Walt Disney Co - Quarter Report: 2022 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 1, 2022
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 1,820,633,408 shares of common stock outstanding as of February 2, 2022.
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 1, 2022 | January 2, 2021 | ||||||||||
| Revenues: | |||||||||||
| Services | $ | 19,542 | $ | 14,871 | |||||||
| Products | 2,277 | 1,378 | |||||||||
| Total revenues | 21,819 | 16,249 | |||||||||
| Costs and expenses: | |||||||||||
Cost of services (exclusive of depreciation and amortization) | (13,161) | (10,738) | |||||||||
Cost of products (exclusive of depreciation and amortization) | (1,406) | (1,037) | |||||||||
| Selling, general, administrative and other | (3,787) | (2,917) | |||||||||
| Depreciation and amortization | (1,269) | (1,298) | |||||||||
| Total costs and expenses | (19,623) | (15,990) | |||||||||
| Restructuring and impairment charges | — | (113) | |||||||||
| Other expense, net | (436) | — | |||||||||
| Interest expense, net | (311) | (324) | |||||||||
| Equity in the income of investees | 239 | 224 | |||||||||
| Income from continuing operations before income taxes | 1,688 | 46 | |||||||||
| Income taxes on continuing operations | (488) | (16) | |||||||||
| Net income from continuing operations | 1,200 | 30 | |||||||||
| Loss from discontinued operations, net of income tax benefit of $14 and $4, respectively | (48) | (12) | |||||||||
| Net income | 1,152 | 18 | |||||||||
Net income from continuing operations attributable to noncontrolling interests | (48) | (1) | |||||||||
| Net income attributable to Disney | $ | 1,104 | $ | 17 | |||||||
Earnings (loss) per share attributable to Disney(1): | |||||||||||
| Diluted | |||||||||||
| Continuing operations | $ | 0.63 | $ | 0.02 | |||||||
| Discontinued operations | (0.03) | (0.01) | |||||||||
| $ | 0.60 | $ | 0.01 | ||||||||
| Basic | |||||||||||
| Continuing operations | $ | 0.63 | $ | 0.02 | |||||||
| Discontinued operations | (0.03) | (0.01) | |||||||||
| $ | 0.61 | $ | 0.01 | ||||||||
Weighted average number of common and common equivalent shares outstanding: | |||||||||||
| Diluted | 1,828 | 1,823 | |||||||||
| Basic | 1,819 | 1,812 | |||||||||
(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 1, 2022 | January 2, 2021 | ||||||||||
| Net income | $ | 1,152 | $ | 18 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Market value adjustments for hedges | 50 | (173) | |||||||||
Pension and postretirement medical plan adjustments | 155 | 150 | |||||||||
Foreign currency translation and other | (22) | 277 | |||||||||
| Other comprehensive income | 183 | 254 | |||||||||
| Comprehensive income | 1,335 | 272 | |||||||||
Net income from continuing operations attributable to noncontrolling interests | (48) | (1) | |||||||||
| Other comprehensive loss attributable to noncontrolling interests | (19) | (73) | |||||||||
| Comprehensive income attributable to Disney | $ | 1,268 | $ | 198 | |||||||
See Notes to Condensed Consolidated Financial Statements
3
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
| January 1, 2022 | October 2, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 14,444 | $ | 15,959 | |||||||
| Receivables, net | 14,882 | 13,367 | |||||||||
| Inventories | 1,345 | 1,331 | |||||||||
| Content advances | 1,125 | 2,183 | |||||||||
| Other current assets | 1,117 | 817 | |||||||||
| Total current assets | 32,913 | 33,657 | |||||||||
| Produced and licensed content costs | 30,669 | 29,549 | |||||||||
| Investments | 3,549 | 3,935 | |||||||||
| Parks, resorts and other property | |||||||||||
| Attractions, buildings and equipment | 65,257 | 64,892 | |||||||||
| Accumulated depreciation | (38,505) | (37,920) | |||||||||
| 26,752 | 26,972 | ||||||||||
| Projects in progress | 4,808 | 4,521 | |||||||||
| Land | 1,121 | 1,131 | |||||||||
| 32,681 | 32,624 | ||||||||||
| Intangible assets, net | 16,574 | 17,115 | |||||||||
| Goodwill | 78,052 | 78,071 | |||||||||
| Other assets | 8,873 | 8,658 | |||||||||
| Total assets | $ | 203,311 | $ | 203,609 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable and other accrued liabilities | $ | 18,709 | $ | 20,894 | |||||||
| Current portion of borrowings | 6,783 | 5,866 | |||||||||
| Deferred revenue and other | 4,545 | 4,317 | |||||||||
| Total current liabilities | 30,037 | 31,077 | |||||||||
| Borrowings | 47,349 | 48,540 | |||||||||
| Deferred income taxes | 8,124 | 7,246 | |||||||||
| Other long-term liabilities | 14,208 | 14,522 | |||||||||
Commitments and contingencies (Note 13) | |||||||||||
| Redeemable noncontrolling interests | 9,283 | 9,213 | |||||||||
| Equity | |||||||||||
Preferred stock | — | — | |||||||||
Common stock, $0.01 par value, Authorized – 4.6 billion shares, Issued – 1.8 billion shares | 55,500 | 55,471 | |||||||||
| Retained earnings | 41,547 | 40,429 | |||||||||
| Accumulated other comprehensive loss | (6,276) | (6,440) | |||||||||
Treasury stock, at cost, 19 million shares | (907) | (907) | |||||||||
| Total Disney Shareholders’ equity | 89,864 | 88,553 | |||||||||
| Noncontrolling interests | 4,446 | 4,458 | |||||||||
| Total equity | 94,310 | 93,011 | |||||||||
| Total liabilities and equity | $ | 203,311 | $ | 203,609 | |||||||
