Walt Disney Co - Quarter Report: 2021 January (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 2, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 001-38842
| Delaware | 83-0940635 | |||||||
| State or Other Jurisdiction of | I.R.S. Employer Identification | |||||||
| Incorporation or Organization | ||||||||
500 South Buena Vista Street
Burbank, California 91521
Address of Principal Executive Offices and Zip Code
(818) 560-1000
Registrant’s Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value | DIS | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
There were 1,815,263,899 shares of common stock outstanding as of February 3, 2021.
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per share data)
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Revenues: | |||||||||||
| Services | $ | 14,871 | $ | 18,094 | |||||||
| Products | 1,378 | 2,783 | |||||||||
| Total revenues | 16,249 | 20,877 | |||||||||
| Costs and expenses: | |||||||||||
Cost of services (exclusive of depreciation and amortization) | (10,738) | (11,395) | |||||||||
Cost of products (exclusive of depreciation and amortization) | (1,037) | (1,639) | |||||||||
| Selling, general, administrative and other | (2,917) | (3,709) | |||||||||
| Depreciation and amortization | (1,298) | (1,299) | |||||||||
| Total costs and expenses | (15,990) | (18,042) | |||||||||
| Restructuring and impairment charges | (113) | (150) | |||||||||
| Interest expense, net | (324) | (283) | |||||||||
| Equity in the income of investees | 224 | 224 | |||||||||
| Income from continuing operations before income taxes | 46 | 2,626 | |||||||||
| Income taxes on continuing operations | (16) | (458) | |||||||||
| Net income from continuing operations | 30 | 2,168 | |||||||||
| Loss from discontinued operations, net of income tax benefit of $4 and $7, respectively | (12) | (21) | |||||||||
| Net income | 18 | 2,147 | |||||||||
Net income from continuing operations attributable to noncontrolling interests | (1) | (40) | |||||||||
| Net income attributable to The Walt Disney Company (Disney) | $ | 17 | $ | 2,107 | |||||||
Earnings (loss) per share attributable to Disney(1): | |||||||||||
| Diluted | |||||||||||
| Continuing operations | $ | 0.02 | $ | 1.17 | |||||||
| Discontinued operations | (0.01) | (0.01) | |||||||||
| $ | 0.01 | $ | 1.16 | ||||||||
| Basic | |||||||||||
| Continuing operations | $ | 0.02 | $ | 1.18 | |||||||
| Discontinued operations | (0.01) | (0.01) | |||||||||
| $ | 0.01 | $ | 1.17 | ||||||||
Weighted average number of common and common equivalent shares outstanding: | |||||||||||
| Diluted | 1,823 | 1,817 | |||||||||
| Basic | 1,812 | 1,805 | |||||||||
(1)Total may not equal the sum of the column due to rounding.
See Notes to Condensed Consolidated Financial Statements
2
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Net income | $ | 18 | $ | 2,147 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
Market value adjustments, primarily for hedges | (173) | (107) | |||||||||
Pension and postretirement medical plan adjustments | 150 | 107 | |||||||||
Foreign currency translation and other | 277 | 127 | |||||||||
| Other comprehensive income | 254 | 127 | |||||||||
| Comprehensive income | 272 | 2,274 | |||||||||
Net income from continuing operations attributable to noncontrolling interests | (1) | (40) | |||||||||
| Other comprehensive income attributable to noncontrolling interests | (73) | (43) | |||||||||
| Comprehensive income attributable to Disney | $ | 198 | $ | 2,191 | |||||||
See Notes to Condensed Consolidated Financial Statements
3
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
| January 2, 2021 | October 3, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 17,068 | $ | 17,914 | |||||||
| Receivables | 14,051 | 12,708 | |||||||||
| Inventories | 1,480 | 1,583 | |||||||||
| Content advances | 1,423 | 2,171 | |||||||||
| Other current assets | 852 | 875 | |||||||||
| Total current assets | 34,874 | 35,251 | |||||||||
| Produced and licensed content costs | 25,929 | 25,022 | |||||||||
| Investments | 4,037 | 3,903 | |||||||||
| Parks, resorts and other property | |||||||||||
| Attractions, buildings and equipment | 63,017 | 62,111 | |||||||||
| Accumulated depreciation | (36,380) | (35,517) | |||||||||
| 26,637 | 26,594 | ||||||||||
| Projects in progress | 4,547 | 4,449 | |||||||||
| Land | 1,079 | 1,035 | |||||||||
| 32,263 | 32,078 | ||||||||||
| Intangible assets, net | 18,642 | 19,173 | |||||||||
| Goodwill | 77,800 | 77,689 | |||||||||
| Other assets | 8,343 | 8,433 | |||||||||
| Total assets | $ | 201,888 | $ | 201,549 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable and other accrued liabilities | $ | 16,846 | $ | 16,801 | |||||||
| Current portion of borrowings | 5,397 | 5,711 | |||||||||
| Deferred revenue and other | 4,303 | 4,116 | |||||||||
| Total current liabilities | 26,546 | 26,628 | |||||||||
| Borrowings | 52,878 | 52,917 | |||||||||
| Deferred income taxes | 7,201 | 7,288 | |||||||||
| Other long-term liabilities | 17,205 | 17,204 | |||||||||
Commitments and contingencies (Note 12) | |||||||||||
| Redeemable noncontrolling interests | 9,330 | 9,249 | |||||||||
| Equity | |||||||||||
Preferred stock | — | — | |||||||||
Common stock, $0.01 par value, Authorized – 4.6 billion shares, Issued – 1.8 billion shares | 54,663 | 54,497 | |||||||||
| Retained earnings | 38,456 | 38,315 | |||||||||
| Accumulated other comprehensive loss | (8,141) | (8,322) | |||||||||
Treasury stock, at cost, 19 million shares | (907) | (907) | |||||||||
| Total Disney Shareholders’ equity | 84,071 | 83,583 | |||||||||
| Noncontrolling interests | 4,657 | 4,680 | |||||||||
| Total equity | 88,728 | 88,263 | |||||||||
| Total liabilities and equity | $ | 201,888 | $ | 201,549 | |||||||
See Notes to Condensed Consolidated Financial Statements
4
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income from continuing operations | $ | 30 | $ | 2,168 | |||||||
| Depreciation and amortization | 1,298 | 1,299 | |||||||||
| Net gain on investments | (80) | 3 | |||||||||
| Deferred income taxes | (105) | 534 | |||||||||
| Equity in the income of investees | (224) | (224) | |||||||||
| Cash distributions received from equity investees | 193 | 219 | |||||||||
| Net change in produced and licensed content costs and advances | 771 | (77) | |||||||||
| Net change in operating lease right of use assets / liabilities | 36 | (2) | |||||||||
| Equity-based compensation | 134 | 115 | |||||||||
| Other | 90 | 66 | |||||||||
| Changes in operating assets and liabilities, net of business acquisitions: | |||||||||||
| Receivables | (1,324) | (1,424) | |||||||||
| Inventories | 94 | 81 | |||||||||
| Other assets | (136) | (158) | |||||||||
| Accounts payable and other liabilities | (642) | (714) | |||||||||
| Income taxes | (60) | (256) | |||||||||
| Cash provided by operations - continuing operations | 75 | 1,630 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Investments in parks, resorts and other property | (760) | (1,338) | |||||||||
| Other | 28 | (12) | |||||||||
| Cash used in investing activities - continuing operations | (732) | (1,350) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Commercial paper borrowings (payments), net | (179) | 1,172 | |||||||||
| Borrowings | 1 | 51 | |||||||||
| Reduction of borrowings | (139) | (46) | |||||||||
| Proceeds from exercise of stock options | 209 | 126 | |||||||||
| Other | (225) | (186) | |||||||||
| Cash provided by (used in) financing activities - continuing operations | (333) | 1,117 | |||||||||
| CASH FLOWS FROM DISCONTINUED OPERATIONS | |||||||||||
| Cash provided by (used in) operations - discontinued operations | 9 | (19) | |||||||||
| Impact of exchange rates on cash, cash equivalents and restricted cash | 139 | 41 | |||||||||
| Change in cash, cash equivalents and restricted cash | (842) | 1,419 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 17,954 | 5,455 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 17,112 | $ | 6,874 | |||||||
See Notes to Condensed Consolidated Financial Statements
5
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
| Quarter Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Attributable to Disney | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Common Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Disney Equity | Non-controlling Interests(1) | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance at October 3, 2020 | 1,810 | $ | 54,497 | $ | 38,315 | $ | (8,322) | $ | (907) | $ | 83,583 | $ | 4,680 | $ | 88,263 | |||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | 17 | 181 | — | 198 | (6) | 192 | ||||||||||||||||||||||||||||||||||||||||||
| Equity compensation activity | 4 | 165 | — | — | — | 165 | — | 165 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | 5 | 5 | ||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of accounting change | — | — | 110 | — | — | 110 | — | 110 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions and other | — | 1 | 14 | — | — | 15 | (22) | (7) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at January 2, 2021 | 1,814 | $ | 54,663 | $ | 38,456 | $ | (8,141) | $ | (907) | $ | 84,071 | $ | 4,657 | $ | 88,728 | |||||||||||||||||||||||||||||||||||
| Balance at September 28, 2019 | 1,802 | $ | 53,907 | $ | 42,494 | $ | (6,617) | $ | (907) | $ | 88,877 | $ | 5,012 | $ | 93,889 | |||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | 2,107 | 84 | — | 2,191 | 17 | 2,208 | ||||||||||||||||||||||||||||||||||||||||||
| Equity compensation activity | 3 | 88 | — | — | — | 88 | — | 88 | ||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | (1,587) | — | — | (1,587) | — | (1,587) | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | 20 | 20 | ||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of accounting change | — | — | 197 | — | — | 197 | — | 197 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions and other | — | — | (9) | — | — | (9) | (33) | (42) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 28, 2019 | 1,805 | $ | 53,995 | $ | 43,202 | $ | (6,533) | $ | (907) | $ | 89,757 | $ | 5,016 | $ | 94,773 | |||||||||||||||||||||||||||||||||||
(1)Excludes redeemable noncontrolling interests.
See Notes to Condensed Consolidated Financial Statements
6
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
1.Principles of Consolidation
These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the quarter ended January 2, 2021 are not necessarily indicative of the results that may be expected for the year ending October 2, 2021.
The terms “Company,” “we,” “us,” and “our” are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted. The term “TWDC” is used to refer to the parent company.
These financial statements should be read in conjunction with the Company’s 2020 Annual Report on Form 10-K.
The Fox sports media business in Mexico, along with another Fox business divested in fiscal 2020, are presented as discontinued operations in the Condensed Consolidated Statements of Income. At January 2, 2021 and October 3, 2020, the assets and liabilities of the sports media operation in Mexico are not material and are included in other assets and other liabilities in the Condensed Consolidated Balance Sheet.
Variable Interest Entities
The Company enters into relationships with or makes investments in other entities that may be variable interest entities (VIE). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant (as defined by ASC 810-10-25-38) to the VIE. Hong Kong Disneyland Resort and Shanghai Disney Resort (together the Asia Theme Parks) are VIEs in which the Company has less than 50% equity ownership. Company subsidiaries (the Management Companies) have management agreements with the Asia Theme Parks, which provide the Management Companies, subject to certain protective rights of joint venture partners, with the ability to direct the day-to-day operating activities and the development of business strategies that we believe most significantly impact the economic performance of the Asia Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the Asia Theme Parks. Therefore, the Company has consolidated the Asia Theme Parks in its financial statements.
Redeemable Noncontrolling Interests
The Company consolidates the results of certain subsidiaries that are less than 100% owned and for which the noncontrolling interest shareholders have the rights to require the Company to purchase their interests in these subsidiaries. The most significant of these are Hulu LLC (Hulu) and BAMTech LLC (BAMTech).
Hulu provides direct-to-consumer (DTC) streaming services and is owned 67% by the Company and 33% by NBC Universal (NBCU). In May 2019, the Company entered into a put/call agreement with NBCU that provided the Company with full operational control of Hulu. Under the agreement, beginning in January 2024, NBCU has the option to require the Company to purchase NBCU’s interest in Hulu and the Company has the option to require NBCU to sell its interest in Hulu to the Company, based on NBCU’s equity ownership percentage of the greater of Hulu’s then fair value or $27.5 billion.
NBCU’s interest will generally not be allocated its portion of Hulu’s losses as the redeemable noncontrolling interest is required to be carried at a minimum value. The minimum value is equal to the fair value as of the May 2019 agreement date accreted to the January 2024 estimated redemption value. At January 2, 2021, NBCU’s interest in Hulu is recorded in the Company’s financial statements at $8.2 billion.
BAMTech provides streaming technology services to third parties and is owned 75% by the Company, 15% by Major League Baseball (MLB) and 10% by the National Hockey League (NHL), both of which have the right to sell their interests to the Company in the future.
MLB has the right to sell its interest to the Company and the Company has the right to buy MLB’s interest starting five years from and ending ten years after the Company’s September 25, 2017 acquisition date of BAMTech at the greater of fair value or a guaranteed floor value ($563 million accreting at 8% annually for eight years from the date of acquisition). The NHL
7
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
can sell its interest to the Company in 2021 for $350 million. The Company has the right to acquire the NHL interest in 2021 for $500 million.
The MLB and NHL interests are required to be recorded at a minimum value equal to the greater of (i) their acquisition date fair value adjusted for their share (if any) of earnings, losses, or dividends (“adjusted value”) or (ii) an accreted value from the date of the acquisition to the applicable redemption date (“accreted value”). As the accreted value is generally always higher than the adjusted value, the MLB and NHL interests are not allocated their portion of BAMTech losses. Therefore, the MLB and NHL interests are accreted to the estimated redemption value as of the earliest redemption date. As of January 2, 2021, the guaranteed floor value for the MLB interest, accreted from the date of acquisition, was $724 million. As of January 2, 2021, the accreted value of the NHL interest was $325 million.
Adjustments to the carrying amount of redeemable noncontrolling interests increase or decrease income available to Company shareholders and are recorded in “Net income from continuing operations attributable to noncontrolling interests” on the Condensed Consolidated Statements of Income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results may differ from those estimates.
Reclassifications
Certain reclassifications have been made in the fiscal 2020 financial statements and notes to conform to the fiscal 2021 presentation.
2.Description of Business and Segment Information
Our operating segments report separate financial information, which is evaluated regularly by the Chief Executive Officer in order to decide how to allocate resources and to assess performance.
Effective at the beginning of the first quarter of fiscal 2021, we changed the presentation of segment operating results as discussed below and have recast our fiscal 2020 segment operating results to align with the fiscal 2021 presentation.
Media and Entertainment Reorganization
In October 2020, the Company reorganized its media and entertainment operations, which have been previously reported in three segments: Media Networks, Studio Entertainment and Direct-to-Consumer & International. Under this reorganization, a single group is responsible for distributing all of the Company’s media and entertainment content across all platforms globally. This distribution organization will have full accountability for the financial results of the media and entertainment businesses, and content will be created by three production groups: Studios, General Entertainment and Sports.
As a result of the reorganization, effective at the beginning of the first quarter of fiscal 2021, the financial results of the media and entertainment businesses will be reported as one segment, Disney Media and Entertainment Distribution (DMED). We will report operating results for the DMED segment across three significant lines of business/distribution platforms: Direct-to-Consumer (DTC), Linear Networks and Content Sales/Licensing (primarily comprising theatrical, home entertainment and third-party television and subscription video-on-demand “TV/SVOD” distribution globally).
Intersegment Transfer Pricing
Under our previous segment structure, in certain instances production and distribution activities were in different segments. In these situations, for segment financial accounting purposes, the producer segment would recognize revenue based on an intersegment transfer price that included a “mark-up”. These transactions were reported “gross” (i.e. the segment producing the content reported revenue and the mark-up from intersegment transactions, and the required eliminations were reported on a separate “Eliminations” line when presenting a summary of our segment results). Under our new segment structure, the operating results of the production and distribution activities are reported in the same segment, and the fully loaded production cost will be allocated across the distribution platforms which are utilizing the content.
Elimination of Consumer Products Revenue Share
Under our legacy segment financial reporting, the Studio Entertainment segment received a revenue share related to the consumer products business, which is included in the Disney Parks, Experiences and Products (DPEP) segment. Under the new reporting structure, DMED will not receive a revenue share from DPEP related to the consumer products business.
8
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
DESCRIPTION OF BUSINESS
Disney Media and Entertainment Distribution
•Significant operations:
◦Linear Networks
▪Domestic Channels: ABC Television Network and eight owned ABC television stations (Broadcasting), and Disney, ESPN, Freeform, FX and National Geographic branded domestic television networks (Cable)
▪International Channels: Disney, ESPN, Fox, National Geographic and Star branded television networks outside the U.S.
