2009 versus a $69 million benefit in 2008. Management says it does not plan to grant additional cash-settled awards and is evaluating a shift toward performance-based restricted stock units. Results will remain volatile while outstanding cash-settled awards are still unpaid, and $117 million of the related liability was classified as current at year-end.
06—Continue