See Notes to Condensed Consolidated Financial Statements
4
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income from continuing operations | $ | 1,200 | $ | 30 | |||||||
| Depreciation and amortization | 1,269 | 1,298 | |||||||||
| Net (gain) loss on investments | 436 | (80) | |||||||||
| Deferred income taxes | 726 | (105) | |||||||||
| Equity in the income of investees | (239) | (224) | |||||||||
| Cash distributions received from equity investees | 223 | 193 | |||||||||
| Net change in produced and licensed content costs and advances | 507 | 771 | |||||||||
| Equity-based compensation | 196 | 134 | |||||||||
| Pension and postretirement medical benefit cost amortization | 155 | 194 | |||||||||
| Other, net | (7) | (68) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Receivables | (1,401) | (1,324) | |||||||||
| Inventories | (14) | 94 | |||||||||
| Other assets | (115) | (136) | |||||||||
| Accounts payable and other liabilities | (2,579) | (642) | |||||||||
| Income taxes | (566) | (60) | |||||||||
| Cash (used in) provided by operations - continuing operations | (209) | 75 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Investments in parks, resorts and other property | (981) | (760) | |||||||||
| Other, net | (6) | 28 | |||||||||
| Cash used in investing activities - continuing operations | (987) | (732) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Commercial paper payments, net | (124) | (179) | |||||||||
| Borrowings | 33 | 1 | |||||||||
| Reduction of borrowings | — | (139) | |||||||||
| Proceeds from exercise of stock options | 33 | 209 | |||||||||
| Other, net | (222) | (225) | |||||||||
| Cash used in financing activities - continuing operations | (280) | (333) | |||||||||
| CASH FLOWS FROM DISCONTINUED OPERATIONS | |||||||||||
| Cash provided by operations - discontinued operations | 8 | 9 | |||||||||
| Cash used in financing activities - discontinued operations | (12) | — | |||||||||
| Cash (used in) provided by discontinued operations | (4) | 9 | |||||||||
| Impact of exchange rates on cash, cash equivalents and restricted cash | (35) | 139 | |||||||||
| Change in cash, cash equivalents and restricted cash | (1,515) | (842) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 16,003 | 17,954 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 14,488 | $ | 17,112 | |||||||
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 2, 2021 | 1,818 | $ | 55,471 | $ | 40,429 | $ | (6,440) | $ | (907) | $ | 88,553 | $ | 4,458 | $ | 93,011 | |||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | 1,104 | 164 | — | 1,268 | (4) | 1,264 | ||||||||||||||||||||||||||||||||||||||||||
| Equity compensation activity | 3 | 29 | — | — | — | 29 | — | 29 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions | — | — | — | — | — | — | 29 | 29 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions and other | — | — | 14 | — | — | 14 | (37) | (23) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 1,821 | $ | 55,500 | $ | 41,547 | $ | (6,276) | $ | (907) | $ | 89,864 | $ | 4,446 | $ | 94,310 | |||||||||||||||||||||||||||||||||||
| Balance at October 3, 2020 | 1,810 | $ | 54,497 | $ | 38,315 | $ | (8,322) | $ | (907) | $ | 83,583 | $ | 4,680 | $ | 88,263 | |||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | 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 | |||||||||||||||||||||||||||||||||||
(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 statement of the results for the interim period. Operating results for the quarter ended January 1, 2022 are not necessarily indicative of the results that may be expected for the year ending October 1, 2022.
The terms “Company,” “Disney,” “we,” “us,” and “our” are used in this report to refer collectively to the parent company, The Walt Disney Company, as well as the subsidiaries through which its various businesses are actually conducted.
These financial statements should be read in conjunction with the Company’s 2021 Annual Report on Form 10-K.
The Fox sports media business in Mexico was sold in November 2021. The Company recognized a $58 million loss on the sale, which is presented as discontinued operations in the Condensed Consolidated Statements of Income. At October 2, 2021, the assets and liabilities of the Fox sports media business in Mexico were not material and were included in other assets and other liabilities in the Condensed Consolidated Balance Sheets.
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, in either case at a redemption value based on NBCU’s equity ownership percentage of the greater of Hulu’s then equity fair value or a guaranteed floor value of $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 1, 2022, NBCU’s interest in Hulu is recorded in the Company’s financial statements at $8.5 billion.
BAMTech provides streaming technology services to third parties and is owned 85% by the Company and 15% by Major League Baseball (MLB). 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 in either case at a redemption value based on MLB’s equity ownership percentage of the greater of MLB’s then equity fair value or a guaranteed floor value ($563 million accreting at 8% annually for eight years from the date of acquisition).