▪A 50% equity investment in A+E Television Networks (A+E), which operates a variety of cable channels including A&E, HISTORY and Lifetime
◦Direct-to-Consumer
▪Disney+, Disney+Hotstar, ESPN+, Hulu and Star+ DTC streaming services
◦Content Sales/Licensing
▪Sale of film and television content to third-party television and subscription video-on-demand (TV/SVOD) services
▪Theatrical distribution
▪Home entertainment distribution (DVD, Blu-ray and electronic home video licenses)
•Music distribution
•Staging and licensing of live entertainment events on Broadway and around the world (Stage Plays)
•DMED also includes the following activities that are reported with Content Sales/Licensing:
◦Post-production services through Industrial Light & Magic and Skywalker Sound
◦A 30% ownership interest in Tata Sky Limited, which operates a direct-to-home satellite distribution platform in India
•Significant revenues:
◦Affiliate fees - Fees charged by our linear networks to multi-channel video programming distributors (i.e. cable, satellite, telecommunications and digital over-the-top (e.g. Hulu, YouTube TV) service providers) (MVPDs) and to television stations affiliated with the ABC Network for the right to deliver our programming to their customers
◦Advertising - Sales of advertising time/space on our networks, DTC streaming services and owned television stations
◦Subscription fees - Fees charged to customers/subscribers for our DTC services
◦TV/SVOD distribution - Licensing fees and other revenue for the right to use our film and television productions and revenue from fees charged to customers to view our sports programming (“pay-per-view”) and Premier Access content. TV/SVOD distribution revenue is primarily reported in Content Sales/Licensing, except for pay-per-view and Premier Access revenue, which is reported in Direct-to-Consumer
◦Theatrical distribution - Rentals from licensing our film productions to theaters
◦Home entertainment - Sale of our film and television content to retailers and distributors in home video formats
◦Other content sales/licensing revenue - Revenues from licensing our music, ticket sales from stage play performances and fees from licensing our intellectual properties for use in stage plays
◦Other revenue - Fees from sub-licensing of sports programming rights (reported in Linear Networks) and post-production services (reported with Content Sales/Licensing)
•Significant expenses:
◦Operating expenses consist primarily of programming and production costs. technical support costs, operating labor, distribution costs and costs of sales. Operating expenses also includes fees paid to Linear Networks from other DMED business for the right to air the linear networks feed and other services. Programming and production costs include amortization of acquired licensed programming rights (including sports rights), amortization of capitalized production costs (including participations and residuals) and production costs related to live
9
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
programming such as news and sports. Programming and production costs are largely incurred across three content creation groups, as follows:
▪Studios - Primarily capitalized production costs related to feature films produced under the Walt Disney Pictures, Twentieth Century Studios, Marvel, Lucasfilm, Pixar and Searchlight Pictures banners
▪General Entertainment - Primarily acquisition of rights to and internal production of episodic television programs and news content. Internal content is generally produced by the following television studios: ABC Signature; 20th Television; Disney Television Animation, FX Productions and various studios for which we commission productions for our branded channels and DTC services
▪Sports - Primarily acquisition of professional and college sports programming rights and related production costs
◦Selling, general and administrative costs
◦Depreciation and amortization
Disney Parks, Experiences and Products
•Significant operations:
◦Parks & Experiences:
▪Theme parks and resorts, which include: Walt Disney World Resort in Florida; Disneyland Resort in California; Disneyland Paris; Hong Kong Disneyland Resort; Shanghai Disney Resort. Additionally, the Company licenses our intellectual property to a third party to operate Tokyo Disney Resort
▪Disney Cruise Line, Disney Vacation Club and Aulani, a Disney Resort & Spa in Hawaii
◦Consumer Products:
▪Licensing of our trade names, characters, visual, literary and other intellectual properties to various manufacturers, game developers, publishers and retailers throughout the world, for use on merchandise, published materials and games
▪Sale of branded merchandise through retail, online and wholesale businesses, and development and publishing of books, comic books and magazines
•Significant revenues:
◦Theme park admissions - Sales of tickets for admission to our theme parks
◦Parks & Experiences merchandise, food and beverage - Sales of merchandise, food and beverages at our theme parks and resorts and cruise ships
◦Resorts and vacations - Sales of room nights at hotels, sales of cruise and other vacations and sales and rentals of vacation club properties
◦Merchandise licensing and retail:
▪Merchandise licensing - Royalties from licensing our intellectual properties for use on consumer goods
▪Retail - Sales of merchandise at The Disney Stores and through branded internet shopping sites, as well as to wholesalers (including books, comic books and magazines)
◦Parks licensing and other - Revenues from sponsorships and co-branding opportunities and real estate rent and sales. In addition, we earn royalties on Tokyo Disney Resort revenues
•Significant expenses:
◦Operating expenses consist primarily of operating labor, costs of goods sold, infrastructure costs, supplies, commissions and entertainment offerings. Infrastructure costs include information systems expense, repairs and maintenance, property taxes, utilities and fuel, retail occupancy costs, insurance and transportation
◦Selling, general and administrative costs
◦Depreciation and amortization
SEGMENT INFORMATION
Segment operating results reflect earnings before corporate and unallocated shared expenses, restructuring and impairment charges, net other income, net interest expense, income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees and excludes impairments of certain equity investments and acquisition accounting amortization of TFCF Corporation (TFCF) and Hulu assets (i.e. intangible assets and the fair value step-up for film and
10
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
television costs) recognized in connection with the TFCF acquisition in fiscal 2019 (TFCF and Hulu acquisition amortization). Corporate and unallocated shared expenses principally consist of corporate functions, executive management and certain unallocated administrative support functions.
Segment operating results include allocations of certain costs, including information technology, pension, legal and other shared services costs, which are allocated based on metrics designed to correlate with consumption.
Impact of COVID-19
Since early 2020, the world has been, and continues to be, impacted by the novel coronavirus (COVID-19) pandemic. COVID-19 and measures to prevent its spread are impacting our segments in a number of ways, most significantly at DPEP where our theme parks have been closed or operating at significantly reduced capacity and cruise ship sailings and guided tours have been suspended. We have delayed, or in some cases, shortened or canceled, theatrical releases, and stage play performances have been suspended. Since March 2020, we have experienced significant disruptions in the production and availability of content, including the shift of key live sports programming from the third quarter of fiscal 2020 to the fourth quarter and into fiscal 2021 as well as the suspension of most film and television content late in the second quarter of fiscal 2020. Although most film and television production activities have resumed beginning in the fourth quarter of fiscal 2020, we continue to see disruption in production activities depending on local circumstances.
The impact of these disruptions and the extent of their adverse impact on our financial and operating results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19, and among other things, the impact of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward. As some of our businesses have reopened, we have incurred additional costs to address government regulations and the safety of our employees, talent and guests.
Segment revenues and segment operating income are as follows:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Revenues: | |||||||||||
| Disney Media and Entertainment Distribution | $ | 12,661 | $ | 13,297 | |||||||
| Disney Parks, Experiences and Products | 3,588 | 7,580 | |||||||||
| $ | 16,249 | $ | 20,877 | ||||||||
| Segment operating income (loss): | |||||||||||
| Disney Media and Entertainment Distribution | $ | 1,451 | $ | 1,474 | |||||||
| Disney Parks, Experiences and Products | (119) | 2,522 | |||||||||
| $ | 1,332 | $ | 3,996 | ||||||||
Equity in the income of investees is included in segment operating income as follows:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Disney Media and Entertainment Distribution | $ | 235 | $ | 235 | |||||||
| Disney Parks, Experiences and Products | (8) | (3) | |||||||||
| Equity in the income of investees included in segment operating income | 227 | 232 | |||||||||
| Amortization of TFCF intangible assets related to equity investees | (3) | (8) | |||||||||
| Equity in the income of investees, net | $ | 224 | $ | 224 | |||||||
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THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
A reconciliation of segment operating income to income from continuing operations before income taxes is as follows:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Segment operating income | $ | 1,332 | $ | 3,996 | |||||||
| Corporate and unallocated shared expenses | (232) | (237) | |||||||||
Restructuring and impairment charges (see Note 15) | (113) | (150) | |||||||||
| Interest expense, net | (324) | (283) | |||||||||
TFCF and Hulu acquisition amortization(1) | (617) | (700) | |||||||||
| Income from continuing operations before income taxes | $ | 46 | $ | 2,626 | |||||||
(1)For the quarter ended January 2, 2021 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $447 million, $167 million and $3 million, respectively. For the quarter ended December 28, 2019 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $486 million, $206 million, and $8 million, respectively.
Goodwill
The changes in the carrying amount of goodwill for the quarter ended January 2, 2021 are as follows:
| Media Networks | Disney Parks, Experiences and Products | Studio Entertainment | Direct-to-Consumer & International | Disney Media and Entertainment Distribution | Total | ||||||||||||||||||||||||||||||
| Balance at October 3, 2020 | $ | 33,991 | $ | 5,550 | $ | 17,795 | $ | 20,353 | $ | — | $ | 77,689 | |||||||||||||||||||||||
Segment recast (1) | (33,991) | — | (17,795) | (20,353) | 72,139 | — | |||||||||||||||||||||||||||||
| Currency translation adjustments and other, net | — | — | — | — | 111 | 111 | |||||||||||||||||||||||||||||
| Balance at January 2, 2021 | $ | — | $ | 5,550 | $ | — | $ | — | $ | 72,250 | $ | 77,800 | |||||||||||||||||||||||
(1)Represents the reallocation of goodwill as a result of the Company recasting its segments.
3.Revenues
The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business.
The following table presents our revenues by segment and major source:
| Quarter Ended January 2, 2021 | Quarter Ended December 28, 2019 | ||||||||||||||||||||||||||||||||||
| Disney Media and Entertainment Distribution | Disney Parks, Experiences and Products | Consolidated | Disney Media and Entertainment Distribution | Disney Parks, Experiences and Products | Consolidated | ||||||||||||||||||||||||||||||
| Affiliate fees | $ | 4,402 | $ | — | $ | 4,402 | $ | 4,440 | $ | — | $ | 4,440 | |||||||||||||||||||||||
| Advertising | 3,763 | 1 | 3,764 | 3,396 | 2 | 3,398 | |||||||||||||||||||||||||||||
| Subscription fees | 2,546 | — | 2,546 | 1,326 | — | 1,326 | |||||||||||||||||||||||||||||
| Theme park admissions | — | 549 | 549 | — | 2,067 | 2,067 | |||||||||||||||||||||||||||||
| Resort and vacations | — | 432 | 432 | — | 1,631 | 1,631 | |||||||||||||||||||||||||||||
| Retail and wholesale sales of merchandise, food and beverage | — | 1,163 | 1,163 | — | 2,313 | 2,313 | |||||||||||||||||||||||||||||
| TV/SVOD distribution licensing | 1,169 | — | 1,169 | 1,569 | — | 1,569 | |||||||||||||||||||||||||||||
| Theatrical distribution licensing | 31 | — | 31 | 1,408 | — | 1,408 | |||||||||||||||||||||||||||||
| Merchandise licensing | 5 | 1,090 | 1,095 | 8 | 1,048 | 1,056 | |||||||||||||||||||||||||||||
| Home entertainment | 300 | — | 300 | 596 | — | 596 | |||||||||||||||||||||||||||||
| Other | 445 | 353 | 798 | 554 | 519 | 1,073 | |||||||||||||||||||||||||||||
| $ | 12,661 | $ | 3,588 | $ | 16,249 | $ | 13,297 | $ | 7,580 | $ | 20,877 | ||||||||||||||||||||||||
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THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The following table presents our revenues by segment and primary geographical markets:
| Quarter Ended January 2, 2021 | Quarter Ended December 28, 2019 | ||||||||||||||||||||||||||||||||||
| Disney Media and Entertainment Distribution | Disney Parks, Experiences and Products | Consolidated | Disney Media and Entertainment Distribution | Disney Parks, Experiences and Products | Consolidated | ||||||||||||||||||||||||||||||
| Americas | $ | 10,291 | $ | 2,456 | $ | 12,747 | $ | 10,417 | $ | 5,878 | $ | 16,295 | |||||||||||||||||||||||
| Europe | 1,293 | 487 | 1,780 | 1,563 | 933 | 2,496 | |||||||||||||||||||||||||||||
| Asia Pacific | 1,077 | 645 | 1,722 | 1,317 | 769 | 2,086 | |||||||||||||||||||||||||||||
| Total revenues | $ | 12,661 | $ | 3,588 | $ | 16,249 | $ | 13,297 | $ | 7,580 | $ | 20,877 | |||||||||||||||||||||||
Revenues recognized in the current and prior-year quarter from performance obligations satisfied (or partially satisfied) in previous reporting periods primarily relate to revenues earned on TV/SVOD and theatrical distribution licensee sales on titles made available to the licensee in previous reporting periods. For the quarter ended January 2, 2021, $0.4 billion was recognized related to performance obligations satisfied as of October 3, 2020. For the quarter ended December 28, 2019, $0.5 billion was recognized related to performance obligations satisfied as of September 28, 2019.
As of January 2, 2021, revenue for unsatisfied performance obligations expected to be recognized in the future is $16 billion, which primarily relates to content to be delivered in the future under existing agreements with television station affiliates and TV/SVOD licensees. Of this amount, we expect to recognize approximately $5 billion in the remainder of fiscal 2021, $5 billion in fiscal 2022, $3 billion in fiscal 2023 and $3 billion thereafter. These amounts include only fixed consideration or minimum guarantees and do not include amounts related to (i) contracts with an original expected term of one year or less (such as most advertising contracts) or (ii) licenses of IP that are solely based on the sales of the licensee.
When the timing of the Company’s revenue recognition is different from the timing of customer payments, the Company recognizes either a contract asset (customer payment is subsequent to revenue recognition and subject to the Company satisfying additional performance obligations) or deferred revenue (customer payment precedes the Company satisfying the performance obligations). Consideration due under contracts with payment in arrears is recognized as accounts receivable. Deferred revenues are recognized as (or when) the Company performs under the contract. Contract assets, accounts receivable and deferred revenues from contracts with customers are as follows:
| January 2, 2021 | October 3, 2020 | ||||||||||
| Contract assets | $ | 44 | $ | 70 | |||||||
| Accounts receivable | |||||||||||
| Current | 12,544 | 11,340 | |||||||||
| Non-current | 1,705 | 1,789 | |||||||||
| Allowance for credit losses | (319) | (460) | |||||||||
| Deferred revenues | |||||||||||
| Current | 3,853 | 3,688 | |||||||||
| Non-current | 559 | 513 | |||||||||
Contract assets primarily relate to certain multi-season TV/SVOD licensing contracts. Activity for the current and prior-year quarters related to contract assets was not material. The allowance for credit losses decreased from $460 million at October 3, 2020 to $319 million at January 2, 2021 due to the adoption of new accounting guidance on the measurement of credit losses (see Note 16).
For the quarter ended January 2, 2021, the Company recognized revenues of $1.5 billion, primarily related to licensing and publishing advances and content sales included in the deferred revenue balance at October 3, 2020. For the quarter ended December 28, 2019, the Company recognized revenues of $2.1 billion primarily related to theme park admissions, vacation packages and licensing advances included in the deferred revenue balance at September 28, 2019.
We evaluate our allowance for credit losses and estimate collectability of current and non-current accounts receivable based on historical bad debt experience, our assessment of the financial condition of individual companies with which we do business, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, including COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods.
13
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The Company has accounts receivable with original maturities greater than one year related to the sale of film and television program rights and vacation club properties. These receivables are discounted to present value at contract inception and the related revenues are recognized at the discounted amount.
The balance of film and television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $1.0 billion as of January 2, 2021. The activity in the allowance for credit losses for the quarter ended January 2, 2021 was not material.
The balance of mortgage receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $0.7 billion as of January 2, 2021. The activity in the allowance for credit losses for the quarter ended January 2, 2021 was not material.
4.Cash, Cash Equivalents, Restricted Cash and Borrowings
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheet to the total of the amounts reported in the Condensed Consolidated Statements of Cash Flows.
| January 2, 2021 | October 3, 2020 | |||||||||||||
| Cash and cash equivalents | $ | 17,068 | $ | 17,914 | ||||||||||
| Restricted cash included in: | ||||||||||||||
| Other current assets | 3 | 3 | ||||||||||||
| Other assets | 41 | 37 | ||||||||||||
| Total cash, cash equivalents and restricted cash in the statement of cash flows | $ | 17,112 | $ | 17,954 | ||||||||||
Borrowings
During the quarter ended January 2, 2021, the Company’s borrowing activity was as follows:
| October 3, 2020 | Borrowings | Payments | Other Activity | January 2, 2021 | |||||||||||||||||||||||||
| Commercial paper with original maturities greater than three months | $ | 2,023 | $ | 50 | $ | (229) | $ | 2 | $ | 1,846 | |||||||||||||||||||
U.S. dollar denominated notes(1) | 52,736 | — | — | (34) | 52,702 | ||||||||||||||||||||||||
Asia Theme Parks borrowings(2) | 1,303 | — | (70) | 61 | 1,294 | ||||||||||||||||||||||||
Foreign currency denominated debt and other(3) | 2,566 | 1 | (69) | (65) | 2,433 | ||||||||||||||||||||||||
| $ | 58,628 | $ | 51 | $ | (368) | $ | (36) | $ | 58,275 | ||||||||||||||||||||
(1)The other activity is primarily due to the amortization of purchase price adjustments on debt assumed in the TFCF acquisition and debt issuance fees.
(2)The other activity is due to the impact of changes in foreign currency exchange rates.
(3)The other activity is due to market value adjustments for debt with qualifying hedges, partially offset by the impact of changes in foreign currency exchange rates.
At January 2, 2021, the Company’s bank facilities, which are with a syndicate of lenders, were as follows:
| Committed Capacity | Capacity Used | Unused Capacity | |||||||||||||||
| Facility expiring March 2021 | $ | 5,250 | $ | — | $ | 5,250 | |||||||||||
| Facility expiring April 2021 | 5,000 | — | 5,000 | ||||||||||||||
| Facility expiring March 2023 | 4,000 | — | 4,000 | ||||||||||||||
| Facility expiring March 2025 | 3,000 | — | 3,000 | ||||||||||||||
| Total | $ | 17,250 | $ | — | $ | 17,250 | |||||||||||
These bank facilities (other than the facility expiring April 2021) support commercial paper borrowings. All of the facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the
14
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Company’s debt, or a fixed spread in the case of the facility expiring in April 2021, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. The spread above LIBOR can range from 0.18% to 1.80%. The bank facilities specifically exclude certain entities, including the Asia Theme Parks, from any representations, covenants or events of default. The bank facilities contain only one financial covenant, which is interest coverage of three times earnings before interest, taxes, depreciation and amortization, including both intangible amortization and amortization of our film and television production and programming costs. On January 2, 2021 the financial covenant was met by a significant margin. The Company also has the ability to issue up to $500 million of letters of credit under the facility expiring in March 2023, which if utilized, reduces available borrowings under this facility. As of January 2, 2021, the Company has $1.2 billion of outstanding letters of credit, of which none were issued under this facility.
Cruise Ship Credit Facilities
The Company has credit facilities to finance up to 80% of the contract price of three new cruise ships, which are scheduled to be delivered in 2022, 2024 and 2025. Under the facilities, $1.0 billion in financing is available beginning in October 2021, $1.1 billion is available beginning in August 2023 and $1.1 billion is available beginning in August 2024. Each tranche of financing may be utilized for a period of 18 months from the initial availability date. If utilized, the interest rates will be fixed at 3.48%, 3.80% and 3.74%, respectively, and the loan and interest will be payable semi-annually over a 12-year period from the borrowing date. Early repayment is permitted subject to cancellation fees.
Interest expense, net
Interest expense (net of amounts capitalized), interest and investment income, and net periodic pension and postretirement benefit costs (other than service costs) (see Note 8) are reported net in the Condensed Consolidated Statements of Income and consist of the following:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Interest expense | $ | (404) | $ | (362) | |||||||
| Interest and investment income | 113 | 76 | |||||||||
| Net periodic pension and postretirement benefit costs (other than service costs) | (33) | 3 | |||||||||
| Interest expense, net | $ | (324) | $ | (283) | |||||||
Interest and investment income includes gains and losses on publicly traded and non-public investments, investment impairments and interest earned on cash and cash equivalents and certain receivables.
5.International Theme Parks
The Company has a 48% ownership interest in the operations of Hong Kong Disneyland Resort and a 43% ownership interest in the operations of Shanghai Disney Resort. The Asia Theme Parks together with Disneyland Paris are collectively referred to as the International Theme Parks.