7
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The MLB interest is required to be carried at a minimum value equal to its acquisition date fair value accreted to its estimated redemption value through the applicable redemption date. Therefore, the MLB interest is generally not allocated its portion of BAMTech losses. As of January 1, 2022, the MLB interest was recorded in the Company’s financial statements at $822 million.
Our estimate of the redemption value of noncontrolling interests requires management to make significant judgments with respect to the future value of the noncontrolling interests. We are accreting the noncontrolling interests of both BAMTech and Hulu to their guaranteed floor values. If our estimate of the future redemption value increased above either of the guaranteed floor values, we would change our rate of accretion, which would generally increase earnings recorded in “Net income from continuing operations attributable to noncontrolling interests” and thus reduce “Net income attributable to Disney” on the Condensed Consolidated Statements of Income.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 2021 financial statements and notes to conform to the fiscal 2022 presentation.
2.Segment Information
The Company’s operations are conducted in the Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP) segments. 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.
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 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) and its variants. COVID-19 and measures to prevent its spread have impacted our segments in a number of ways, most significantly at the DPEP segment where our theme parks and resorts were closed and cruise ship sailings and guided tours were suspended. These operations resumed at various points since May 2020, initially at reduced operating capacities as a result of COVID-19 restrictions. In fiscal 2020 and 2021, we delayed, or in some cases, shortened or cancelled theatrical releases. In addition, we experienced significant disruptions in the production and availability of content, including the delay of key live sports programming during fiscal 2020 and fiscal 2021.
In fiscal 2022, our domestic parks and experiences are generally operating without significant mandatory COVID-19-related capacity restrictions, such as those that were in place during the prior year; however, we continue to manage capacity to address ongoing COVID-19 considerations with respect to guest and cast health and safety. Certain of our international operations continue to be impacted by mandatory COVID-19-related capacity and travel restrictions. At the DMED segment, our film and television productions have generally resumed, although we have seen disruptions of production activities depending on local circumstances. We have generally been able to release our films theatrically in the current quarter, although certain markets continue to impose restrictions on theater openings and capacity.
The impact of these disruptions and the extent of their adverse impact on our financial and operating results will depend on the length of time that such disruptions continue. This will, in turn, depend on the duration and severity of the impacts of COVID-19 and its variants, 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. We have incurred and will continue to incur additional costs to address government regulations and the safety of our employees, guests and talent.
8
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Segment revenues and segment operating income (loss) are as follows:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Revenues: | |||||||||||
| Disney Media and Entertainment Distribution | $ | 14,585 | $ | 12,661 | |||||||
| Disney Parks, Experiences and Products | 7,234 | 3,588 | |||||||||
| Total consolidated revenues | $ | 21,819 | $ | 16,249 | |||||||
| Segment operating income (loss): | |||||||||||
| Disney Media and Entertainment Distribution | $ | 808 | $ | 1,451 | |||||||
| Disney Parks, Experiences and Products | 2,450 | (119) | |||||||||
Total segment operating income(1) | $ | 3,258 | $ | 1,332 | |||||||
(1) Equity in the income of investees is included in segment operating income as follows:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Disney Media and Entertainment Distribution | $ | 245 | $ | 235 | |||||||
| Disney Parks, Experiences and Products | (3) | (8) | |||||||||
| Equity in the income of investees included in segment operating income | 242 | 227 | |||||||||
| Amortization of TFCF intangible assets related to equity investees | (3) | (3) | |||||||||
| Equity in the income of investees, net | $ | 239 | $ | 224 | |||||||
A reconciliation of segment operating income to income from continuing operations before income taxes is as follows:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Segment operating income | $ | 3,258 | $ | 1,332 | |||||||
| Corporate and unallocated shared expenses | (228) | (232) | |||||||||
| Restructuring and impairment charges | — | (113) | |||||||||
| Other expense, net | (436) | — | |||||||||
| Interest expense, net | (311) | (324) | |||||||||
TFCF and Hulu acquisition amortization(1) | (595) | (617) | |||||||||
| Income from continuing operations before income taxes | $ | 1,688 | $ | 46 | |||||||
(1)For the quarter ended January 1, 2022 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $435 million, $157 million and $3 million, respectively. 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.
Goodwill
The changes in the carrying amount of goodwill are as follows:
| DMED | DPEP | Total | |||||||||||||||
| Balance at October 2, 2021 | $ | 72,521 | $ | 5,550 | $ | 78,071 | |||||||||||
| Currency translation adjustments and other, net | (19) | — | (19) | ||||||||||||||
| Balance at January 1, 2022 | $ | 72,502 | $ | 5,550 | $ | 78,052 | |||||||||||
9
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
3.Revenues
The following table presents our revenues by segment and major source:
| Quarter Ended January 1, 2022 | Quarter Ended January 2, 2021 | ||||||||||||||||||||||||||||||||||
| DMED | DPEP | Total | DMED | DPEP | Total | ||||||||||||||||||||||||||||||
| Affiliate fees | $ | 4,371 | $ | — | $ | 4,371 | $ | 4,402 | $ | — | $ | 4,402 | |||||||||||||||||||||||
| Advertising | 3,868 | 1 | 3,869 | 3,763 | 1 | 3,764 | |||||||||||||||||||||||||||||
| Subscription fees | 3,598 | — | 3,598 | 2,546 | — | 2,546 | |||||||||||||||||||||||||||||
| Theme park admissions | — | 2,152 | 2,152 | — | 549 | 549 | |||||||||||||||||||||||||||||
| Resort and vacations | — | 1,445 | 1,445 | — | 433 | 433 | |||||||||||||||||||||||||||||
| Retail and wholesale sales of merchandise, food and beverage | — | 2,089 | 2,089 | — | 1,163 | 1,163 | |||||||||||||||||||||||||||||
| TV/SVOD distribution licensing | 1,396 | — | 1,396 | 1,169 | — | 1,169 | |||||||||||||||||||||||||||||
| Theatrical distribution licensing | 529 | — | 529 | 31 | — | 31 | |||||||||||||||||||||||||||||
| Merchandise licensing | — | 1,119 | 1,119 | 5 | 1,090 | 1,095 | |||||||||||||||||||||||||||||
| Home entertainment | 294 | — | 294 | 300 | — | 300 | |||||||||||||||||||||||||||||
| Other | 529 | 428 | 957 | 445 | 352 | 797 | |||||||||||||||||||||||||||||
| $ | 14,585 | $ | 7,234 | $ | 21,819 | $ | 12,661 | $ | 3,588 | $ | 16,249 | ||||||||||||||||||||||||
The following table presents our revenues by segment and primary geographical markets:
| Quarter Ended January 1, 2022 | Quarter Ended January 2, 2021 | ||||||||||||||||||||||||||||||||||
| DMED | DPEP | Total | DMED | DPEP | Total | ||||||||||||||||||||||||||||||
| Americas | $ | 11,830 | $ | 5,711 | $ | 17,541 | $ | 10,291 | $ | 2,456 | $ | 12,747 | |||||||||||||||||||||||
| Europe | 1,538 | 865 | 2,403 | 1,293 | 487 | 1,780 | |||||||||||||||||||||||||||||
| Asia Pacific | 1,217 | 658 | 1,875 | 1,077 | 645 | 1,722 | |||||||||||||||||||||||||||||
| Total revenues | $ | 14,585 | $ | 7,234 | $ | 21,819 | $ | 12,661 | $ | 3,588 | $ | 16,249 | |||||||||||||||||||||||
Revenues recognized in the current and prior-year periods from performance obligations satisfied (or partially satisfied) in previous reporting periods primarily relate to revenues earned on TV/SVOD licenses for titles made available to the licensee in previous reporting periods. For the quarter ended January 1, 2022, $0.4 billion was recognized related to performance obligations satisfied as of October 2, 2021. For the quarter ended January 2, 2021, $0.4 billion was recognized related to performance obligations satisfied as of October 3, 2020.
As of January 1, 2022, revenue for unsatisfied performance obligations expected to be recognized in the future is $14 billion, primarily for content and other intellectual property (IP) to be made available in the future under existing agreements with television station affiliates, merchandise licensees and DTC subscribers. Of this amount, we expect to recognize approximately $5 billion in the remainder of fiscal 2022, $4 billion in fiscal 2023, $2 billion in fiscal 2024 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.
10
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Contract assets, accounts receivable and deferred revenues from contracts with customers are as follows:
| January 1, 2022 | October 2, 2021 | ||||||||||
| Contract assets | $ | 142 | $ | 155 | |||||||
| Accounts receivable | |||||||||||
| Current | 12,649 | 11,190 | |||||||||
| Non-current | 1,341 | 1,359 | |||||||||
| Allowance for credit losses | (199) | (194) | |||||||||
| Deferred revenues | |||||||||||
| Current | 4,278 | 4,067 | |||||||||
| Non-current | 575 | 581 | |||||||||
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.
For the quarters ended January 1, 2022 and January 2, 2021, the Company recognized revenues of $1.9 billion and $1.5 billion included in the deferred revenue balance at October 2, 2021 and October 3, 2020, respectively. The revenues recognized in both periods were primarily for DTC subscriptions and advances from merchandise and TV/SVOD licensees.
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, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods.
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 allowance for credit losses that is not material, was $0.8 billion as of January 1, 2022. The activity in the allowance for credit losses for the quarter ended January 1, 2022 was not material.
The balance of vacation club receivables recorded in other non-current assets, net of an allowance for credit losses that is not material, was $0.6 billion as of January 1, 2022. The activity in the allowance for credit losses for the quarter ended January 1, 2022 was not material.
4.Other Expense, net
Other expense, net is as follows:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| DraftKings loss | $ | (432) | $ | (186) | |||||||
| fuboTV gain | — | 186 | |||||||||
| Other, net | (4) | — | |||||||||
| Other income expense, net | $ | (436) | $ | — | |||||||
For the quarter ended January 1, 2022 and January 2, 2021, the Company recognized a non-cash loss of $432 million and $186 million, respectively, from the adjustment of its investment in DraftKings, Inc. to fair value (DraftKings loss).
For the quarter ended January 2, 2021, the Company recognized a non-cash gain of $186 million from the adjustment of its investment in fuboTV Inc. to fair value (fuboTV gain).