15
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The following table summarizes the carrying amounts of the Asia Theme Parks’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheet:
| January 2, 2021 | October 3, 2020 | ||||||||||
| Cash and cash equivalents | $ | 277 | $ | 372 | |||||||
| Other current assets | 97 | 91 | |||||||||
| Total current assets | 374 | 463 | |||||||||
| Parks, resorts and other property | 6,838 | 6,720 | |||||||||
| Other assets | 189 | 191 | |||||||||
| Total assets | $ | 7,401 | $ | 7,374 | |||||||
| Current liabilities | $ | 428 | $ | 486 | |||||||
| Long-term borrowings | 1,268 | 1,213 | |||||||||
| Other long-term liabilities | 407 | 403 | |||||||||
| Total liabilities | $ | 2,103 | $ | 2,102 | |||||||
The following table summarizes the International Theme Parks’ revenues and costs and expenses included in the Company’s Condensed Consolidated Statements of Income for the quarter ended January 2, 2021:
| Revenues | $ | 319 | |||
| Costs and expenses | (622) | ||||
| Equity in the loss of investees | (8) | ||||
Asia Theme Parks’ royalty and management fees of $22 million for the quarter ended January 2, 2021 are eliminated in consolidation, but are considered in calculating earnings attributable to noncontrolling interests.
International Theme Parks’ cash flows included in the Company’s Condensed Consolidated Statements of Cash Flows for the quarter ended January 2, 2021 were $244 million used in operating activities, $183 million used in investing activities and $65 million used in financing activities.
Hong Kong Disneyland Resort
The Government of the Hong Kong Special Administrative Region (HKSAR) and the Company have a 52% and a 48% equity interest in Hong Kong Disneyland Resort, respectively.
The Company and HKSAR have both provided loans to Hong Kong Disneyland Resort with outstanding balances of $147 million and $97 million, respectively. The interest rate is three month HIBOR plus 2%, and the maturity date is September 2025. The Company’s loan is eliminated in consolidation.
The Company has provided Hong Kong Disneyland Resort with a revolving credit facility of HK $2.1 billion ($271 million), which bears interest at a rate of three month HIBOR plus 1.25% and matures in December 2023. The outstanding balance under the line of credit at January 2, 2021 was $34 million.
Shanghai Disney Resort
Shanghai Shendi (Group) Co., Ltd (Shendi) and the Company have 57% and 43% equity interests in Shanghai Disney Resort, respectively. A management company, in which the Company has a 70% interest and Shendi a 30% interest, operates Shanghai Disney Resort.
The Company has provided Shanghai Disney Resort with loans totaling $872 million, bearing interest at rates up to 8% and maturing in 2036, with early repayment permitted. The Company has also provided Shanghai Disney Resort with a $157 million line of credit bearing interest at 8%. As of January 2, 2021, the total amount outstanding under the line of credit was $17 million. These balances are eliminated in consolidation.
Shendi has provided Shanghai Disney Resort with loans totaling 7.7 billion yuan (approximately $1.2 billion), bearing interest at rates up to 8% and maturing in 2036, with early repayment permitted. Shendi has also provided Shanghai Disney Resort with a 1.4 billion yuan (approximately $0.2 billion) line of credit bearing interest at 8%. As of January 2, 2021 the total amount outstanding under the line of credit was 0.2 billion yuan (approximately $24 million).
16
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
6.Produced and Acquired/Licensed Content Costs and Advances
The Company classifies its capitalized produced and acquired/licensed content costs as long-term assets and generally classifies advances for live programming rights made prior to the live event as short-term assets. For purposes of amortization and impairment, the capitalized content costs are classified based on their predominant monetization strategy as follows:
•Individual - lifetime value is predominantly derived from third-party revenues that are directly attributable to the specific film or television title (e.g. theatrical revenues or sales to third-party television programmers)
•Group - lifetime value is predominantly derived from third-party revenues that are attributable only to a bundle of titles (e.g. subscription revenue for a DTC service or affiliate fees for a cable television network)
Total capitalized produced and licensed content by predominant monetization strategy is as follows:
| As of January 2, 2021 | As of October 3, 2020 | ||||||||||||||||||||||||||||||||||
| Predominantly Monetized Individually | Predominantly Monetized as a Group | Total | Predominantly Monetized Individually | Predominantly Monetized as a Group | Total | ||||||||||||||||||||||||||||||
| Produced content | |||||||||||||||||||||||||||||||||||
| Theatrical film costs | |||||||||||||||||||||||||||||||||||
| Released, less amortization | $ | 2,775 | $ | 2,902 | $ | 5,677 | $ | 3,000 | $ | 2,601 | $ | 5,601 | |||||||||||||||||||||||
| Completed, not released | 473 | 6 | 479 | 522 | 210 | 732 | |||||||||||||||||||||||||||||
| In-process | 3,965 | 255 | 4,220 | 3,322 | 259 | 3,581 | |||||||||||||||||||||||||||||
| In development or pre-production | 275 | — | 275 | 262 | 16 | 278 | |||||||||||||||||||||||||||||
| $ | 7,488 | $ | 3,163 | 10,651 | $ | 7,106 | $ | 3,086 | 10,192 | ||||||||||||||||||||||||||
| Television costs | |||||||||||||||||||||||||||||||||||
| Released, less amortization | $ | 1,893 | $ | 5,723 | $ | 7,616 | $ | 2,090 | $ | 5,584 | $ | 7,674 | |||||||||||||||||||||||
| Completed, not released | 58 | 572 | 630 | 33 | 510 | 543 | |||||||||||||||||||||||||||||
| In-process | 255 | 2,627 | 2,882 | 263 | 1,831 | 2,094 | |||||||||||||||||||||||||||||
| In development or pre-production | 4 | 146 | 150 | 6 | 87 | 93 | |||||||||||||||||||||||||||||
| $ | 2,210 | $ | 9,068 | 11,278 | $ | 2,392 | $ | 8,012 | 10,404 | ||||||||||||||||||||||||||
| Licensed content - Television programming rights and advances | 5,423 | 6,597 | |||||||||||||||||||||||||||||||||
| Total produced and licensed content | $ | 27,352 | $ | 27,193 | |||||||||||||||||||||||||||||||
| Current portion | $ | 1,423 | $ | 2,171 | |||||||||||||||||||||||||||||||
| Non-current portion | $ | 25,929 | $ | 25,022 | |||||||||||||||||||||||||||||||
Amortization of produced and licensed content is as follows:
| Quarter Ended January 2, 2021 | Quarter Ended December 28, 2019 | ||||||||||||||||||||||||||||||||||
| Predominantly Monetized Individually | Predominantly Monetized as a Group | Total | Predominantly Monetized Individually | Predominantly Monetized as a Group | Total | ||||||||||||||||||||||||||||||
| Theatrical film costs | $ | 297 | $ | 240 | $ | 537 | $ | 526 | $ | 311 | $ | 837 | |||||||||||||||||||||||
| Television costs | 315 | 958 | 1,273 | 754 | 927 | 1,681 | |||||||||||||||||||||||||||||
| Total produced content costs | $ | 612 | $ | 1,198 | $ | 1,810 | $ | 1,280 | $ | 1,238 | 2,518 | ||||||||||||||||||||||||
| Television programming rights and advances | 4,539 | 3,731 | |||||||||||||||||||||||||||||||||
Total produced and licensed content costs(1) | $ | 6,349 | $ | 6,249 | |||||||||||||||||||||||||||||||
(1)Primarily included in “Costs of services” in the Condensed Consolidated Statements of Income .
7.Income Taxes
Interim Period Tax Expense
Because of the uncertainties associated with the impact of COVID-19 on our projections of full-year pre-tax earnings and income tax expense, as well as the projected impact of permanent tax differences and other items that are generally not proportional to full-year earnings (“Permanent Differences”), our normal approach of using an estimated full-year effective income tax rate to determine interim period tax expense produces an income tax provision for the current year-to-date period
17
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
that is not meaningful. Accordingly, we calculated year-to-date fiscal 2021 tax expense based on year-to-date earnings before tax and using a blended U.S. Federal and state statutory tax rate of approximately 23%, and adjusted for the estimated impact of Permanent Differences.
Unrecognized Tax Benefits
The change in the Company’s gross unrecognized tax benefits for the quarter ended January 2, 2021 was not material. In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to resolutions of open tax matters, which would reduce our unrecognized tax benefits by $0.3 billion, of which $0.3 billion would reduce income tax expense and the effective tax rate if recognized.
8.Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows:
| Pension Plans | Postretirement Medical Plans | ||||||||||||||||||||||
| Quarter Ended | Quarter Ended | ||||||||||||||||||||||
| January 2, 2021 | December 28, 2019 | January 2, 2021 | December 28, 2019 | ||||||||||||||||||||
| Service costs | $ | 108 | $ | 103 | $ | 3 | $ | 3 | |||||||||||||||
| Other costs (benefits): | |||||||||||||||||||||||
| Interest costs | 114 | 133 | 12 | 14 | |||||||||||||||||||
| Expected return on plan assets | (275) | (273) | (14) | (14) | |||||||||||||||||||
| Amortization of previously deferred service costs | 2 | 3 | — | — | |||||||||||||||||||
| Recognized net actuarial loss | 186 | 131 | 7 | 3 | |||||||||||||||||||
| Total other costs (benefits) | 27 | (6) | 5 | 3 | |||||||||||||||||||
| Net periodic benefit cost | $ | 135 | $ | 97 | $ | 8 | $ | 6 | |||||||||||||||
During the quarter ended January 2, 2021, the Company did not make any material contributions to its pension and postretirement medical plans. The Company currently expects to make approximately $0.5 billion to $0.6 billion in pension and postretirement medical plan contributions in fiscal 2021. Final minimum funding requirements for fiscal 2021 will be determined based on a January 1, 2021 funding actuarial valuation, which is expected to be received during the fourth quarter of fiscal 2021.
9.Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period and are calculated using the treasury stock method for equity-based compensation awards (Awards). A reconciliation of the weighted average number of common and common equivalent shares outstanding and the number of Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, are as follows:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Shares (in millions): | |||||||||||
| Weighted average number of common and common equivalent shares outstanding (basic) | 1,812 | 1,805 | |||||||||
| Weighted average dilutive impact of Awards | 11 | 12 | |||||||||
| Weighted average number of common and common equivalent shares outstanding (diluted) | 1,823 | 1,817 | |||||||||
| Awards excluded from diluted earnings per share | 8 | 9 | |||||||||
18
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
10.Equity
The Company paid the following dividend in fiscal 2020:
| Per Share | Total Paid | Payment Timing | Related to Fiscal Period | |||||||||||||||||
| $0.88 | $1.6 billion | Second Quarter of Fiscal 2020 | Second Half 2019 | |||||||||||||||||
The Company did not pay a dividend with respect to fiscal year 2020 operations.
The following tables summarize the changes in each component of accumulated other comprehensive income (loss) (AOCI) including our proportional share of equity method investee amounts:
Market Value Adjustments(1) | Unrecognized Pension and Postretirement Medical Expense | Foreign Currency Translation and Other | AOCI | ||||||||||||||||||||
| AOCI, before tax | |||||||||||||||||||||||
| First quarter of fiscal 2021 | |||||||||||||||||||||||
| Balance at October 3, 2020 | $ | (191) | $ | (9,423) | $ | (1,088) | $ | (10,702) | |||||||||||||||
| Quarter Ended January 2, 2021: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | (185) | 2 | 211 | 28 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | (43) | 194 | — | 151 | |||||||||||||||||||
| Balance at January 2, 2021 | $ | (419) | $ | (9,227) | $ | (877) | $ | (10,523) | |||||||||||||||
| First quarter of fiscal 2020 | |||||||||||||||||||||||
| Balance at September 28, 2019 | $ | 129 | $ | (7,502) | $ | (1,086) | $ | (8,459) | |||||||||||||||
| Quarter Ended December 28, 2019: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | (81) | — | 82 | 1 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | (60) | 139 | — | 79 | |||||||||||||||||||
| Balance at December 28, 2019 | $ | (12) | $ | (7,363) | $ | (1,004) | $ | (8,379) | |||||||||||||||
Market Value Adjustments(1) | Unrecognized Pension and Postretirement Medical Expense | Foreign Currency Translation and Other | AOCI | ||||||||||||||||||||
| Tax on AOCI | |||||||||||||||||||||||
| First quarter of fiscal 2021 | |||||||||||||||||||||||
| Balance at October 3, 2020 | $ | 40 | $ | 2,201 | $ | 139 | $ | 2,380 | |||||||||||||||
| Quarter Ended January 2, 2021: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | 46 | (1) | (7) | 38 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | 9 | (45) | — | (36) | |||||||||||||||||||
| Balance at January 2, 2021 | $ | 95 | $ | 2,155 | $ | 132 | $ | 2,382 | |||||||||||||||
| First quarter of fiscal 2020 | |||||||||||||||||||||||
| Balance at September 28, 2019 | $ | (29) | $ | 1,756 | $ | 115 | $ | 1,842 | |||||||||||||||
| Quarter Ended December 28, 2019: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | 20 | — | 2 | 22 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | 14 | (32) | — | (18) | |||||||||||||||||||
| Balance at December 28, 2019 | $ | 5 | $ | 1,724 | $ | 117 | $ | 1,846 | |||||||||||||||
19
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Market Value Adjustments(1) | Unrecognized Pension and Postretirement Medical Expense | Foreign Currency Translation and Other | AOCI | ||||||||||||||||||||
| AOCI, after tax | |||||||||||||||||||||||
| First quarter of fiscal 2021 | |||||||||||||||||||||||
| Balance at October 3, 2020 | $ | (151) | $ | (7,222) | $ | (949) | $ | (8,322) | |||||||||||||||
| Quarter Ended January 2, 2021: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | (139) | 1 | 204 | 66 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | (34) | 149 | — | 115 | |||||||||||||||||||
| Balance at January 2, 2021 | $ | (324) | $ | (7,072) | $ | (745) | $ | (8,141) | |||||||||||||||
| First quarter of fiscal 2020 | |||||||||||||||||||||||
| Balance at September 28, 2019 | $ | 100 | $ | (5,746) | $ | (971) | $ | (6,617) | |||||||||||||||
| Quarter Ended December 28, 2019: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | (61) | — | 84 | 23 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | (46) | 107 | — | 61 | |||||||||||||||||||
| Balance at December 28, 2019 | $ | (7) | $ | (5,639) | $ | (887) | $ | (6,533) | |||||||||||||||
(1)Primarily reflects market value adjustments for cash flow hedges.
Details about AOCI components reclassified to net income are as follows:
Gain (loss) in net income: | Affected line item in the Condensed Consolidated Statements of Operations: | Quarter Ended | ||||||||||||||||||
| January 2, 2021 | December 28, 2019 | |||||||||||||||||||
| Market value adjustments, primarily cash flow hedges | Primarily revenue | $ | 43 | $ | 60 | |||||||||||||||
| Estimated tax | Income taxes | (9) | (14) | |||||||||||||||||
| 34 | 46 | |||||||||||||||||||
| Pension and postretirement medical expense | Interest expense, net | (194) | (139) | |||||||||||||||||
| Estimated tax | Income taxes | 45 | 32 | |||||||||||||||||
| (149) | (107) | |||||||||||||||||||
| Total reclassifications for the period | $ | (115) | $ | (61) | ||||||||||||||||
11.Equity-Based Compensation
Compensation expense related to stock options and restricted stock units (RSUs) is as follows:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Stock options | $ | 25 | $ | 21 | |||||||
| RSUs | 109 | 94 | |||||||||
Total equity-based compensation expense(1) | $ | 134 | $ | 115 | |||||||
| Equity-based compensation expense capitalized during the period | $ | 34 | $ | 24 | |||||||
(1)Equity-based compensation expense is net of capitalized equity-based compensation and estimated forfeitures and excludes amortization of previously capitalized equity-based compensation costs.
20
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Unrecognized compensation cost related to unvested stock options and RSUs was $165 million and $1,182 million, respectively, as of January 2, 2021.
The weighted average grant date fair values of options granted during the quarters ended January 2, 2021 and December 28, 2019 were $55.28 and $36.35, respectively.
During the quarter ended January 2, 2021, the Company made equity compensation grants consisting of 1.1 million stock options and 3.0 million RSUs.
12.Commitments and Contingencies
Legal Matters
The Company, together with, in some instances, certain of its directors and officers, is a defendant in various legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses. Management does not believe that the Company has incurred a probable material loss by reason of any of those actions.
Contractual Guarantees
The Company has guaranteed bond issuances by the Anaheim Public Authority that were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the Disneyland Resort. Revenues from sales, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds, which mature in 2037. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of January 2, 2021, the remaining debt service obligation guaranteed by the Company was $232 million. To the extent that tax revenues exceed the debt service payments subsequent to the Company funding a shortfall, the Company would be reimbursed for any previously funded shortfalls. To date, tax revenues have exceeded the debt service payments for these bonds.
13.Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and is generally classified in one of the following categories:
Level 1 - Quoted prices for identical instruments in active markets
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level:
| Fair Value Measurement at January 2, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments | $ | 1,056 | $ | — | $ | — | $ | 1,056 | |||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | 444 | — | 444 | |||||||||||||||||||
| Foreign exchange | — | 547 | — | 547 | |||||||||||||||||||
| Other | — | 9 | — | 9 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | (56) | — | (56) | |||||||||||||||||||
| Foreign exchange | — | (779) | — | (779) | |||||||||||||||||||
| Other | — | (6) | — | (6) | |||||||||||||||||||
| Total recorded at fair value | $ | 1,056 | $ | 159 | $ | — | $ | 1,215 | |||||||||||||||
| Fair value of borrowings | $ | — | $ | 64,826 | $ | 1,372 | $ | 66,198 | |||||||||||||||
21
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
| Fair Value Measurement at October 3, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments | $ | — | $ | 1,057 | $ | — | $ | 1,057 | |||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | 515 | — | 515 | |||||||||||||||||||
| Foreign exchange | — | 505 | — | 505 | |||||||||||||||||||
| Other | — | 1 | — | 1 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | (4) | — | (4) | |||||||||||||||||||
| Foreign exchange | — | (549) | — | (549) | |||||||||||||||||||
| Other | — | (22) | — | (22) | |||||||||||||||||||
| Total recorded at fair value | $ | — | $ | 1,503 | $ | — | $ | 1,503 | |||||||||||||||
| Fair value of borrowings | $ | — | $ | 63,370 | $ | 1,448 | $ | 64,818 | |||||||||||||||
The fair values of Level 2 investments are based on quoted market prices, adjusted for trading restrictions.
The fair values of Level 2 derivatives are primarily determined by internal discounted cash flow models that use observable inputs such as interest rates, yield curves and foreign currency exchange rates. Counterparty credit risk, which is mitigated by master netting agreements and collateral posting arrangements with certain counterparties, did not have a material impact on derivative fair value estimates.
Level 2 borrowings, which include commercial paper, U.S. dollar denominated notes and certain foreign currency denominated borrowings, are valued based on quoted prices for similar instruments in active markets or identical instruments in markets that are not active.
Level 3 borrowings include the Asia Theme Park borrowings, which are valued based on the current borrowing cost and credit risk of the Asia Theme Parks as well as prevailing market interest rates.
The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.
14.Derivative Instruments
The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.