11
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
5.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 Sheets to the total of the amounts reported in the Condensed Consolidated Statements of Cash Flows.
| January 1, 2022 | October 2, 2021 | |||||||||||||
| Cash and cash equivalents | $ | 14,444 | $ | 15,959 | ||||||||||
| Restricted cash included in: | ||||||||||||||
| Other current assets | 3 | 3 | ||||||||||||
| Other assets | 41 | 41 | ||||||||||||
| Total cash, cash equivalents and restricted cash in the statement of cash flows | $ | 14,488 | $ | 16,003 | ||||||||||
Borrowings
During the quarter ended January 1, 2022, the Company’s borrowing activity was as follows:
| October 2, 2021 | Borrowings | Payments | Other Activity | January 1, 2022 | |||||||||||||||||||||||||
| Commercial paper with original maturities greater than three months | $ | 1,992 | $ | 200 | $ | (324) | $ | 2 | $ | 1,870 | |||||||||||||||||||
U.S. dollar denominated notes(1) | 49,090 | — | — | (34) | 49,056 | ||||||||||||||||||||||||
Asia Theme Parks borrowings(2) | 1,331 | 33 | — | 27 | 1,391 | ||||||||||||||||||||||||
Foreign currency denominated debt and other(3) | 1,993 | — | — | (178) | 1,815 | ||||||||||||||||||||||||
| $ | 54,406 | $ | 233 | $ | (324) | $ | (183) | $ | 54,132 | ||||||||||||||||||||
(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 driven by the impact of changes in foreign currency exchange rates.
(3)The other activity is due to market value adjustments for debt with qualifying hedges.
At January 1, 2022, the Company’s bank facilities, which are with a syndicate of lenders and support our commercial paper borrowings, were as follows:
| Committed Capacity | Capacity Used | Unused Capacity | |||||||||||||||
| Facility expiring March 2022 | $ | 5,250 | $ | — | $ | 5,250 | |||||||||||
| Facility expiring March 2023 | 4,000 | — | 4,000 | ||||||||||||||
| Facility expiring March 2025 | 3,000 | — | 3,000 | ||||||||||||||
| Total | $ | 12,250 | $ | — | $ | 12,250 | |||||||||||
The facilities expiring in March 2023 and March 2025 allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, or a fixed spread in the case of the facility expiring in March 2022, subject to a cap and floor that vary with the Company’s debt ratings assigned by Moody’s Investors Service and Standard and Poor’s. The spread above LIBOR can range from 0.18% to 1.63%. 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 1, 2022 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 1, 2022, the Company has $1.4 billion of outstanding letters of credit, of which none were issued under this facility.
12
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
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 as of 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 9) are reported net in the Condensed Consolidated Statements of Income and consist of the following:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Interest expense | $ | (361) | $ | (404) | |||||||
| Interest and investment income | 34 | 113 | |||||||||
| Net periodic pension and postretirement benefit costs (other than service costs) | 16 | (33) | |||||||||
| Interest expense, net | $ | (311) | $ | (324) | |||||||
Interest and investment income includes gains and losses on certain publicly traded and non-public investments, investment impairments and interest earned on cash and cash equivalents and certain receivables.
6.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.
The following table summarizes the carrying amounts of the Asia Theme Parks’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets:
| January 1, 2022 | October 2, 2021 | ||||||||||
| Cash and cash equivalents | $ | 304 | $ | 287 | |||||||
| Other current assets | 104 | 95 | |||||||||
| Total current assets | 408 | 382 | |||||||||
| Parks, resorts and other property | 6,947 | 6,928 | |||||||||
| Other assets | 172 | 176 | |||||||||
| Total assets | $ | 7,527 | $ | 7,486 | |||||||
| Current liabilities | $ | 488 | $ | 473 | |||||||
| Long-term borrowings | 1,358 | 1,331 | |||||||||
| Other long-term liabilities | 414 | 422 | |||||||||
| Total liabilities | $ | 2,260 | $ | 2,226 | |||||||
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 1, 2022:
| Revenues | $ | 792 | |||
| Costs and expenses | (826) | ||||
| Equity in the loss of investees | (3) | ||||
13
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Asia Theme Parks’ royalty and management fees of $26 million for the quarter ended January 1, 2022 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 1, 2022 were $109 million provided by operating activities, $193 million used in investing activities and $62 million provided by 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 provided loans to Hong Kong Disneyland Resort with outstanding balances of $150 million and $100 million, respectively. The interest rate on both loans 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 ($269 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 1, 2022 was $124 million. The Company’s line of credit is eliminated in consolidation.
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 $905 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 1.0 billion yuan (approximately $0.2 billion) line of credit bearing interest at 8%. As of January 1, 2022, the total amount outstanding under the line of credit was 0.2 billion yuan (approximately $25 million). These balances are eliminated in consolidation.
Shendi has provided Shanghai Disney Resort with loans totaling 8.0 billion yuan (approximately $1.3 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 1, 2022 the total amount outstanding under the line of credit was 0.2 billion yuan (approximately $33 million).
7.Produced and Acquired/Licensed Content Costs and Advances
The Company classifies its capitalized produced and acquired/licensed content costs as long-term assets and 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)
14
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Total capitalized produced and licensed content by predominant monetization strategy is as follows:
| As of January 1, 2022 | As of October 2, 2021 | ||||||||||||||||||||||||||||||||||
| Predominantly Monetized Individually | Predominantly Monetized as a Group | Total | Predominantly Monetized Individually | Predominantly Monetized as a Group | Total | ||||||||||||||||||||||||||||||
| Produced content | |||||||||||||||||||||||||||||||||||
| Released, less amortization | $ | 5,296 | $ | 10,036 | $ | 15,332 | $ | 4,944 | $ | 9,779 | $ | 14,723 | |||||||||||||||||||||||
| Completed, not released | 300 | 992 | 1,292 | 630 | 762 | 1,392 | |||||||||||||||||||||||||||||
| In-process | 4,408 | 5,466 | 9,874 | 4,371 | 4,623 | 8,994 | |||||||||||||||||||||||||||||
| In development or pre-production | 205 | 129 | 334 | 351 | 162 | 513 | |||||||||||||||||||||||||||||
| $ | 10,209 | $ | 16,623 | 26,832 | $ | 10,296 | $ | 15,326 | 25,622 | ||||||||||||||||||||||||||
| Licensed content - Television programming rights and advances | 4,962 | 6,110 | |||||||||||||||||||||||||||||||||
| Total produced and licensed content | $ | 31,794 | $ | 31,732 | |||||||||||||||||||||||||||||||
| Current portion | $ | 1,125 | $ | 2,183 | |||||||||||||||||||||||||||||||
| Non-current portion | $ | 30,669 | $ | 29,549 | |||||||||||||||||||||||||||||||
Amortization of produced and licensed content is as follows:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Produced content | |||||||||||
| Predominantly monetized individually | $ | 1,033 | $ | 612 | |||||||
| Predominantly monetized as a group | 1,618 | 1,198 | |||||||||
| 2,651 | 1,810 | ||||||||||
| Licensed programming rights and advances | 4,811 | 4,539 | |||||||||
Total produced and licensed content costs(1) | $ | 7,462 | $ | 6,349 | |||||||
(1)Primarily included in “Costs of services” in the Condensed Consolidated Statements of Income .
8.Income Taxes
Interim Period Tax Expense
Generally, we record interim period tax expense based on the estimated annual effective tax rate using projections of full-year pre-tax earnings and income tax expense, adjusted for tax expense amounts recognized fully in the quarter they occur. We used this approach to determine tax expense in the current quarter of fiscal 2022. For interim periods in fiscal 2021, because of the uncertainties associated with the impact of COVID-19 on our projections of full-year pre-tax earnings and income tax expense, our normal approach of calculating interim period tax expense produced an income tax provision that was not meaningful. Accordingly, we calculated interim period fiscal 2021 tax expense based on the year-to-date earnings before tax, a blended U.S. Federal and state statutory tax rate of approximately 23% adjusted for tax expense amounts recognized fully in the quarter they occurred.
Unrecognized Tax Benefits
The Company’s unrecognized tax benefits at both January 1, 2022 and October 2, 2021 were approximately $2.6 billion (before interest and penalties). 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.
15
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
9.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 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Service costs | $ | 100 | $ | 108 | $ | 2 | $ | 3 | |||||||||||||||
| Other costs (benefits): | |||||||||||||||||||||||
| Interest costs | 124 | 114 | 13 | 12 | |||||||||||||||||||
| Expected return on plan assets | (293) | (275) | (15) | (14) | |||||||||||||||||||
| Amortization of previously deferred service costs | 1 | 2 | — | — | |||||||||||||||||||
| Recognized net actuarial loss | 147 | 186 | 7 | 7 | |||||||||||||||||||
| Total other costs (benefits) | (21) | 27 | 5 | 5 | |||||||||||||||||||
| Net periodic benefit cost | $ | 79 | $ | 135 | $ | 7 | $ | 8 | |||||||||||||||
During the quarter ended January 1, 2022, the Company did not make any material contributions to its pension and postretirement medical plans. The Company currently expects to make approximately $100 million to $150 million in pension and postretirement medical plans contributions in fiscal 2022. Final minimum funding requirements for fiscal 2022 will be determined based on a January 1, 2022 funding actuarial valuation, which is expected to be received by the end of the fourth quarter of fiscal 2022.