22
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The Company’s derivative positions measured at fair value are summarized in the following tables:
| As of January 2, 2021 | |||||||||||||||||||||||
| Current Assets | Other Assets | Other Current Liabilities | Other Long- Term Liabilities | ||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||
| Foreign exchange | $ | 124 | $ | 240 | $ | (205) | $ | (184) | |||||||||||||||
| Interest rate | — | 444 | (56) | — | |||||||||||||||||||
| Other | 2 | 1 | (5) | (1) | |||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||
| Foreign exchange | 99 | 84 | (214) | (176) | |||||||||||||||||||
| Interest rate | — | — | — | — | |||||||||||||||||||
| Other | 6 | — | — | — | |||||||||||||||||||
| Gross fair value of derivatives | 231 | 769 | (480) | (361) | |||||||||||||||||||
| Counterparty netting | (211) | (403) | 342 | 272 | |||||||||||||||||||
| Cash collateral (received) paid | (4) | (107) | 102 | 41 | |||||||||||||||||||
| Net derivative positions | $ | 16 | $ | 259 | $ | (36) | $ | (48) | |||||||||||||||
| As of October 3, 2020 | |||||||||||||||||||||||
| Current Assets | Other Assets | Other Current Liabilities | Other Long- Term Liabilities | ||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||
| Foreign exchange | $ | 184 | $ | 132 | $ | (77) | $ | (273) | |||||||||||||||
| Interest rate | — | 515 | (4) | — | |||||||||||||||||||
| Other | 1 | — | (15) | (4) | |||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||
| Foreign exchange | 53 | 136 | (98) | (101) | |||||||||||||||||||
| Interest rate | — | — | — | — | |||||||||||||||||||
| Other | — | — | (3) | — | |||||||||||||||||||
| Gross fair value of derivatives | 238 | 783 | (197) | (378) | |||||||||||||||||||
| Counterparty netting | (143) | (378) | 184 | 338 | |||||||||||||||||||
| Cash collateral (received) paid | (26) | (142) | — | 9 | |||||||||||||||||||
| Net derivative positions | $ | 69 | $ | 263 | $ | (13) | $ | (31) | |||||||||||||||
Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company primarily uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate risk management activities.
The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of January 2, 2021 and October 3, 2020, the total notional amount of the Company’s pay-floating interest rate swaps was $15.9 billion and $15.8 billion, respectively.
23
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The following table summarizes fair value hedge adjustments to hedged borrowings:
Carrying Amount of Hedged Borrowings(1) | Fair Value Adjustments Included in Hedged Borrowings(1) | ||||||||||||||||||||||
| January 2, 2021 | October 3, 2020 | January 2, 2021 | October 3, 2020 | ||||||||||||||||||||
| Borrowings: | |||||||||||||||||||||||
| Current | $ | 751 | $ | 753 | $ | 1 | $ | 4 | |||||||||||||||
| Long-term | 16,173 | 16,229 | 360 | 505 | |||||||||||||||||||
| $ | 16,924 | $ | 16,982 | $ | 361 | $ | 509 | ||||||||||||||||
(1)Includes $33 million and $34 million of gains on terminated interest rate swaps as of January 2, 2021 and October 3, 2020, respectively.
The following amounts are included in “Interest expense, net” in the Condensed Consolidated Statements of Income:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Gain (loss) on: | |||||||||||
| Pay-floating swaps | $ | (147) | $ | (113) | |||||||
| Borrowings hedged with pay-floating swaps | 147 | 113 | |||||||||
| Benefit (expense) associated with interest accruals on pay-floating swaps | 35 | (12) | |||||||||
The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at January 2, 2021 or at October 3, 2020, and gains and losses related to pay-fixed swaps recognized in earnings for the quarter ended January 2, 2021 and December 28, 2019 were not material.
Foreign Exchange Risk Management
The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.
The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings into U.S. dollar denominated borrowings.
The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of January 2, 2021 and October 3, 2020, the notional amounts of the Company’s net foreign exchange cash flow hedges were $4.9 billion and $4.6 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Net deferred losses recorded in AOCI for contracts that will mature in the next twelve months total $102 million. The following table summarizes the effect of foreign exchange cash flow hedges on AOCI for the quarter ended January 2, 2021:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Gain (loss) recognized in AOCI | $ | (151) | $ | (85) | |||||||
Gain (loss) reclassified from AOCI into the Statement of Operations(1) | 44 | 60 | |||||||||
(1)Primarily recorded in revenue.
24
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The Company designates cross currency swaps as fair value hedges of foreign currency denominated borrowings. The impact of the designated exposure is recorded to “Interest expense, net” to offset the foreign currency impact of the foreign currency denominated borrowing. The non-hedged exposure is recorded to AOCI and is amortized over the life of the cross currency swap. As of January 2, 2021 and October 3, 2020, the total notional amounts of the Company’s designated cross currency swaps were Canadian $1.3 billion ($1.0 billion) and Canadian $1.3 billion ($1.0 billion), respectively.
The following amounts are included in “Interest expense, net” in the Condensed Consolidated Statements of Income:
| Quarter Ended | |||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||
| Gain (loss) on: | |||||||||||
| Cross currency swaps | $ | 42 | $ | — | |||||||
| Borrowings hedged with cross currency swaps | (42) | — | |||||||||
Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at January 2, 2021 and October 3, 2020 were $3.5 billion. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the net foreign exchange gains or losses on the foreign exchange contracts we entered into to mitigate our exposure with respect to foreign currency denominated assets and liabilities by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of Income:
| Costs and Expenses | Interest expense, net | Income Tax Expense | |||||||||||||||||||||||||||||||||
| Quarter Ended: | January 2, 2021 | December 28, 2019 | January 2, 2021 | December 28, 2019 | January 2, 2021 | December 28, 2019 | |||||||||||||||||||||||||||||
| Net gains (losses) on foreign currency denominated assets and liabilities | $ | 158 | $ | 69 | $ | (41) | $ | (12) | $ | (59) | $ | (15) | |||||||||||||||||||||||
| Net gains (losses) on foreign exchange risk management contracts not designated as hedges | (187) | (80) | 43 | 10 | 50 | 17 | |||||||||||||||||||||||||||||
| Net gains (losses) | $ | (29) | $ | (11) | $ | 2 | $ | (2) | $ | (9) | $ | 2 | |||||||||||||||||||||||
Commodity Price Risk Management
The Company is subject to the volatility of commodities prices and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The notional amount of these commodities contracts at January 2, 2021 and October 3, 2020 and related gains or losses recognized in earnings for the quarter ended January 2, 2021 and December 28, 2019 were not material.
Risk Management – Other Derivatives Not Designated as Hedges
The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which include certain total return swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings. The notional amount and fair value of these contracts at January 2, 2021 and October 3, 2020 were $0.3 billion. The related gains or losses recognized in earnings for the quarter ended January 2, 2021 and December 28, 2019 were not material.
Contingent Features and Cash Collateral
The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or the counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $227 million and $53 million on January 2, 2021 and October 3, 2020, respectively.
25
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
15.Restructuring and Impairment Charges
TFCF Integration
In fiscal 2019, the Company implemented a restructuring and integration plan as a part of its initiative to realize cost synergies from the acquisition of TFCF. The restructuring plan was substantially complete as of the end of fiscal 2020. We have recorded restructuring charges of $1.7 billion, including $1.3 billion related to severance (including employee contract terminations) in connection with the plan and $0.3 billion of equity based compensation costs, primarily for TFCF awards that were accelerated to vest upon the closing of the TFCF acquisition. These charges are recorded in “Restructuring and impairment charges” in the Condensed Consolidated Statements of Income. As of January 2, 2021, the remaining restructuring reserve is $0.2 billion, the majority of which is expected to be paid out by the end of fiscal 2021.
Other
The Company recorded approximately $0.1 billion of restructuring charges during the quarter ended January 2, 2021, primarily for severance. These charges are recorded in “Restructuring and impairment charges” in the Condensed Consolidated Statements of Income.
16.New Accounting Pronouncements
Accounting Pronouncements Adopted in Fiscal 2021
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued new accounting guidance which modifies existing guidance related to the measurement of credit losses on financial instruments, including trade and loan receivables. The new guidance requires the allowance for credit losses to be measured based on expected losses over the life of the asset rather than incurred losses. The Company adopted the new guidance in the first quarter of fiscal 2021 without restating prior periods by recording the impact of adoption as an adjustment to retained earnings at the beginning of fiscal 2021. The adoption did not have a material impact on our financial statements.
Accounting Pronouncements Not Yet Adopted
Facilitation of the Effects of Reference Rate Reform
In March 2020, the FASB issued guidance which provides optional expedients and exceptions for applying current GAAP to contracts, hedging relationships, and other transactions affected by the transition from the use of LIBOR to an alternative reference rate. We are currently evaluating our contracts and hedging relationships that reference LIBOR and the potential effects of adopting this new guidance. The guidance can be adopted immediately and is applicable to contracts entered into on or before December 31, 2022.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance which simplifies the accounting for income taxes. The guidance amends the rules for recognizing deferred taxes for investments, performing intraperiod tax allocations and calculating income taxes in interim periods. It also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group. The guidance is effective at the beginning of the Company’s 2022 fiscal year (with early adoption permitted). We currently do not expect the new guidance will have a material impact on our financial statements.
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
•Consolidated Results
•Significant Developments
•Current Quarter Results Compared to Prior-Year Quarter
•Seasonality
•Business Segment Results
•Corporate and Unallocated Shared Expenses
•Financial Condition
•Supplemental Guarantor Financial Information
•Commitments and Contingencies
•Other Matters
•Market Risk
CONSOLIDATED RESULTS
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions, except per share data) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Services | $ | 14,871 | $ | 18,094 | (18) % | ||||||||||||
| Products | 1,378 | 2,783 | (50) % | ||||||||||||||
| Total revenues | 16,249 | 20,877 | (22) % | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | (10,738) | (11,395) | 6 % | ||||||||||||||
| Cost of products (exclusive of depreciation and amortization) | (1,037) | (1,639) | 37 % | ||||||||||||||
| Selling, general, administrative and other | (2,917) | (3,709) | 21 % | ||||||||||||||
| Depreciation and amortization | (1,298) | (1,299) | — % | ||||||||||||||
| Total costs and expenses | (15,990) | (18,042) | 11 % | ||||||||||||||
| Restructuring and impairment charges | (113) | (150) | 25 % | ||||||||||||||
| Interest expense, net | (324) | (283) | (14) % | ||||||||||||||
| Equity in the income of investees | 224 | 224 | — % | ||||||||||||||
| Income from continuing operations before income taxes | 46 | 2,626 | (98) % | ||||||||||||||
| Income taxes on continuing operations | (16) | (458) | 97 % | ||||||||||||||
| Net income from continuing operations | 30 | 2,168 | (99) % | ||||||||||||||
| Loss from discontinued operations, net of income tax benefit of $4 and $7, respectively | (12) | (21) | 43 % | ||||||||||||||
| Net income | 18 | 2,147 | (99) % | ||||||||||||||
| Net income from continuing operations attributable to noncontrolling interests | (1) | (40) | 98 % | ||||||||||||||
| Net income attributable to Disney | $ | 17 | $ | 2,107 | (99) % | ||||||||||||
| Diluted earnings per share from continuing operations attributable to Disney | $ | 0.02 | $ | 1.17 | (98) % | ||||||||||||
SIGNIFICANT DEVELOPMENTS
COVID-19 Pandemic
Since early 2020, the world has been, and continues to be, impacted by COVID-19. COVID-19 and measures to prevent its spread are impacting our segments in a number of ways, most significantly at Disney Parks, Experiences and Products. In the current quarter, our theme parks and resorts have been closed or operating at significantly reduced capacity and cruise ship
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
sailings and guided tours have been suspended. We have delayed or, in some cases, shortened or canceled, theatrical releases, and stage play performances have been suspended. Since March 2020, we have experienced significant disruptions in the production and availability of content, including the shift of key live sports programming from the third quarter of fiscal 2020 to the fourth quarter and into fiscal 2021, as well as the suspension of production of most film and television content late in the second quarter of fiscal 2020. Although most film and television production activities have resumed beginning in the fourth quarter of fiscal 2020, we continue to see disruption of production activities depending on local circumstances.
We have taken a number of mitigation efforts in response to the impacts of COVID-19 on our businesses. We have significantly increased cash balances through the issuance of senior notes in March and May 2020, and we entered into an additional $5.0 billion credit facility in April 2020. The Company did not pay a dividend with respect to fiscal 2020 operations; suspended certain capital projects; reduced certain discretionary expenditures (such as spending on marketing); reduced management compensation for several months in fiscal 2020 and temporarily eliminated Board of Director retainers and committee fees in fiscal 2020. In addition, we furloughed over 120,000 of our employees (who continued to receive Company provided medical benefits), many of which have returned from furlough as certain business operations have re-opened. At the end of fiscal 2020, the Company announced a workforce reduction plan and the majority of employees that were impacted have been terminated. As of January 2, 2021, approximately 31,000 employees, who are not scheduled for employment termination, remain on furlough. We may take additional mitigation actions in the future such as raising additional financing; not declaring future dividends; reducing, or not making, certain payments, such as some contributions to our pension and postretirement medical plans; further suspending capital spending, reducing film and television content investments; or implementing additional furloughs or reductions in force. Some of these measures may have an adverse impact on our businesses.
The most significant impact on operating income in the current quarter from COVID-19 was an estimated detriment of approximately $2.6 billion at the Disney Parks, Experiences and Products segment due to revenue lost as a result of the closures and reduced operating capacities. The impacts at our Disney Media and Entertainment Distribution segment were less significant. Higher sports programming costs reflecting the shift of key sporting events from prior quarters to the current quarter were largely offset by advertising revenue related to the broadcast of events. Lower revenues due to the deferral or cancellation of significant film releases as a result of theater closures were largely offset by a reduction in the related film cost amortization, marketing and distribution costs. The impact of COVID-19 in the current quarter is not necessarily indicative of the impact on future period results.
The impact of these disruptions and the extent of their adverse impact on our financial and operational results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19, and among other things, the impact and duration of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward. While we cannot be certain as to the duration of the impacts of COVID-19, we currently expect COVID-19 to adversely impact our financial results at least through fiscal 2021.
Some of our businesses have reopened with limited operations. We have incurred and will continue to incur additional costs to address government regulations and the safety of our employees, talent and guests. For example, as we reopened theme parks and retail stores, we incurred and will continue to incur costs for such things as additional custodial services, personal protection equipment, temperature screenings and testing, sanitizer and cleaning supplies and signage, among other items. As we resume production of film and television content, including live sporting events, we anticipate incurring similar costs and productions may take longer to complete. The timing, duration and extent of these costs will depend on the timing and scope of the resumption of our operations. We currently estimate these costs may total approximately $1 billion in fiscal 2021. Some of these costs may be capitalized and amortized over future periods. With the unknown duration of COVID-19 and yet to be determined timing of the phased reopening of certain businesses, it is not possible to precisely estimate the impact of COVID-19 on our operations in future quarters. As we reopen our businesses, we will no longer benefit from certain savings related to the closure of those businesses, such as related furloughs. The reopening or closure of our businesses is dependent on applicable government requirements, which vary by location, and are subject to ongoing changes, which could result from increasing COVID-19 cases.
Additionally, see Part II. Other Information, Item 1A. Risk Factors - The adverse impact of COVID-19 on our businesses will continue for an unknown length of time and may continue to impact certain of our key sources of revenue.
CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER
Revenues for the quarter decreased 22%, or $4.6 billion, to $16.2 billion; net income attributable to Disney decreased $2.1 billion, to $17 million; and diluted earnings per share from continuing operations attributable to Disney (EPS) was $0.02 compared to $1.17 in the prior-year quarter. The EPS decrease for the quarter was due to lower results at the Disney Parks, Experiences and Products segment.
28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues
Service revenues for the quarter decreased 18%, or $3.2 billion, to $14.9 billion due to the closure/reduced operating capacity of our theme parks and resorts and lower theatrical revenues due to theater closures, both of which were driven by the impact of COVID-19, and a decrease in TV/SVOD distribution revenue driven by the shift from licensing our content to third parties to distribution on our direct-to-consumer services. These decreases were partially offset by higher DTC subscription revenue and increased advertising revenue at Hulu and our international channels. The increase in international channels advertising revenue was due to a shift of cricket events from the third quarter of the prior fiscal year to the current quarter due to COVID-19.
Product revenues for the quarter decreased 50%, or $1.4 billion, to $1.4 billion due to lower merchandise, food and beverage sales at our theme parks and resorts and a decrease in home entertainment volumes.
Costs and expenses
Cost of services for the quarter decreased 6%, or $0.7 billion, to $10.7 billion due to the closure/reduced operating capacity of our theme parks and resorts and lower theatrical production amortization and distribution costs. These decreases were partially offset by higher sports programming costs at Linear Networks and increased programming, production and technology costs at DTC.
Cost of products for the quarter decreased 37%, or $0.6 billion, to $1.0 billion due to lower merchandise, food and beverage sales at our theme parks and resorts and a decrease in home entertainment volumes.
Selling, general, administrative and other costs decreased 21%, or $0.8 billion, to $2.9 billion due to lower marketing costs driven by no significant worldwide theatrical releases and a decrease in spending at the theme parks and resorts businesses, partially offset by an increase at DTC.
Restructuring and impairment charges
Restructuring and impairment charges of $113 million for the current quarter were primarily due to severance.
Restructuring and impairment charges of $150 million for the prior-year quarter were primarily for severance in connection with the acquisition and integration of TFCF.
Interest expense, net
Interest expense, net is as follows:
| Quarter Ended | |||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | % Change Better (Worse) | ||||||||||||||
| Interest expense | $ | (404) | $ | (362) | (12) % | ||||||||||||
| Interest income, investment income and other | 80 | 79 | 1 % | ||||||||||||||
| Interest expense, net | $ | (324) | $ | (283) | (14) % | ||||||||||||
The increase in interest expense was due to higher average debt balances, partially offset by lower average interest rates.
Interest income, investment income and other was comparable to the prior-year quarter as higher pension and postretirement benefit costs, other than service cost were offset by higher investment gains.
Effective Income Tax Rate
| Quarter Ended | ||||||||||||||||||||
| January 2, 2021 | December 28, 2019 | Change Better (Worse) | ||||||||||||||||||
| Effective income tax rate - continuing operations | 34.8% | 17.4% | (17.4) | ppt | ||||||||||||||||
The increase in the effective income tax rate was due to higher foreign losses for which we are unable to recognize a tax benefit, partially offset by higher excess tax benefits on employee share-based awards. An excess tax benefit arises when the value of an employee share-based award on the exercise or vesting date is higher than the fair value on the grant date.
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Noncontrolling Interests
| Quarter Ended | |||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | % Change Better (Worse) | ||||||||||||||
| Net income from continuing operations attributable to noncontrolling interests | $ | (1) | $ | (40) | 98 % | ||||||||||||
The decrease in net income from continuing operations attributable to noncontrolling interests was due to lower operating results at ESPN.
Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable.