10.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 1, 2022 | January 2, 2021 | ||||||||||
| Shares (in millions): | |||||||||||
| Weighted average number of common and common equivalent shares outstanding (basic) | 1,819 | 1,812 | |||||||||
| Weighted average dilutive impact of Awards | 9 | 11 | |||||||||
| Weighted average number of common and common equivalent shares outstanding (diluted) | 1,828 | 1,823 | |||||||||
| Awards excluded from diluted earnings per share | 4 | 8 | |||||||||
16
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
11.Equity
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 for Hedges | Unrecognized Pension and Postretirement Medical Expense | Foreign Currency Translation and Other | AOCI | ||||||||||||||||||||
| AOCI, before tax | |||||||||||||||||||||||
| First quarter of fiscal 2022 | |||||||||||||||||||||||
| Balance at October 2, 2021 | $ | (152) | $ | (7,025) | $ | (1,047) | $ | (8,224) | |||||||||||||||
| Quarter Ended January 1, 2022: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | 87 | 47 | (37) | 97 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | (18) | 155 | — | 137 | |||||||||||||||||||
| Balance at January 1, 2022 | $ | (83) | $ | (6,823) | $ | (1,084) | $ | (7,990) | |||||||||||||||
| 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) | |||||||||||||||
| Market Value Adjustments for Hedges | Unrecognized Pension and Postretirement Medical Expense | Foreign Currency Translation and Other | AOCI | ||||||||||||||||||||
| Tax on AOCI | |||||||||||||||||||||||
| First quarter of fiscal 2022 | |||||||||||||||||||||||
| Balance at October 2, 2021 | $ | 42 | $ | 1,653 | $ | 89 | $ | 1,784 | |||||||||||||||
| Quarter Ended January 1, 2022: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | (23) | (11) | (4) | (38) | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | 4 | (36) | — | (32) | |||||||||||||||||||
| Balance at January 1, 2022 | $ | 23 | $ | 1,606 | $ | 85 | $ | 1,714 | |||||||||||||||
| 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 | |||||||||||||||
17
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
| Market Value Adjustments for Hedges | Unrecognized Pension and Postretirement Medical Expense | Foreign Currency Translation and Other | AOCI | ||||||||||||||||||||
| AOCI, after tax | |||||||||||||||||||||||
| First quarter of fiscal 2022 | |||||||||||||||||||||||
| Balance at October 2, 2021 | $ | (110) | $ | (5,372) | $ | (958) | $ | (6,440) | |||||||||||||||
| Quarter Ended January 1, 2022: | |||||||||||||||||||||||
| Unrealized gains (losses) arising during the period | 64 | 36 | (41) | 59 | |||||||||||||||||||
| Reclassifications of realized net (gains) losses to net income | (14) | 119 | — | 105 | |||||||||||||||||||
| Balance at January 1, 2022 | $ | (60) | $ | (5,217) | $ | (999) | $ | (6,276) | |||||||||||||||
| 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) | |||||||||||||||
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 1, 2022 | January 2, 2021 | |||||||||||||||||||
| Market value adjustments, primarily cash flow hedges | Primarily revenue | $ | 18 | $ | 43 | |||||||||||||||
| Estimated tax | Income taxes | (4) | (9) | |||||||||||||||||
| 14 | 34 | |||||||||||||||||||
| Pension and postretirement medical expense | Interest expense, net | (155) | (194) | |||||||||||||||||
| Estimated tax | Income taxes | 36 | 45 | |||||||||||||||||
| (119) | (149) | |||||||||||||||||||
| Total reclassifications for the period | $ | (105) | $ | (115) | ||||||||||||||||
12.Equity-Based Compensation
Compensation expense related to stock options and restricted stock units (RSUs) is as follows:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Stock options | $ | 24 | $ | 25 | |||||||
| RSUs | 172 | 109 | |||||||||
Total equity-based compensation expense(1) | $ | 196 | $ | 134 | |||||||
| Equity-based compensation expense capitalized during the period | $ | 30 | $ | 34 | |||||||
(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.
Unrecognized compensation cost related to unvested stock options and RSUs was $160 million and $2.2 billion, respectively, as of January 1, 2022.
18
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
The weighted average grant date fair values of options granted during the quarter ended January 1, 2022 and January 2, 2021 were $47.66 and $55.28, respectively.
During the quarter ended January 1, 2022, the Company made equity compensation grants consisting of 1.6 million stock options and 9.1 million RSUs.
13.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.
14.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 1, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments | $ | 527 | $ | — | $ | — | $ | 527 | |||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | 100 | — | 100 | |||||||||||||||||||
| Foreign exchange | — | 696 | — | 696 | |||||||||||||||||||
| Other | — | 18 | — | 18 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | (353) | — | (353) | |||||||||||||||||||
| Foreign exchange | — | (525) | — | (525) | |||||||||||||||||||
| Other | — | (2) | — | (2) | |||||||||||||||||||
| Other | — | (438) | — | (438) | |||||||||||||||||||
| Total recorded at fair value | $ | 527 | $ | (504) | $ | — | $ | 23 | |||||||||||||||
| Fair value of borrowings | $ | — | $ | 58,177 | $ | 1,475 | $ | 59,652 | |||||||||||||||
19
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 2, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investments | $ | 950 | $ | — | $ | — | $ | 950 | |||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | 186 | — | 186 | |||||||||||||||||||
| Foreign exchange | — | 707 | — | 707 | |||||||||||||||||||
| Other | — | 10 | — | 10 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||
| Interest rate | — | (287) | — | (287) | |||||||||||||||||||
| Foreign exchange | — | (618) | — | (618) | |||||||||||||||||||
| Other | — | (8) | — | (8) | |||||||||||||||||||
| Other | — | (375) | — | (375) | |||||||||||||||||||
| Total recorded at fair value | $ | 950 | $ | (385) | $ | — | $ | 565 | |||||||||||||||
| Fair value of borrowings | $ | — | $ | 58,913 | $ | 1,411 | $ | 60,324 | |||||||||||||||
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, had an impact on derivative fair value estimates that was not material.
Level 2 other liabilities are primarily arrangements that are valued based on the fair value of underlying investments, which are generally measured using Level 1 and Level 2 fair value techniques.
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.
15.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.