Certain Items Impacting Results in the Quarter
Results for the quarter ended January 2, 2021 were impacted by the following:
•TFCF and Hulu acquisition amortization of $617 million
•Restructuring charges of $113 million
•In addition, the Company recognized a non-cash gain of $186 million to adjust its investment in fuboTV Inc. to fair value, which was offset by a non-cash loss of $186 million to adjust its investment in DraftKings, Inc. to fair value.
Results for the quarter ended December 28, 2019 were impacted by the following:
•TFCF and Hulu acquisition amortization of $700 million
•Restructuring charges of $150 million
A summary of the impact of these items on EPS is as follows:
| (in millions, except per share data) | Pre-Tax Income (Loss) | Tax Benefit (Expense)(1) | After-Tax Income (Loss) | EPS Favorable (Adverse)(2) | |||||||||||||||||||
| Quarter Ended January 2, 2021: | |||||||||||||||||||||||
TFCF and Hulu acquisition amortization(3) | $ | (617) | $ | 144 | $ | (473) | $ | (0.25) | |||||||||||||||
| Restructuring and impairment charges | (113) | 28 | (85) | (0.05) | |||||||||||||||||||
| Total | $ | (730) | $ | 172 | $ | (558) | $ | (0.30) | |||||||||||||||
| Quarter Ended December 28, 2019: | |||||||||||||||||||||||
TFCF and Hulu acquisition amortization(3) | $ | (700) | $ | 162 | $ | (538) | $ | (0.30) | |||||||||||||||
| Restructuring and impairment charges | (150) | 35 | (115) | (0.06) | |||||||||||||||||||
| Total | $ | (850) | $ | 197 | $ | (653) | $ | (0.36) | |||||||||||||||
(1)Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item.
(2)EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.
(3)Includes amortization of intangibles related to TFCF equity investees.
SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended January 2, 2021 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
Disney Media and Entertainment Distribution revenues are subject to seasonal advertising patterns, changes in viewership and subscriber levels, timing and performance of film releases in the theatrical and home entertainment markets, timing of and demand for film and television programs, and the demand for sports programming. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Sports programming also depends on timing of sports seasons and events, which varies throughout the year or may take place periodically (e.g. biannually, quadrennially). Affiliate revenues vary with the subscriber trends of MVPDs. Theatrical release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Disney Parks, Experiences and Products revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities, which generally results in higher revenues during the Company’s first and fourth fiscal quarters. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early winter and spring holiday periods. Consumer products revenue fluctuates with consumer purchasing behavior, which is generally higher in our first fiscal quarter due to the winter holiday season and in the fourth quarter due to back-to-school. In addition, licensing revenues fluctuate with the timing and performance of our film and television content.
BUSINESS SEGMENT RESULTS
The following table reconciles income from continuing operations before income taxes to total segment operating income:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Income from continuing operations before income taxes | $ | 46 | $ | 2,626 | (98) % | ||||||||||||
| Add: | |||||||||||||||||
| Corporate and unallocated shared expenses | 232 | 237 | 2 % | ||||||||||||||
| Restructuring and impairment charges | 113 | 150 | 25 % | ||||||||||||||
| Interest expense, net | 324 | 283 | (14) % | ||||||||||||||
TFCF and Hulu acquisition amortization(1) | 617 | 700 | 12 % | ||||||||||||||
| Total segment operating income | $ | 1,332 | $ | 3,996 | (67) % | ||||||||||||
(1)Includes amortization of intangibles related to TFCF equity investees.
The following is a summary of segment revenue and operating income:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Disney Media and Entertainment Distribution | $ | 12,661 | $ | 13,297 | (5) % | ||||||||||||
| Disney Parks, Experiences and Products | 3,588 | 7,580 | (53) % | ||||||||||||||
| $ | 16,249 | $ | 20,877 | (22) % | |||||||||||||
| Segment operating income: | |||||||||||||||||
| Disney Media and Entertainment Distribution | $ | 1,451 | $ | 1,474 | (2) % | ||||||||||||
| Disney Parks, Experiences and Products | (119) | 2,522 | nm | ||||||||||||||
| $ | 1,332 | $ | 3,996 | (67) % | |||||||||||||
Depreciation expense is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Disney Media and Entertainment Distribution | $ | 167 | $ | 142 | (18) % | ||||||||||||
| Disney Parks, Experiences and Products | |||||||||||||||||
| Domestic | 388 | 398 | 3 % | ||||||||||||||
| International | 176 | 169 | (4) % | ||||||||||||||
| Total Disney Parks, Experiences and Products | 564 | 567 | 1 % | ||||||||||||||
| Corporate | 46 | 31 | (48) % | ||||||||||||||
| Total depreciation expense | $ | 777 | $ | 740 | (5) % | ||||||||||||
31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Amortization of intangible assets is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Disney Media and Entertainment Distribution | $ | 47 | $ | 46 | (2) % | ||||||||||||
| Disney Parks, Experiences and Products | 27 | 27 | — % | ||||||||||||||
| TFCF and Hulu | 447 | 486 | 8 % | ||||||||||||||
| Total amortization of intangible assets | $ | 521 | $ | 559 | 7 % | ||||||||||||
Disney Media and Entertainment Distribution
Revenue and operating results for the Disney Media and Entertainment Distribution segment are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Linear Networks | $ | 7,693 | $ | 7,536 | 2 % | ||||||||||||
| Direct-to-Consumer | 3,504 | 2,025 | 73 % | ||||||||||||||
| Content Sales/Licensing and Other | 1,702 | 3,910 | (56) % | ||||||||||||||
Elimination of Intrasegment Revenue(1) | (238) | (174) | (37) % | ||||||||||||||
| $ | 12,661 | $ | 13,297 | (5) % | |||||||||||||
| Segment operating income (loss): | |||||||||||||||||
| Linear Networks | $ | 1,729 | $ | 1,808 | (4) % | ||||||||||||
| Direct-to-Consumer | (466) | (1,110) | 58 % | ||||||||||||||
| Content Sales/Licensing and Other | 188 | 776 | (76) % | ||||||||||||||
| $ | 1,451 | $ | 1,474 | (2) % | |||||||||||||
(1) Reflects fees received from other DMED businesses for the right to air the linear networks and related services.
Linear Networks
Operating results for Linear Networks are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Revenues | |||||||||||||||||
| Affiliate fees | $ | 4,640 | $ | 4,614 | 1 % | ||||||||||||
| Advertising | 2,835 | 2,731 | 4 % | ||||||||||||||
| Other | 218 | 191 | 14 % | ||||||||||||||
| Total revenues | 7,693 | 7,536 | 2 % | ||||||||||||||
| Operating expenses | (5,421) | (4,958) | (9) % | ||||||||||||||
| Selling, general, administrative and other | (724) | (918) | 21 % | ||||||||||||||
| Depreciation and amortization | (53) | (66) | 20 % | ||||||||||||||
| Equity in the income of investees | 234 | 214 | 9 % | ||||||||||||||
| Operating Income | $ | 1,729 | $ | 1,808 | (4) % | ||||||||||||
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues
Affiliate revenue is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Domestic Channels | $ | 3,773 | $ | 3,650 | 3 % | ||||||||||||
| International Channels | 867 | 964 | (10) % | ||||||||||||||
| $ | 4,640 | $ | 4,614 | 1 % | |||||||||||||
The increase in affiliate revenue at our Domestic Channels was due to an increase of 8% from higher contractual rates, partially offset by a decrease of 5% from fewer subscribers.
The decrease in affiliate revenue at our International Channels was due to decreases of 6% from fewer subscribers, driven by channel closures primarily in Europe, and 2% from an unfavorable foreign exchange impact.
Advertising revenue is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Cable | $ | 1,217 | $ | 1,309 | (7) % | ||||||||||||
| Broadcasting | 984 | 941 | 5 % | ||||||||||||||
| Domestic Channels | 2,201 | 2,250 | (2) % | ||||||||||||||
| International Channels | 634 | 481 | 32 % | ||||||||||||||
| $ | 2,835 | $ | 2,731 | 4 % | |||||||||||||
The decrease in Cable advertising revenue was due to decreases of 17% from lower impressions reflecting lower average viewership and 2% from the cancellation of certain college sporting events, partially offset by an increase of 13% from higher rates.
The increase in Broadcasting advertising revenue was due to increases of 9% from the owned television stations, due to higher political advertising, and 2% from airing New Year’s Rockin’ Eve in the current quarter, whereas in the prior fiscal year it aired in the second quarter. These increases were partially offset by decreases of 4% from lower network impressions, reflecting lower average viewership, and 4% from lower network rates.
The increase in International Channels advertising revenue was due to an increase in viewership. The increase reflected a shift of Indian Premier League (IPL) cricket matches for the 2020 season from the third quarter of the prior fiscal year to the current quarter as a result of COVID-19, partially offset by the absence of Board of Control for Cricket in India (BCCI) matches in the current quarter as a result of COVID-19. IPL cricket matches generally occur during our third fiscal quarter.
Other revenue increased $27 million, to $218 million from $191 million, primarily due to higher sub-licensing fees from the 2020 IPL cricket matches shifted into the current quarter.
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Cable | $ | (3,404) | $ | (3,121) | (9) % | ||||||||||||
| Broadcasting | (747) | (755) | 1 % | ||||||||||||||
| Domestic Channels | (4,151) | (3,876) | (7) % | ||||||||||||||
| International Channels | (914) | (686) | (33) % | ||||||||||||||
| $ | (5,065) | $ | (4,562) | (11) % | |||||||||||||
The increase in programming and production costs at cable was due to the timing of the College Football Playoffs (CFP) relative to our fiscal periods and higher NBA programming costs. The current quarter included six CFP bowl games compared
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
to three in the prior-year quarter. As a result of delays due to COVID-19, four NBA Finals games were played in the current quarter, whereas these games would normally have occurred in the third quarter of the prior year.
The increase in programming and production costs at International Channels was due to the shift of the 2020 IPL cricket matches into the current quarter, partially offset by the absence of the BCCI matches.
Selling, general administrative and other costs decreased $194 million, to $724 million from $918 million, driven by lower labor costs, a decrease in bad debt expense and lower marketing costs.
Equity in the Income of Investees
Income from equity investees increased $20 million, to $234 million from $214 million, primarily due to higher income from A+E Television Networks due to higher program sales, partially offset by lower advertising revenue.
Operating Income from Linear Networks
Operating income from Linear Networks decreased $79 million, to $1,729 million from $1,808 million, due to decreases at our domestic cable channels, ABC Television Network and international channels. These decreases were offset by an increase at the owned television stations.
The following table provides supplemental revenue and operating income detail for Linear Networks:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Supplemental revenue detail | |||||||||||||||||
| Domestic Channels | $ | 6,070 | $ | 5,993 | 1 % | ||||||||||||
| International Channels | 1,623 | 1,543 | 5 % | ||||||||||||||
| $ | 7,693 | $ | 7,536 | 2 % | |||||||||||||
| Supplemental operating income detail | |||||||||||||||||
| Domestic Channels | $ | 1,120 | $ | 1,206 | (7) % | ||||||||||||
| International Channels | 375 | 388 | (3) % | ||||||||||||||
| Equity in the income of investees | 234 | 214 | 9 % | ||||||||||||||
| $ | 1,729 | $ | 1,808 | (4) % | |||||||||||||
Direct-to-Consumer
Operating results for Direct-to-Consumer are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Revenues | |||||||||||||||||
| Subscription fees | $ | 2,546 | $ | 1,326 | 92 % | ||||||||||||
| Advertising | 882 | 599 | 47 % | ||||||||||||||
| TV/SVOD distribution and other | 76 | 100 | (24) % | ||||||||||||||
| Total revenues | 3,504 | 2,025 | 73 % | ||||||||||||||
| Operating expenses | (2,921) | (2,343) | (25) % | ||||||||||||||
| Selling, general, administrative and other | (970) | (732) | (33) % | ||||||||||||||
| Depreciation and amortization | (79) | (60) | (32) % | ||||||||||||||
| Operating Loss | $ | (466) | $ | (1,110) | 58 % | ||||||||||||
Revenues
The increase in subscription fees was due to increases of 87% from higher subscribers driven by growth at Disney+, Hulu, and to a lesser extent, ESPN+ and 7% from higher rates due to an increase in retail pricing at Hulu. Higher subscribers at Disney+ include a full quarter of operations in the current quarter compared to two months of operations in the prior-year quarter (Disney+ launched in November 2019).
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Higher advertising revenue reflected an increase of 48% from higher impressions due to growth at Hulu.
The decrease in TV/SVOD distribution and other revenue was due to lower licensing revenue driven by the delay of the 2020/2021 National Hockey League season due to COVID-19.
The following table presents the number of paid subscribers(1) (in millions) for Disney+, ESPN+ and Hulu as of:
| January 2, 2021 | December 28, 2019 | % Change Better (Worse) | |||||||||||||||
Disney+(3) | 94.9 | 26.5 | >100 % | ||||||||||||||
| ESPN+ | 12.1 | 6.6 | 83 % | ||||||||||||||
| Hulu | |||||||||||||||||
| SVOD Only | 35.4 | 27.2 | 30 % | ||||||||||||||
| Live TV + SVOD | 4.0 | 3.2 | 25 % | ||||||||||||||
| Total Hulu | 39.4 | 30.4 | 30 % | ||||||||||||||
The following table presents the average monthly revenue per paid subscriber(2) for the quarter ended:
| % Change Better (Worse) | |||||||||||||||||
| January 2, 2021 | December 28, 2019 | ||||||||||||||||
Disney+(3)(4) | $ | 4.03 | $ | 5.56 | (28) % | ||||||||||||
ESPN+(5) | $ | 4.48 | $ | 4.44 | 1 % | ||||||||||||
| Hulu | |||||||||||||||||
| SVOD Only | $ | 13.51 | $ | 13.15 | 3 % | ||||||||||||
| Live TV + SVOD | $ | 75.11 | $ | 59.47 | 26 % | ||||||||||||
(1)A subscriber for which we recognized subscription revenue. A subscriber ceases to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method. A subscription bundle is considered a paid subscriber for each service included in the bundle. Subscribers include those who receive the service through wholesale arrangements in which we receive a fee for the distribution of Disney+ to each subscriber to an existing content distribution tier. When we aggregate the total number of paid subscribers across our DTC services, whether acquired individually, through a wholesale arrangement or via the bundle, we refer to them as paid subscriptions.
(2)Revenue per paid subscriber is calculated based upon the average of the monthly average paid subscribers for each month in the period. The monthly average paid subscribers is calculated as the sum of the beginning of the month and end of the month paid subscriber count, divided by two. Disney+ average monthly revenue per paid subscriber is calculated using a daily average of paid subscribers for the period. The average revenue per subscriber is net of discounts offered on bundled services. The discount is allocated to each service based on the relative retail price of each service on a standalone basis. In general, wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third party platforms like Apple.
(3)Disney+ Hotstar launched on April 3, 2020 and September 5, 2020 in India and Indonesia, respectively, (as a conversion of the preexisting Hotstar service) and is included in the number of paid subscribers and average monthly revenue per paid subscriber. The average monthly revenue per paid subscriber for Disney+ Hotstar is significantly lower than the average monthly revenue per paid subscriber for Disney+ in other markets.
(4)Excludes Premier Access revenue
(5)Excludes Pay-Per-View revenue.
The average monthly revenue per paid subscriber for Disney+ decreased from $5.56 to $4.03 due to the launch of Disney+ Hotstar.
The average monthly revenue per paid subscriber for ESPN+ increased from $4.44 to $4.48 due to an increase in retail pricing, partially offset by a higher mix of subscribers to the bundled offering available in the U.S.
The average monthly revenue per paid subscriber for the Hulu SVOD Only service increased from $13.15 to $13.51 due to higher per-subscriber advertising revenue, a lower mix of wholesale subscribers and an increase in per-subscriber premium and feature add-on revenue. These increases were partially offset by a higher mix of subscribers to the bundled offering. The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $59.47 to $75.11 due to
35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
increases in retail pricing, higher per-subscriber advertising revenue and an increase in per-subscriber premium and feature add-on revenue. These increases were partially offset by a higher mix of subscribers to the bundled offering.
Costs and Expenses
Operating expenses are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Programming and production costs | $ | (2,379) | $ | (1,920) | (24) % | ||||||||||||
| Other operating expense | (542) | (423) | (28) % | ||||||||||||||
| $ | (2,921) | $ | (2,343) | (25) % | |||||||||||||
The increase in programming and production costs was due to higher costs at Disney+, Hulu and to a lesser extent, ESPN+. The increase at Disney+ was driven by the ongoing expansion including launches in additional markets. Higher costs at Hulu were primarily due to an increase in subscriber-based fees for programming on the live television service. The increase at ESPN+ was driven by higher soccer programming costs. Other operating expenses, which include technical support and distribution costs, increased due to higher distribution costs at Disney+ driven by subscriber growth and a full quarter of operations.
Selling, general, administrative and other costs increased $238 million, to $970 million from $732 million, due to higher marketing costs at Disney+ driven by launches in additional markets.
Depreciation and amortization increased $19 million, to $79 million from $60 million, primarily due to the ongoing expansion of Disney+.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer decreased $644 million, to $466 million from $1,110 million, due to improved results at Hulu, and to a lesser extent, at Disney+ and ESPN+.
Content Sales/Licensing and Other
Operating results for Content Sales/Licensing and Other are as follows:
| Quarter Ended | % Change | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | Better (Worse) | ||||||||||||||
| Revenues | |||||||||||||||||
| TV/SVOD distribution | $ | 1,022 | $ | 1,439 | (29) % | ||||||||||||
| Theatrical distribution | 31 | 1,408 | (98) % | ||||||||||||||
| Home entertainment | 300 | 596 | (50) % | ||||||||||||||
| Other | 349 | 467 | (25) % | ||||||||||||||
| Total revenues | 1,702 | 3,910 | (56) % | ||||||||||||||
| Operating expenses | (1,074) | (1,998) | 46 % | ||||||||||||||
| Selling, general, administrative and other | (359) | (1,095) | 67 % | ||||||||||||||
| Depreciation and amortization | (82) | (62) | (32) % | ||||||||||||||
| Equity in the income of investees | 1 | 21 | (95) % | ||||||||||||||
| Operating Income | $ | 188 | $ | 776 | (76) % | ||||||||||||
Revenues
The decrease in TV/SVOD distribution revenue was driven by the shift from licensing our content to third parties to distribution on our direct-to-consumer services.
The decrease in theatrical distribution revenue was due to no significant worldwide theatrical releases in the current quarter, which was negatively impacted by COVID-19 as many theaters globally were either closed or operating at reduced capacity. Soul was released in limited markets in the current quarter, whereas the prior-year quarter included Frozen II, Star Wars: The Rise of Skywalker and Maleficent: Mistress of Evil.
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The decrease in home entertainment revenue was due to a decrease of 42% from lower unit sales of new releases and catalog titles as there were fewer new release titles in the current quarter than the prior-year quarter. New release titles in the current quarter included Mulan, whereas the prior-year quarter included Toy Story 4 and The Lion King. Other significant titles in the prior-year quarter included Aladdin, Dark Phoenix and Avengers: Endgame.
The decrease in other revenue was due to lower revenues from stage plays reflecting the impact of theater closures as a result of COVID-19.
Costs and Expenses
Operating expenses are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Programming and production costs | $ | (877) | $ | (1,562) | 44 % | ||||||||||||
| Cost of goods sold and distribution costs | (197) | (436) | 55 % | ||||||||||||||
| $ | (1,074) | $ | (1,998) | 46 % | |||||||||||||
The decrease in production costs was due to lower theatrical and TV/SVOD distribution revenue and a decrease in home entertainment volumes.
The decrease in cost of goods sold and distribution costs was driven by decreased theatrical and stage play distribution costs due to fewer theatrical releases and stage play performances and a decrease in home entertainment volumes.
Selling, general administrative, and other costs decreased $736 million, to $359 million from $1,095 million, due to lower theatrical and home entertainment marketing costs.
Depreciation and amortization increased $20 million, to $82 million from $62 million, due to increased investments in technology.
Equity in the Income of Investees
Income from equity investments decreased $20 million, to $1 million from $21 million, primarily due to the sale of our interest in Endemol Shine in July 2020.
Operating Income from Content Sales/Licensing and Other
Operating income from Content Sales/Licensing and Other decreased $588 million, to $188 million from $776 million, due to lower theatrical, TV/SVOD and home entertainment distribution results.
Items Excluded from Segment Operating Income Related to Disney Media and Entertainment Distribution
The following table presents supplemental information for items related to the Disney Media and Entertainment Distribution segment that are excluded from segment operating income:
| Quarter Ended | % Change | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | Better (Worse) | ||||||||||||||
TFCF and Hulu acquisition amortization(1) | $ | (615) | $ | (698) | 12 % | ||||||||||||
| Restructuring and impairment charges | (81) | (127) | 36 % | ||||||||||||||
(1)In the current quarter, amortization of step-up on film and television costs was $167 million and amortization of intangible assets was $445 million. In the prior-year quarter, amortization of step-up on film and television costs was $206 million and amortization of intangible assets was $484 million.
37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Disney Parks, Experiences and Products
Operating results for the Disney Parks, Experiences and Products segment are as follows:
| Quarter Ended | % Change | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | Better (Worse) | ||||||||||||||
| Revenues | |||||||||||||||||
| Theme park admissions | $ | 549 | $ | 2,067 | (73) % | ||||||||||||
| Parks & Experiences merchandise, food and beverage | 553 | 1,691 | (67) % | ||||||||||||||
| Resorts and vacations | 433 | 1,631 | (73) % | ||||||||||||||
| Merchandise licensing and retail | 1,698 | 1,669 | 2 % | ||||||||||||||
| Parks licensing and other | 355 | 522 | (32) % | ||||||||||||||
| Total revenues | 3,588 | 7,580 | (53) % | ||||||||||||||
| Operating expenses | (2,430) | (3,703) | 34 % | ||||||||||||||
| Selling, general, administrative and other | (678) | (758) | 11 % | ||||||||||||||
| Depreciation and amortization | (591) | (594) | 1 % | ||||||||||||||
| Equity in the loss of investees | (8) | (3) | >(100) % | ||||||||||||||
| Operating Income (Loss) | $ | (119) | $ | 2,522 | nm | ||||||||||||
COVID-19
Revenues at the Disney Parks, Experiences and Products segment were adversely impacted by COVID-19 as a result of the closure/reduced operating capacity of our theme parks and resorts. Disneyland Resort was closed and our cruise business was suspended for the entire current quarter. Disneyland Paris closed on October 30, 2020 and Hong Kong Disneyland Resort closed on December 2, 2020. Walt Disney World Resort, Shanghai Disney Resort and Tokyo Disney Resort were open in the current quarter. Our parks and resorts that were open during the quarter operated at significantly reduced capacities. We estimate that the adverse impact of COVID-19 on current quarter segment operating income was approximately $2.6 billion, which is net of cost reductions from initiatives to mitigate the impacts of COVID-19.
Revenues
The decrease in revenues from theme park admissions, merchandise, food and beverage sales, and resorts and vacations was due to the closure and reduced operating capacity of the parks and resorts and suspension of cruise ship sailings.
Merchandise licensing and retail revenue growth was due to an increase of 3% from merchandise licensing due to higher revenues from merchandise based on Disney Classics, Spider-Man and The Mandalorian, partially offset by a decrease in sales of merchandise based on Frozen. Higher licensing revenues from Spider-Man were driven by the current quarter release of Marvel’s Spider-Man: Miles Morales game.
The decrease in parks licensing and other revenue was due to lower sponsorship revenue and a decrease in royalties from Tokyo Disney Resort. Tokyo Disney Resort was operating at reduced capacity in the current quarter.
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business:
| Domestic | International(1) | Total | |||||||||||||||||||||||||||||||||
| Quarter Ended | Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||||
| Jan 2, 2021 | Dec 28, 2019 | Jan 2, 2021 | Dec 28, 2019 | Jan 2, 2021 | Dec 28, 2019 | ||||||||||||||||||||||||||||||
| Parks | |||||||||||||||||||||||||||||||||||
| Increase (decrease) | |||||||||||||||||||||||||||||||||||
Attendance(2) | (74) % | 2 % | (61) % | (8) % | (71) % | (1) % | |||||||||||||||||||||||||||||
Per Capita Guest Spending(3) | 1 % | 10 % | (9) % | 3 % | (5) % | 9 % | |||||||||||||||||||||||||||||
| Hotels | |||||||||||||||||||||||||||||||||||
Occupancy(4) | 28 % | 92 % | 13 % | 73 % | 24 % | 88 % | |||||||||||||||||||||||||||||
Available Room Nights (in thousands)(5) | 2,644 | 2,535 | 799 | 800 | 3,443 | 3,335 | |||||||||||||||||||||||||||||
Per Room Guest Spending(6) | $363 | $375 | $355 | $316 | $362 | $363 | |||||||||||||||||||||||||||||
(1)Per capita guest spending growth rate is stated on a constant currency basis. Per room guest spending is stated at the average foreign exchange rate for the same period in the prior year.
(2)Attendance is used to analyze volume trends at our theme parks and is based on the number of unique daily entries, i.e. a person visiting multiple theme parks in a single day is counted only once. Our attendance count includes complimentary entries but excludes entries by children under the age of three.
(3)Per capita guest spending is used to analyze guest spending trends and is defined as total revenue from ticket sales and sales of food, beverage and merchandise in our theme parks, divided by total theme park attendance.
(4)Occupancy is used to analyze the usage of available capacity at hotels and is defined as the number of room nights occupied by guests as a percentage of available hotel room nights.
(5)Available hotel room nights are defined as the total number of room nights that are available at our hotels and at Disney Vacation Club (DVC) properties located at our theme parks and resorts that are not utilized by DVC members. Available hotel room nights include rooms temporarily taken out of service.
(6)Per room guest spending is used to analyze guest spending at our hotels and is defined as total revenue from room rentals and sales of food, beverage and merchandise at our hotels, divided by total occupied hotel room nights.
Costs and Expenses
Operating expenses are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Operating labor | $ | (1,030) | $ | (1,592) | 35 % | ||||||||||||
| Infrastructure costs | (522) | (605) | 14 % | ||||||||||||||
| Cost of goods sold and distribution costs | (587) | (903) | 35 % | ||||||||||||||
| Other operating expense | (291) | (603) | 52 % | ||||||||||||||
| $ | (2,430) | $ | (3,703) | 34 % | |||||||||||||
The decrease in operating labor was due to lower volumes and the benefit of approximately $0.1 billion in government credits for certain employee costs. The decrease in infrastructure costs, cost of goods sold and distribution costs and other operating expenses was due to lower volumes.
Selling, general, administrative and other costs decreased $80 million, to $678 million from $758 million, due to marketing cost reductions.
Segment Operating Income (Loss)
Segment operating income decreased from a profit of $2.5 billion to a loss of $0.1 billion due to decreases at our domestic and international parks and experiences businesses. This decrease was partially offset by an increase in operating income at our consumer products business.
39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The following table presents supplemental revenue and operating income (loss) detail for the Disney Parks, Experiences and Products segment:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Supplemental revenue detail | |||||||||||||||||
| Parks & Experiences | |||||||||||||||||
| Domestic | $ | 1,489 | $ | 4,939 | (70) % | ||||||||||||
| International | 378 | 950 | (60) % | ||||||||||||||
| Consumer Products | 1,721 | 1,691 | 2 % | ||||||||||||||
| $ | 3,588 | $ | 7,580 | (53) % | |||||||||||||
| Supplemental operating income (loss) detail | |||||||||||||||||
| Parks & Experiences | |||||||||||||||||
| Domestic | $ | (798) | $ | 1,572 | nm | ||||||||||||
| International | (262) | 51 | nm | ||||||||||||||
| Consumer Products | 941 | 899 | 5 % | ||||||||||||||
| $ | (119) | $ | 2,522 | nm | |||||||||||||
Items Excluded from Segment Operating Income Related to Disney Parks, Experiences and Products
The following table presents supplemental information for items related to the Disney Parks, Experiences and Products segment that are excluded from segment operating income:
| Quarter Ended | % Change | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | Better (Worse) | ||||||||||||||
| Restructuring and impairment charges | $ | (28) | $ | (6) | >(100) % | ||||||||||||
| TFCF and Hulu acquisition amortization | (2) | (2) | — % | ||||||||||||||
CORPORATE AND UNALLOCATED SHARED EXPENSES
| Quarter Ended | % Change | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | Better (Worse) | ||||||||||||||
| Corporate and unallocated shared expenses | $ | (232) | $ | (237) | 2 % | ||||||||||||
FINANCIAL CONDITION
The change in cash and cash equivalents is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||||||||
| Cash provided by operations - continuing operations | $ | 75 | $ | 1,630 | (95) % | ||||||||||||
| Cash used in investing activities - continuing operations | (732) | (1,350) | 46 % | ||||||||||||||
| Cash provided by (used in) financing activities - continuing operations | (333) | 1,117 | nm | ||||||||||||||
| Cash provided by (used in) operations - discontinued operations | 9 | (19) | nm | ||||||||||||||
| Impact of exchange rates on cash, cash equivalents and restricted cash | 139 | 41 | >100 % | ||||||||||||||
| Change in cash, cash equivalents and restricted cash | $ | (842) | $ | 1,419 | nm | ||||||||||||
Operating Activities
Cash provided by continuing operating activities decreased 95% to $0.1 billion for the current quarter compared to $1.6 billion in the prior-year quarter. The decrease in cash provided by operations was due to lower operating cash flow at Disney Parks, Experiences and Products, partially offset by higher operating cash flow at Disney Media and Entertainment
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Distribution. Lower operating cash flows at Disney Parks, Experiences and Products was due to lower cash receipts driven by decreased revenues, partially offset by lower cash disbursements due to lower operating expenses. The increase at Disney Media and Entertainment Distribution was due to lower spending on licensed and produced film and television content reflecting the impact of COVID-19.
Produced and licensed programming costs
The Disney Media and Entertainment Distribution segment incurs costs to produce and license feature film and television content. Film and television production costs include all internally produced content such as live-action and animated feature films, television series, television specials and theatrical stage plays. Programming costs include film or television content rights licensed from third parties for use on the Company’s Linear Networks and DTC services. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities.
The Company’s film and television production and programming activity for the quarter ended January 2, 2021 and December 28, 2019 are as follows:
| Quarter Ended | |||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||
| Beginning balances: | |||||||||||
| Produced and licensed programming assets | $ | 27,193 | $ | 27,407 | |||||||
| Programming liabilities | (4,099) | (4,061) | |||||||||
| 23,094 | 23,346 | ||||||||||
| Spending: | |||||||||||
| Programming licenses and rights | 2,709 | 3,198 | |||||||||
| Produced film and television content | 2,869 | 3,128 | |||||||||
| 5,578 | 6,326 | ||||||||||
| Amortization: | |||||||||||
| Programming licenses and rights | (4,539) | (3,731) | |||||||||
| Produced film and television content | (1,810) | (2,518) | |||||||||
| (6,349) | (6,249) | ||||||||||
| Change in internally produced and licensed content costs | (771) | 77 | |||||||||
| Other non-cash activity | 185 | 28 | |||||||||
| Ending balances: | |||||||||||
| Produced and licensed programming assets | 27,352 | 27,873 | |||||||||
| Programming liabilities | (4,844) | (4,422) | |||||||||
| $ | 22,508 | $ | 23,451 | ||||||||
Investing Activities
Investing activities consist principally of investments in parks, resorts and other property and acquisition and divestiture activity. The Company’s investments in parks, resorts and other property for the quarter ended January 2, 2021 and December 28, 2019 are as follows:
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||
| Disney Media and Entertainment Distribution | $ | 177 | $ | 188 | |||||||
| Disney Parks, Experiences and Products | |||||||||||
| Domestic | 336 | 820 | |||||||||
| International | 183 | 229 | |||||||||
| Total Disney Parks, Experiences and Products | 519 | 1,049 | |||||||||
| Corporate | 64 | 101 | |||||||||
| $ | 760 | $ | 1,338 | ||||||||
Capital expenditures at Disney Media and Entertainment Distribution primarily reflect investments in technology and in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities.
41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Capital expenditures for the Disney Parks, Experiences and Products segment are principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and systems infrastructure. The decrease in the period compared to the prior-year period was primarily due to the temporary suspension of certain capital projects as a result of COVID-19.
Capital expenditures at Corporate primarily reflect investments in corporate facilities, information technology infrastructure and equipment.
The Company currently expects its fiscal 2021 capital expenditures will be comparable to fiscal 2020 capital expenditures of $4.0 billion, as increased spending on technology for our DTC services and on facilities at Corporate are anticipated to be offset by lower investments at our domestic parks and resorts, in part reflecting a reduction in spending in response to COVID-19.
Financing Activities
Cash used in financing activities was $0.3 billion in the current quarter compared to cash provided by financing activities of $1.1 billion in the prior-year quarter. In the current quarter, the Company had a decrease in net borrowings of $0.3 billion compared to an increase in net borrowings of $1.2 billion in the prior-year quarter.
See Note 4 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the quarter ended January 2, 2021 and information regarding the Company’s bank facilities. The Company may use operating cash flows, commercial paper borrowings up to the amount of its unused $12.25 billion bank facilities maturing in March 2021, March 2023 and March 2025, incremental term debt issuances and unused availability under the $5.0 billion bank facility maturing in April 2021 to retire or refinance other borrowings before or as they come due.
See Note 10 to the Condensed Consolidated Financial Statements for a summary of the Company’s dividend payments.
The Company’s operating cash flow and access to the capital markets can be impacted by factors outside of its control, including COVID-19, which has had an adverse impact on the Company’s operating cash flows. We have taken a number of measures to mitigate the impact on the Company’s financial position. We have significantly increased the Company’s cash balances through the issuance of senior notes in March and May 2020. In addition, we entered into an additional $5.0 billion credit facility in April 2020, bringing the total capacity of our bank facilities to $17.25 billion. See Significant Developments for the impact COVID-19 has had on our operations and mitigating measures we have taken.
Despite the impact of COVID-19, we believe that the Company’s financial condition remains strong and that its cash balances, other liquid assets, operating cash flows, access to debt and equity capital markets and borrowing capacity under current bank facilities, taken together, provide adequate resources to fund ongoing operating requirements and upcoming debt maturities as well as future capital expenditures related to the expansion of existing businesses and development of new projects, although these activities have been scaled back or suspended in light of COVID-19. In addition to measures the Company has already taken in response to COVID-19, there are a number of additional mitigating actions the Company may take in the future such as not declaring dividends (which the Company did not declare with respect to fiscal 2020 operations); reducing, or not making certain payments, such as some contributions to our pension and postretirement medical plans; raising additional financing; further suspending capital spending; reducing film and television content investments; or implementing additional furloughs or reductions in force.
The Company’s borrowing costs can also be impacted by short- and long-term debt ratings assigned by nationally recognized rating agencies, which are based, in significant part, on the Company’s performance as measured by certain credit metrics such as leverage and interest coverage ratios. As of January 2, 2021, Moody’s Investors Service’s long- and short-term debt ratings for the Company were A2 and P-1, respectively, Standard and Poor’s long- and short-term debt ratings for the Company were BBB+ and A-2, respectively, and Fitch’s long- and short-term debt ratings for the Company were A- and F2, respectively. In addition, Standard and Poor’s and Fitch have placed the Company’s long-term ratings on Negative Outlook. The Company’s bank facilities contain only one financial covenant, relating to interest coverage, which the Company met on January 2, 2021, by a significant margin. The Company’s bank facilities also specifically exclude certain entities, including the Asia Theme Parks, from any representations, covenants or events of default.
The duration of business closures and other impacts related to COVID-19, and the corresponding duration of the impacts on our operating cash flows, are subject to substantial uncertainty and require us to rely more heavily on external funding sources, such as debt and other types of financing.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
On March 20, 2019 as part of the acquisition of TFCF, The Walt Disney Company (“TWDC”) became the ultimate parent of TWDC Enterprises 18 Corp. (formerly known as The Walt Disney Company) (“Legacy Disney”). Legacy Disney and TWDC are collectively referred to as “Obligor Group”, and individually, as a “Guarantor”. Concurrent with the close of the TFCF acquisition, $16.8 billion of TFCF’s assumed public debt (which then constituted 96% of such debt) was exchanged for
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
senior notes of TWDC (the “exchange notes”) issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an Indenture, dated as of March 20, 2019, between TWDC, Legacy Disney, as guarantor, and Citibank, N.A., as trustee (the “TWDC Indenture”) and guaranteed by Legacy Disney. On November 26, 2019, $14.0 billion of the outstanding exchange notes were exchanged for new senior notes of TWDC registered under the Securities Act, issued pursuant to the TWDC Indenture and guaranteed by Legacy Disney. In addition, contemporaneously with the closing of the March 20, 2019 exchange offer, TWDC entered into a guarantee of the registered debt securities issued by Legacy Disney under the Indenture dated as of September 24, 2001 between Legacy Disney and Wells Fargo Bank, National Association, as trustee (the “2001 Trustee”) (as amended by the first supplemental indenture among Legacy Disney, as issuer, TWDC, as guarantor, and the 2001 Trustee, as trustee).
Other subsidiaries of the Company do not guarantee the registered debt securities of either TWDC or Legacy Disney (such subsidiaries are referred to as the “non-Guarantors”). The par value and carrying value of total outstanding and guaranteed registered debt securities of the Obligor Group at January 2, 2021 was as follows:
| TWDC | Legacy Disney | ||||||||||||||||||||||
| (in millions) | Par Value | Carrying Value | Par Value | Carrying Value | |||||||||||||||||||
| Registered debt with unconditional guarantee | $ | 38,689 | $ | 40,964 | $ | 12,582 | $ | 12,768 | |||||||||||||||
The guarantees by TWDC and Legacy Disney are full and unconditional and cover all payment obligations arising under the guaranteed registered debt securities. The guarantees may be released and discharged upon (i) as a general matter, the indebtedness for borrowed money of the consolidated subsidiaries of TWDC in aggregate constituting no more than 10% of all consolidated indebtedness for borrowed money of TWDC and its subsidiaries (subject to certain exclusions), (ii) upon the sale, transfer or disposition of all or substantially all of the equity interests or all or substantially all, or substantially as an entirety, the assets of Legacy Disney to a third party, and (iii) other customary events constituting a discharge of a guarantor’s obligations. In addition, in the case of Legacy Disney’s guarantee of registered debt securities issued by TWDC, Legacy Disney may be released and discharged from its guarantee at any time Legacy Disney is not a borrower, issuer or guarantor under certain material bank facilities or any debt securities.
Operations are conducted almost entirely through the Company’s subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service its debt, including the public debt, are dependent upon the earnings of the Company’s subsidiaries and the distribution of those earnings to the Obligor Group, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities have a direct claim only against the Obligor Group.
Set forth below are summarized financial information for the Obligor Group on a combined basis after elimination of (i) intercompany transactions and balances between TWDC and Legacy Disney and (ii) equity in the earnings from and investments in any subsidiary that is a non-Guarantor. This summarized financial information has been prepared and presented pursuant to the Securities and Exchange Commission Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with U.S. GAAP.
| Results of operations (in millions) | Quarter Ended January 2, 2021 | ||||
| Revenues | $ | — | |||
| Costs and expenses | — | ||||
| Net income (loss) from continuing operations | (513) | ||||
| Net income (loss) | (513) | ||||
| Net income (loss) attributable to TWDC shareholders | (513) | ||||
| Balance Sheet (in millions) | January 2, 2021 | October 3, 2020 | |||||||||
| Current assets | $ | 11,428 | $ | 12,899 | |||||||
| Noncurrent assets | 1,972 | 2,076 | |||||||||
| Current liabilities | 6,103 | 6,155 | |||||||||
| Noncurrent liabilities (excluding intercompany to non-Guarantors) | 57,752 | 57,809 | |||||||||
| Intercompany payables to non-Guarantors | 145,660 | 146,748 | |||||||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
COMMITMENTS AND CONTINGENCIES
Legal Matters
As disclosed in Note 12 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters.
Guarantees
As disclosed in Note 12 to the Condensed Consolidated Financial Statements, the Company has exposure to certain guarantees.
Tax Matters
As disclosed in Note 10 to the Consolidated Financial Statements in the 2020 Annual Report on Form 10-K, the Company has exposure for certain tax matters.
Contractual Commitments
See Note 15 to the Consolidated Financial Statements in the 2020 Annual Report on Form 10-K for information regarding the Company’s contractual commitments.
OTHER MATTERS
Accounting Policies and Estimates
We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements in the 2020 Annual Report on Form 10-K.
Produced and Acquired/Licensed Content Costs
We amortize and test for impairment capitalized film and television production costs based on whether the content is predominantly monetized individually or as a group. See Note 6 to the Condensed Consolidated Financial Statements for further discussion.
Production costs that are classified as individual are amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues).
With respect to produced films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues is theatrical performance. Revenues derived from other markets subsequent to the theatrical release are generally highly correlated with theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort. Upon a film’s release and determination of the theatrical performance, the Company’s estimates of revenues from succeeding windows and markets are revised based on historical relationships and an analysis of current market trends.
With respect to capitalized television production costs that are classified as individual, the most sensitive factors affecting estimates of Ultimate Revenues are program ratings of the content on our licensees’ platforms. Program ratings, which are an indication of market acceptance, directly affect the program’s ability to generate advertising and subscriber revenues and are correlated with the license fees we can charge for the content in subsequent windows and for subsequent seasons.
Ultimate Revenues are reassessed each reporting period and the impact of any changes on amortization of production cost is accounted for as if the change occurred at the beginning of the current fiscal year. If our estimate of Ultimate Revenues decreases, amortization of costs may be accelerated or result in an impairment. Conversely, if our estimate of Ultimate Revenues increases, cost amortization may be slowed.
Produced content costs that are part of a group and acquired/licensed content costs are amortized based on projected usage typically resulting in an accelerated or straight-line amortization pattern. The determination of projected usage requires judgment and is reviewed periodically for changes. If projected usage changes we may need to accelerate or slow the recognition of amortization expense.
The amortization of multi-year sports rights is based on our projections of revenues over the contract period, which include advertising revenue and an allocation of affiliate revenue (relative value). If the annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season. If estimated relative values by year were to change significantly, amortization of our sports rights costs may be accelerated or slowed.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenue Recognition
The Company has revenue recognition policies for its operating segments that are appropriate to the circumstances of each business. Refer to Note 3 to the Consolidated Financial Statements in the 2020 Annual Report on Form 10-K for our revenue recognition policies.
Pension and Postretirement Medical Plan Actuarial Assumptions
The Company’s pension and postretirement medical benefit obligations and related costs are calculated using a number of actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement, which we evaluate annually. Refer to the 2020 Annual Report on Form 10-K for estimated impacts of changes in these assumptions. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase.
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension and postretirement medical expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. The Company’s discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans’ liability cash flows to the yield curves.
To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension and postretirement medical expense.
Goodwill, Other Intangible Assets, Long-Lived Assets and Investments
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. The Company compares the fair value of each reporting unit to its carrying amount, and to the extent the carrying amount exceeds the fair value, an impairment of goodwill is recognized for the excess up to the amount of goodwill allocated to the reporting unit.
The impairment test for goodwill requires judgment related to the identification of reporting units, the assignment of assets and liabilities to reporting units including goodwill, and the determination of fair value of the reporting units. To determine the fair value of our reporting units, we apply what we believe to be the most appropriate valuation methodology for each of our reporting units. We generally use a present value technique (discounted cash flows) corroborated by market multiples when available and as appropriate. The discounted cash flow analyses are sensitive to our estimates of future revenue growth and margins for these businesses. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual.
The Company is required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized for the excess. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company tests long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of the estimated undiscounted future cash flows expected to be generated over the useful life of an asset group to the carrying value of the asset group. An asset group is generally established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets. If the carrying value of an asset group exceeds the estimated undiscounted future cash flows, an impairment is measured as the difference between the fair value of the asset group and the carrying value of the asset group. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of asset groups, estimates of future cash flows and the discount rate used to determine fair values.
The Company has investments in equity securities. For equity securities that do not have a readily determinable fair value, we consider forecasted financial performance of the investee companies, as well as volatility inherit in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Allowance for Credit Losses
We evaluate our allowance for credit losses and estimate collectability of accounts receivable based on historical bad debt experience, our assessment of the financial condition of individual companies with which we do business, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, including COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, costs and expenses may increase in future periods, and if it is too high, costs and expenses may decrease in future periods. In addition, see Note 3.
Contingencies and Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for the resolution of these proceedings. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and have been developed in consultation with outside counsel as appropriate. From time to time, we are also involved in other contingent matters for which we accrue estimates for a probable and estimable loss. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to legal proceedings or our assumptions regarding other contingent matters. See Note 12 to the Condensed Consolidated Financial Statements for more detailed information on litigation exposure.
Income Tax
As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in proposed assessments. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized by the Company may differ from those recognized in our future financial statements based on a number of factors, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and the Company’s success in supporting its filing positions with taxing authorities.
Impacts of COVID-19 on Accounting Policies and Estimates
In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. As COVID-19 continues to develop, we may make changes to these estimates and judgments over time, which could result in meaningful impacts to our financial statements in future periods. A more detailed discussion of the impact of COVID-19 on the Accounting Policies and Estimates follows.
Produced and Acquired/Licensed Content Costs
Certain of our completed or in progress film and television productions have had their initial release dates delayed or canceled. The duration of the delay, market conditions when we release the content, or a change in our release strategy (e.g. bypassing certain distribution windows) could have an impact on Ultimate Revenues, which may accelerate amortization or result in an impairment of capitalized film and television production costs.
Given the ongoing uncertainty around the resumption and continuation of live sporting events, the amount and timing of revenues derived from the broadcast of these events may differ from the projections of revenues that support our amortization pattern of the rights costs we pay for these events. Such changes in revenues could result in an acceleration or slowing of the amortization of our sports rights costs.
Revenue Recognition
Certain of our affiliate contracts contain commitments with respect to the content to be aired on our television networks (e.g. live sports or original content). If there are delays or cancellations of live sporting events or disruptions to film and television content production activities, we may need to assess the impact on our contractual obligations and adjust the revenue that we recognize related to these contracts.
Goodwill, Other Intangible Assets, Long-Lived Assets and Investments
Given the ongoing impacts of COVID-19 across our businesses, the projected cash flows that we use to assess the fair value of our businesses and assets for purposes of impairment testing are subject to greater uncertainty than normal. If in the future we reduce our cash flow projections, we may need to impair some of these assets.
Income Tax (See Note 7 to the Condensed Consolidated Financial Statements)
The determination of interim period tax provisions generally requires the use of a forecasted full year effective tax rate, which in turn requires a full year forecast of earnings before tax and tax expense. Given the uncertainties created by COVID-19,
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
these forecasts are subject to greater than normal variability, which could lead to volatility in our reported quarterly effective tax rates.
Risk Management Contracts
The Company employs a variety of financial instruments (derivatives) including interest rate and cross-currency swap agreements and forward and option contracts to manage its exposure to fluctuations in interest rates, foreign currency exchange rates and commodity prices.
As a result of the impact of COVID-19 on our businesses, our projected cash flows or projected usage of commodities are subject to a greater degree of uncertainty, which may cause us to recognize gains or losses on hedging instruments in different periods than the hedged transaction.
New Accounting Pronouncements
See Note 16 to the Condensed Consolidated Financial Statements for information regarding new accounting pronouncements.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, commodity fluctuations and changes in the market values of its investments.
Policies and Procedures
In the normal course of business, we employ established policies and procedures to manage the Company’s exposure to changes in interest rates, foreign currencies and commodities using a variety of financial instruments.
Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to the Company’s portfolio of borrowings. By policy, the Company targets fixed-rate debt as a percentage of its net debt between minimum and maximum percentages.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow in order to allow management to focus on core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the U.S. dollar equivalent value of its existing foreign currency assets, liabilities, commitments and forecasted foreign currency revenues and expenses. The Company utilizes option strategies and forward contracts that provide for the purchase or sale of foreign currencies to hedge probable, but not firmly committed, transactions. The Company also uses forward and option contracts to hedge foreign currency assets and liabilities. The principal foreign currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings to U.S. dollar denominated borrowings. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its forecasted foreign exchange exposures generally for periods not to exceed four years. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related exposures. The economic or political conditions in a country could reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country.
Our objectives in managing exposure to commodity fluctuations are to use commodity derivatives to reduce volatility of earnings and cash flows arising from commodity price changes. The amounts hedged using commodity swap contracts are based on forecasted levels of consumption of certain commodities, such as fuel oil and gasoline.
Our objectives in managing exposures to market-based fluctuations in certain retirement liabilities are to use total return swap contracts to reduce the volatility of earnings arising from changes in these retirement liabilities. The amounts hedged using total return swap contracts are based on estimated liability balances.
It is the Company’s policy to enter into foreign currency and interest rate derivative transactions and other financial instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 14 to the Condensed Consolidated Financial Statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures – We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of January 2, 2021, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
Changes in Internal Controls – There have been no changes in our internal control over financial reporting during the first quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As disclosed in Note 12 to the Condensed Consolidated Financial Statements, the Company is engaged in certain legal matters, and the disclosure set forth in Note 12 relating to certain legal matters is incorporated herein by reference.
ITEM 1A. Risk Factors
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for “forward-looking statements” made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our shareholders. Such statements may, for example, express expectations, projections, estimates or future impacts; actions that we may take (or not take); or other statements that are not historical in nature. All forward-looking statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made and the Company does not undertake any obligation to update its disclosure relating to forward-looking matters. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments, asset acquisitions or dispositions or changes to businesses), as well as from developments beyond the Company’s control, including: global pandemics and health concerns; changes in domestic and global economic conditions; competitive conditions and consumer preferences; adverse weather conditions or natural disasters; international, political or military developments; and technological developments. Such developments may affect (or further affect, as applicable) entertainment, travel and leisure businesses generally and may, among other things, affect (or have affected, as applicable) the performance of the Company’s performance of some or all Company businesses either directly or through their impact on those who distribute our products, the industries in which the Company operates and the Company’s expenses.
In addition to the factors affecting specific business operations identified in connection with the description of these operations and the financial results of these operations elsewhere in our filings with the SEC, the most significant factors affecting our business include the following, as well as factors discussed in our 2020 Annual Report on Form 10-K under Item 1A, “Risk Factors”:
BUSINESS, ECONOMIC, MARKET and OPERATING CONDITION RISKS
The adverse impact of COVID-19 on our businesses will continue for an unknown length of time and may continue to impact certain of our key sources of revenue.
Since early 2020, the world has been, and continues to be, impacted by COVID-19. COVID-19 and measures to prevent its spread are impacting our segments in a number of ways, most significantly at DPEP where our theme parks have been closed or operating at significantly reduced capacity and cruise ship sailings and guided tours have been suspended. We have delayed, or in some cases, shortened or canceled, theatrical releases, and stage play performances have been suspended. Since March 2020, we have experienced significant disruptions in the production and availability of content, including the shift of key live sports programming from the third quarter of fiscal 2020 to the fourth quarter and into fiscal 2021 as well as the suspension of most film and television content late in the second quarter of fiscal 2020. Although most film and television production activities have resumed beginning in the fourth quarter of fiscal 2020, we continue to see disruption in production activities depending on local circumstances. Many of our businesses have been closed or suspended consistent with government mandates or guidance. We have continued to pay for certain sports rights, including for certain events that have been deferred or canceled. The impacts to our content have resulted in decreased viewership and advertising revenues, and demands for affiliate fee reductions related to certain of our television networks. These impacts are likely to be exacerbated the longer such content is not available, including if sports content should become unavailable again in the future. Other of our offerings will be exposed to additional financial impacts in the event of future significant unavailability of content. COVID-19 impacts could also hasten the erosion of our historical sources of revenue at our Linear Networks businesses. We have experienced significantly reduced numbers of reservations at our hotels and cruises. We granted rent waivers to some of our tenants, and they have not paid rent while certain of our facilities have been closed. We have experienced increased returns and refunds and customer requests for payment deferrals. Collectively, our impacted businesses have historically been the source of the majority of our revenue. Some of our businesses remain closed and those that are open are operating subject to restrictions and increased expenses. These and other impacts of COVID-19 on our businesses will continue for an unknown length of time. COVID-19 impacts that have subsided may again impact our businesses in the future and new impacts may emerge, particularly given the rise of COVID-19 cases following the end of fiscal 2020. For example, some of our parks closed due to government mandates or guidance following their initial reopening.
Consumers may change their behavior and consumption patterns in response to the prolonged suspension of certain of our businesses, such as subscription to pay television packages (which experienced accelerated decline during some periods after the onset of COVID-19) or theater-going to watch movies. Certain of our customers, including individuals as well as businesses
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such as theatrical distributors, affiliates, licensees of rights to use our programming and intellectual property, advertisers and others, have been negatively impacted by the economic downturn caused by COVID-19, which may result in decreased purchases of our goods and services even after certain operations resume. Some industries in which our customers operate, such as theatrical distribution, retail and travel, could experience contraction, which could impact the profitability of our businesses going forward. Additionally, we have incurred and will continue to incur incremental costs to implement health and safety measures, reopen our parks and restart our halted construction projects. As we have resumed production of content, including live sporting events, we have incurred costs to implement health and safety measures and productions will generally take longer to complete.
Our mitigation efforts in response to the impacts of COVID-19 on our businesses have had, or may have, negative impacts. The Company (or our Board of Directors, as applicable) significantly increased cash balances through the issuance of senior notes in March and May 2020, and we entered into an additional $5.0 billion credit facility in April 2020, did not declare a dividend with respect to fiscal year 2020 operations; suspended certain capital projects; reduced certain discretionary expenditures (such as spending on marketing); temporarily reduced management compensation; temporarily eliminated Board of Director retainers and committee fees; furloughed over half of our employees (some of whom remain furloughed and continue to receive Company provided medical benefits); and reduced our employee population. Such mitigation measures have resulted in the delay or suspension of certain projects in which we have invested, particularly at our parks and resorts and studio operations. We may take additional mitigation actions in the future such as raising additional financing; not declaring future dividends; reducing, or not making, certain payments, such as some contributions to our pension and postretirement medical plans; further suspending capital spending; reducing film and television content investments; implementing additional furloughs or reductions in force or modifying our operating strategy. These and other of our mitigating actions may have an adverse impact on our businesses. Additionally, there are certain limitations on our ability to mitigate the adverse financial impact of COVID-19, including the fixed costs of our theme park business and the impact COVID-19 may have on capital markets and our cost of borrowing. Further, the benefit of certain mitigation efforts will not continue to be available going forward. For example, as our employees return from furlough, the cost reductions of the related furloughs will no longer be available.
Even our operations that were not suspended or that have resumed continue to be adversely impacted by government mandated restrictions (such as density limitations and travel restrictions and requirements); measures we voluntarily implement; measures we are contractually obligated to implement; the distancing practices and health concerns of consumers, talent and production workers; and logistical limitations. Upon reopening our parks and resorts business we have seen lower demand. Geographic variation in government requirements and ongoing changes to restrictions have disrupted and could further disrupt our businesses, including our production operations. Our operations could be suspended or re-suspended by government action or otherwise in the future. For example, both Hong Kong Disneyland Resort and Disneyland Paris have reopened and closed multiple times since the onset of COVID-19. Some of our businesses have not yet been permitted to open, such as Disneyland Resort and our cruise business. Some of our employees who returned to work have been refurloughed. Our operations or reputation could be further negatively impacted by a significant COVID-19 outbreak impacting our employees, customers or others interacting with our businesses, including our supply chain.
In fiscal year 2020, we operated at a net loss. We have impaired goodwill and intangible assets at our International Channels businesses and written down the value of certain of our retail store assets. Certain of our other assets could also become impaired, including further impairments of goodwill and intangible assets; we have increased, and may further increase, allowances for credit losses; and there may be changes in judgments in determining the fair-value of assets; and estimates related to variable consideration may change due to increased returns, reduced usage of our products or services and decreased royalties. Our leverage ratios have increased and are expected to remain elevated in the near-term as a result of COVID-19’s impact on our financial performance, causing certain of the credit rating agencies to downgrade our ratings. Our debt ratings may be further downgraded as a result of the COVID-19 impact, which may negatively impact our cost of borrowing. Due to reduced operating cash flow, we may utilize cash balances and/or future financings to fund a portion of our operations and investments in our businesses. Financial risks may be exacerbated by the timing of customer deposit refunds; liquidity issues among our key customers, particularly advertisers, television affiliates, theatrical exhibitors and distributors and licensees, which have impacted timely payments by such customers to the Company; loss or delay of receivables as a result of contractual performance short falls; our contractual payment obligations; and our investments in our business. The Company has $14.2 billion in trade accounts receivable outstanding at January 2, 2021, with an allowance for credit losses of $0.3 billion. Our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty due to the impacts of COVID-19. Economic or political conditions in a country outside the U.S. as a result of COVID-19 could also reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country.
The impacts of COVID-19 to our business have generally amplified, or reduced our ability to mitigate, the other risks discussed in our filings with the SEC and our remediation efforts may not be successful.
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COVID-19 also makes it more challenging for management to estimate future performance of our businesses. COVID-19 has already adversely impacted our businesses and net cash flow, and we expect the ultimate magnitude of these disruptions on our financial and operational results will be dictated by the length of time that such disruptions continue which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19, and among other things, the impact and duration of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward. If actual performance in our international markets significantly underperforms management’s forecasts, the Company could have foreign currency hedge gains/losses which are not offset by the realization of exposures, resulting in excess hedge gains or losses. While we cannot be certain as to the duration of the impacts of COVID-19, we expect impacts of COVID-19 to affect our financial results at least through fiscal 2021.
Misalignment with public and consumer tastes and preferences for entertainment and consumer products could negatively impact demand for our entertainment offerings and products and adversely affect the profitability of any of our businesses.
Our businesses create entertainment, travel and consumer products whose success depends substantially on consumer tastes and preferences that change in often unpredictable ways. The success of our businesses depends on our ability to consistently create content, which may be distributed among other ways through broadcast, cable, internet or cellular technology, theme park attractions, hotels and other resort facilities and travel experiences and consumer products that meet the changing preferences of the broad consumer market and respond to competition from an expanding array of choices facilitated by technological developments in the delivery of content. The success of our theme parks, resorts, cruise ships and experiences, as well as our theatrical releases, depends on demand for public or out-of-home entertainment experiences. COVID-19 may impact consumer tastes and preferences. Many of our businesses increasingly depend on acceptance of our offerings and products by consumers outside the U.S., and their success therefore depends on our ability to successfully predict and adapt to changing consumer tastes and preferences outside as well as inside the U.S. Moreover, we must often invest substantial amounts in content production and acquisition, acquisition of sports rights, theme park attractions, cruise ships or hotels and other facilities or customer facing platforms before we know the extent to which these products will earn consumer acceptance. The impacts of COVID-19 are inhibiting and delaying our ability to earn returns on some of these and other investments. If our entertainment offerings and products, including our content offerings, modified as a result of COVID-19, as well as our methods to make our offerings and products available to consumers, do not achieve sufficient consumer acceptance, our revenue from advertising sales (which are based in part on ratings for the programs in which advertisements air), affiliate fees, subscription fees, theatrical film receipts, the license of rights to other distributors, theme park admissions, hotel room charges and merchandise, food and beverage sales, sales of licensed consumer products or from sales of our other consumer products and services, may decline, decline further or fail to grow to the extent we anticipate when making investment decisions and thereby further adversely affect the profitability of one or more of our businesses.
The success of our businesses is highly dependent on the existence and maintenance of intellectual property rights in the entertainment products and services we create.
The value to us of our intellectual property rights is dependent on the scope and duration of our rights as defined by applicable laws in the U.S. and abroad and the manner in which those laws are construed. If those laws are drafted or interpreted in ways that limit the extent or duration of our rights, or if existing laws are changed, our ability to generate revenue from our intellectual property may decrease, or the cost of obtaining and maintaining rights may increase.
The unauthorized use of our intellectual property may increase the cost of protecting rights in our intellectual property or reduce our revenues. The convergence of computing, communication and entertainment devices, increased broadband internet speed and penetration, increased availability and speed of mobile data transmission and increasingly sophisticated attempts to obtain unauthorized access to data systems have made the unauthorized digital copying and distribution of our films, television productions and other creative works easier and faster and protection and enforcement of intellectual property rights more challenging. The unauthorized distribution and access to entertainment content generally continues to be a significant challenge for intellectual property rights holders. Inadequate laws or weak enforcement mechanisms to protect entertainment industry intellectual property in one country can adversely affect the results of the Company’s operations worldwide, despite the Company’s efforts to protect its intellectual property rights. COVID-19 may increase incentives and opportunities to access content in unauthorized ways, as negative economic conditions coupled with a shift in government priorities could lead to less enforcement. These developments require us to devote substantial resources to protecting our intellectual property against unlicensed use and present the risk of increased losses of revenue as a result of unlicensed distribution of our content.
With respect to intellectual property developed by the Company and rights acquired by the Company from others, the Company is subject to the risk of challenges to our copyright, trademark and patent rights by third parties. Successful challenges to our rights in intellectual property may result in increased costs for obtaining rights or the loss of the opportunity to earn revenue from or utilize the intellectual property that is the subject of challenged rights. From time to time, the Company has been notified that it may be infringing certain intellectual property rights of third parties. Technological changes in
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industries in which the Company operates and extensive patent coverage in those areas may increase the risk of such claims being brought and prevailing.
A variety of uncontrollable events may reduce demand for or consumption of our products and services, impair our ability to provide our products and services or increase the cost or reduce the profitability of providing our products and services.
Demand for and consumption of our products and services, particularly our theme parks and resorts, is highly dependent on the general environment for travel and tourism. The environment for travel and tourism, as well as demand for and consumption of other entertainment products, can be significantly adversely affected in the U.S., globally or in specific regions as a result of a variety of factors beyond our control, including: health concerns (including as it has been by COVID-19); adverse weather conditions arising from short-term weather patterns or long-term change, catastrophic events or natural disasters (such as excessive heat or rain, hurricanes, typhoons, floods, tsunamis and earthquakes); international, political or military developments; and terrorist attacks. These events and others, such as fluctuations in travel and energy costs and computer virus attacks, intrusions or other widespread computing or telecommunications failures, may also damage our ability to provide our products and services or to obtain insurance coverage with respect to some of these events. An incident that affected our property directly would have a direct impact on our ability to provide goods and services and could have an extended effect of discouraging consumers from attending our facilities. Moreover, the costs of protecting against such incidents, including the costs of protecting against the spread of COVID-19, reduces the profitability of our operations.
For example, COVID-19 and measures to prevent the spread of COVID-19 are currently impairing our ability to provide our products and services and reducing consumption of those products and services. Further, prior to COVID-19, events in Hong Kong impacted profitability of our Hong Kong operations and may continue to do so, and past hurricanes have impacted the profitability of Walt Disney World Resort in Florida and future hurricanes may also do so.
The negative economic consequences of COVID-19 may be particularly challenging in markets where individuals and local businesses have limited access to government supported “safety nets”, which could lead to political instability and unrest, and further depress demand for our products and services over a longer timeframe.
In addition, we derive affiliate fees and royalties from the distribution of our programming, sales of our licensed goods and services by third parties, and the management of businesses operated under brands licensed from the Company, and we are therefore dependent on the successes of those third parties for that portion of our revenue. A wide variety of factors could influence the success of those third parties and if negative factors significantly impacted a sufficient number of those third parties, the profitability of one or more of our businesses could be adversely affected. Impacts of COVID-19 on third parties’ liquidity have impacted timely payments by such third parties to the Company.
We obtain insurance against the risk of losses relating to some of these events, generally including physical damage to our property and resulting business interruption, certain injuries occurring on our property and some liabilities for alleged breach of legal responsibilities. When insurance is obtained it is subject to deductibles, exclusions, terms, conditions and limits of liability. The types and levels of coverage we obtain vary from time to time depending on our view of the likelihood of specific types and levels of loss in relation to the cost of obtaining coverage for such types and levels of loss and we may experience material losses not covered by our insurance. For example, some losses related to impacts of COVID-19 will not be covered by insurance available to us and some insurers may contest coverage.
Changes in our business strategy or restructuring of our businesses may increase our costs or otherwise affect the profitability of our businesses or the value of our assets.
As changes in our business environment occur we have adjusted, and may further adjust our business strategies to meet these changes and we may otherwise decide to further restructure our operations or particular businesses or assets. For example, in October 2020 we announced a reorganization of our media and entertainment businesses to accelerate our direct-to-consumer strategies. Our new organization and strategies may not produce the anticipated benefits, such as supporting our growth strategies and enhancing shareholder value. Our new organization and strategies could be less successful than our previous organizational structure and strategies. In addition, external events including changing technology, changing consumer patterns, acceptance of our theatrical and other content offerings and changes in macroeconomic conditions may impair the value of our assets. When these changes or events occur, we may incur costs to change our business strategy and may need to write-down the value of assets. For example, current conditions, including COVID-19 and our business decisions, have reduced the value of some of our assets. We have impaired goodwill and intangible assets at our International Channels businesses and written down the value of certain of our retail store assets. We may write-down other assets as our strategy evolves to account for the current business environment. We also make investments in existing or new businesses, including investments in international expansion of our business and in new business lines. In recent years, such investments have included expansion and renovation of certain of our theme parks, expansion of our fleet of cruise ships, the acquisition of TFCF and investments related to direct-to-consumer offerings. Some of these investments may have returns that are negative or low, the ultimate business prospects of
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the businesses related to these investments may be uncertain, these investments may impact the profitability of our other businesses, and these risks are exacerbated by COVID-19. In any of these events, our costs may increase, we may have significant charges associated with the write-down of assets or returns on new investments may be lower than prior to the change in strategy or restructuring.
Increased competitive pressures may reduce our revenues or increase our costs.
We face substantial competition in each of our businesses from alternative providers of the products and services we offer and from other forms of entertainment, lodging, tourism and recreational activities. This includes, among other types, competition for human resources, content and other resources we require in operating our business. For example:
•Our programming and production operations compete to obtain creative, performing and business talent, sports and other programming, story properties, advertiser support and market share with other studio operators, television networks, SVOD providers and other new sources of broadband delivered content.
•Our television networks and stations and direct-to-consumer offerings compete for the sale of advertising time with other television and SVOD services, as well as with newspapers, magazines, billboards and radio stations. In addition, we increasingly face competition for advertising sales from internet and mobile delivered content, which offer advertising delivery technologies that are more targeted than can be achieved through traditional means.
•Our television networks compete for carriage of their programming with other programming providers.
•Our theme parks and resorts compete for guests with all other forms of entertainment, lodging, tourism and recreation activities.
•Our content sales/licensing operations compete for customers with all other forms of entertainment.
•Our consumer products business competes with other licensors and creators of intellectual property.
•Our direct-to-consumer businesses compete for customers with competitors’ direct-to-consumer offerings, all other forms of media and all other forms of entertainment, as well as for technology, creative, performing and business talent and for content. Competition in each of these areas may increase as a result of technological developments and changes in market structure, including consolidation of suppliers of resources and distribution channels. Increased competition may divert consumers from our creative or other products, or to other products or other forms of entertainment, which could reduce our revenue or increase our marketing costs.
Competition for the acquisition of resources can increase the cost of producing our products and services or deprive us of talent necessary to produce high quality creative material. Such competition may also reduce, or limit growth in, prices for our products and services, including advertising rates and subscription fees at our media networks, parks and resorts admissions and room rates, and prices for consumer products from which we derive license revenues.
Damage to our reputation or brands may negatively impact our Company across businesses and regions.
Our reputation and globally recognizable brands are integral to the success of our businesses. Because our brands engage consumers across our businesses, damage to our reputation or brands in one business may have an impact on our other businesses. Because some of our brands are globally recognized, brand damage may not be locally contained. Maintenance of the reputation of our Company and brands depends on many factors including the quality of our offerings, maintenance of trust with our customers and our ability to successfully innovate. Significant negative claims or publicity regarding the Company or its operations, products, management, employees, practices, business partners, business decisions, social responsibility and culture may damage our brands or reputation, even if such claims are untrue. Damage to our reputation or brands could impact our sales, business opportunities, profitability, recruiting and valuation of our securities.
The seasonality of certain of our businesses and timing of certain of our product offerings could exacerbate negative impacts on our operations.
Each of our businesses is normally subject to seasonal variations and variations in connection with the timing of our product offerings, including as follows:
•Revenues in our Disney Parks, Experiences and Products segment fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities and seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first and fourth fiscal quarters. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early winter and spring holiday periods. Our parks, resorts and experiences are or may be operating at diminished capacity or are or may be closed during these periods as a result of COVID-19. In addition, licensing revenues fluctuate with the timing and performance of our theatrical releases and cable programming broadcasts, many of which have been delayed, canceled or modified.
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•Revenues from television networks and stations are subject to seasonal advertising patterns and changes in viewership levels. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months.
•Revenues from content sales/licensing fluctuate due to the timing of content releases across various distribution markets. Release dates are determined by a number of factors, including, among others, competition, the timing of vacation and holiday periods and impacts of COVID-19 to various distribution markets.
•Direct-to-consumer revenues fluctuate based on: changes in subscriber levels; viewership levels on our digital platforms; and the demand for sports and film and television content. Each of these may depend on the availability of content, which varies from time to time throughout the year based on, among other things, sports seasons, content production schedules and league shut downs.
Accordingly, negative impacts on our business occurring during a time of typical high seasonal demand could have a disproportionate effect on the results of that business for the year. Examples include the ongoing impact of COVID-19 on various high seasons or hurricane damage to our parks during the summer travel season.
Sustained increases in costs of pension and postretirement medical and other employee health and welfare benefits may reduce our profitability.
With approximately 175,000 employees at January 2, 2021, our profitability is substantially affected by costs of pension and current and postretirement medical benefits. We may experience significant increases in these costs as a result of macroeconomic factors, which are beyond our control, including increases in the cost of health care. Impacts of COVID-19 may lead to an increase in the cost of medical insurance and expenses. In addition, changes in investment returns and discount rates used to calculate pension and postretirement medical expense and related assets and liabilities can be volatile and may have an unfavorable impact on our costs in some years. Our pension and postretirement medical plans were remeasured at the end of fiscal 2020, and as a result, the underfunded status and fiscal 2021 costs increased. These macroeconomic factors as well as a decline in the fair value of pension and postretirement medical plan assets may put upward pressure on the cost of providing pension and postretirement medical benefits and may increase future funding requirements. There can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of our businesses.
The alteration or discontinuation of LIBOR may adversely affect our borrowing costs.
Certain of our interest rate derivatives and a portion of our indebtedness bear interest at variable interest rates, primarily based on LIBOR, which may be subject to regulatory guidance and/or reform that could cause interest rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated consequences. In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. However, on November 30, 2020, ICE Benchmark Administration (“IBA”), indicated that it would consult on its intention to cease publication of most USD LIBOR tenors until June 30, 2023. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after mid-2023. The Alternative Reference Rates Committee (ARCC), which was convened by the Federal Reserve Board and the New York Fed, has identified the Secured Oversight Financing Rate (SOFR) as the recommended risk-free alternative rate for USD LIBOR. The extended cessation date for most USD LIBOR tenors will allow for more time for existing legacy USD LIBOR contracts to mature and provide additional time to continue to prepare for the transition from LIBOR. At this time, it is not possible to predict the effect any discontinuance, modification or other reforms to LIBOR, or the establishment of alternative reference rates such as SOFR, or any other reference rate, will have on the Company. However, if LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, the Company’s borrowing costs may be adversely affected.
TFCF ACQUISITION RISKS
Our consolidated indebtedness increased substantially following completion of the TFCF acquisition and may increase in connection with impacts of COVID-19. This increased level of indebtedness could adversely affect us, including by decreasing our business flexibility.
Our consolidated indebtedness and cash and cash equivalents as of September 29, 2018 were approximately $20.9 billion and $4.2 billion, respectively. With the completion of the TFCF acquisition, our consolidated indebtedness and cash and cash equivalents as of September 28, 2019 were approximately $47.0 billion and $5.4 billion, respectively. As of January 2, 2021, our consolidated indebtedness and cash and cash equivalents were approximately $58.3 billion and $17.1 billion, respectively. The increased indebtedness could have the effect of, among other things, reducing our financial flexibility and reducing our flexibility to respond to changing business and economic conditions, such as those presented by COVID-19, among others. Increased levels of indebtedness could also reduce funds available for capital expenditures, share repurchases and dividends, and other activities and may create competitive disadvantages for us relative to other companies with lower debt levels. Since
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April 2020, Standard and Poor’s has downgraded our long-term debt ratings by two notches to BBB+, downgraded our short-term debt ratings by one notch to A-2 and placed our long-term debt ratings on Negative Outlook. In May 2020, Fitch downgraded our long- and short-term credit ratings by one notch to A- and F2, respectively, and placed our long-term ratings on Negative Outlook.
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)The following table provides information about Company purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended January 2, 2021:
| Period | Total Number of Shares Purchased(1) | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2) | ||||||||||||||||||||||
| October 4, 2020 - October 31, 2020 | 19,950 | $ | 126.82 | — | na | |||||||||||||||||||||
| November 1, 2020 - November 30, 2020 | 19,847 | 142.60 | — | na | ||||||||||||||||||||||
| December 1, 2020 - January 2, 2021 | 18,664 | 170.44 | — | na | ||||||||||||||||||||||
| Total | 58,461 | 146.10 | — | na | ||||||||||||||||||||||
(1)58,461 shares were purchased on the open market to provide shares to participants in the Walt Disney Investment Plan. These purchases were not made pursuant to a publicly announced repurchase plan or program.
(2)Not applicable as the Company no longer has a stock repurchase plan or program.
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ITEM 5. Other Items
None.
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ITEM 6. Exhibits
INDEX OF EXHIBITS
| Number and Description of Exhibit (Numbers Coincide with Item 601 of Regulation S-K) | Document Incorporated by Reference from a Previous Filing or Filed Herewith, as Indicated below | |||||||||||||
| 10.1 | Exhibit 10.1 to the Current Report on Form 8-K of the Company filed December 3, 2020 | |||||||||||||
| 10.2 | Filed herewith | |||||||||||||
| 10.3 | Filed herewith | |||||||||||||
| 10.4 | Filed herewith | |||||||||||||
| 10.5 | Filed herewith | |||||||||||||
| 10.6 | Filed herewith | |||||||||||||
| 22 | Filed herewith | |||||||||||||
| 31(a) | Filed herewith | |||||||||||||
| 31(b) | Filed herewith | |||||||||||||
| 32(a) | Furnished | |||||||||||||
| 32(b) | Furnished | |||||||||||||
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended January 2, 2021 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Equity and (vi) related notes | Filed herewith | ||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | Filed herewith | ||||||||||||
| * | A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. | ||||
| † | Management Contract or compensatory plan or arrangement. | ||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE WALT DISNEY COMPANY | ||||||||
| (Registrant) | ||||||||
| By: | /s/ CHRISTINE M. MCCARTHY | |||||||
| Christine M. McCarthy, Senior Executive Vice President and Chief Financial Officer | ||||||||
February 11, 2021
Burbank, California
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