20
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 1, 2022 | |||||||||||||||||||||||
| Current Assets | Other Assets | Other Current Liabilities | Other Long- Term Liabilities | ||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||
| Foreign exchange | $ | 220 | $ | 264 | $ | (127) | $ | (100) | |||||||||||||||
| Interest rate | 17 | 83 | (353) | — | |||||||||||||||||||
| Other | 8 | 1 | (1) | (1) | |||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||
| Foreign exchange | 109 | 103 | (153) | (145) | |||||||||||||||||||
| Other | 9 | — | — | — | |||||||||||||||||||
| Gross fair value of derivatives | 363 | 451 | (634) | (246) | |||||||||||||||||||
| Counterparty netting | (253) | (326) | 394 | 185 | |||||||||||||||||||
| Cash collateral (received) paid | (26) | (4) | 234 | 41 | |||||||||||||||||||
| Net derivative positions | $ | 84 | $ | 121 | $ | (6) | $ | (20) | |||||||||||||||
| As of October 2, 2021 | |||||||||||||||||||||||
| Current Assets | Other Assets | Other Current Liabilities | Other Long- Term Liabilities | ||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||
| Foreign exchange | $ | 165 | $ | 240 | $ | (122) | $ | (83) | |||||||||||||||
| Interest rate | — | 186 | (287) | — | |||||||||||||||||||
| Other | 10 | — | — | — | |||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||
| Foreign exchange | 183 | 119 | (208) | (205) | |||||||||||||||||||
| Other | (8) | — | — | — | |||||||||||||||||||
| Gross fair value of derivatives | 350 | 545 | (617) | (288) | |||||||||||||||||||
| Counterparty netting | (301) | (360) | 460 | 201 | |||||||||||||||||||
| Cash collateral (received) paid | (3) | (51) | 157 | 73 | |||||||||||||||||||
| Net derivative positions | $ | 46 | $ | 134 | $ | — | $ | (14) | |||||||||||||||
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. The total notional amount of the Company’s pay-floating interest rate swaps at both January 1, 2022 and October 2, 2021, was $15.1 billion.
21
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 | Fair Value Adjustments Included in Hedged Borrowings | ||||||||||||||||||||||
| January 1, 2022 | October 2, 2021 | January 1, 2022 | October 2, 2021 | ||||||||||||||||||||
| Borrowings: | |||||||||||||||||||||||
| Current | $ | 1,512 | $ | 505 | $ | 14 | $ | 5 | |||||||||||||||
| Long-term | 13,957 | 15,136 | (290) | (103) | |||||||||||||||||||
| $ | 15,469 | $ | 15,641 | $ | (276) | $ | (98) | ||||||||||||||||
The following amounts are included in “Interest expense, net” in the Condensed Consolidated Statements of Income:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Gain (loss) on: | |||||||||||
| Pay-floating swaps | $ | (178) | $ | (147) | |||||||
| Borrowings hedged with pay-floating swaps | 178 | 147 | |||||||||
| Benefit (expense) associated with interest accruals on pay-floating swaps | 37 | 35 | |||||||||
The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed interest rate 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 1, 2022 or at October 2, 2021, and gains and losses related to pay-fixed interest rate swaps recognized in earnings for the quarter ended January 1, 2022 and January 2, 2021 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 1, 2022 and October 2, 2021, the notional amounts of the Company’s net foreign exchange cash flow hedges were $8.1 billion and $6.9 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 gains recorded in AOCI for contracts that will mature in the next twelve months total $119 million. The following table summarizes the effect of foreign exchange cash flow hedges on AOCI:
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Gain (loss) recognized in Other Comprehensive Income | $ | 79 | $ | (151) | |||||||
Gain (loss) reclassified from AOCI into the Statements of Operations(1) | 13 | 44 | |||||||||
(1)Primarily recorded in revenue.
22
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 1, 2022 and October 2, 2021, 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 1, 2022 | January 2, 2021 | ||||||||||
| Gain (loss) on: | |||||||||||
| Cross currency swaps | $ | 1 | $ | 42 | |||||||
| Borrowings hedged with cross currency swaps | (1) | (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 1, 2022 and October 2, 2021 were $3.9 billion and $3.5 billion, respectively. 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 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | |||||||||||||||||||||||||||||
| Net gains (losses) on foreign currency denominated assets and liabilities | $ | (63) | $ | 158 | $ | 1 | $ | (41) | $ | 8 | $ | (59) | |||||||||||||||||||||||
| Net gains (losses) on foreign exchange risk management contracts not designated as hedges | 33 | (187) | — | 43 | (8) | 50 | |||||||||||||||||||||||||||||
| Net gains (losses) | $ | (30) | $ | (29) | $ | 1 | $ | 2 | $ | — | $ | (9) | |||||||||||||||||||||||
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 1, 2022 and October 2, 2021 and related gains or losses recognized in earnings for the quarter and quarter ended January 1, 2022 and January 2, 2021 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 amounts of these contracts at both January 1, 2022 and October 2, 2021 were $0.4 billion. The related gains or losses recognized in earnings were not material for the quarters ended January 1, 2022 and January 2, 2021.
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 $301 million and $244 million on January 1, 2022 and October 2, 2021, respectively.
23
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
16.Restructuring and Impairment Charges
The Company recognized 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.
17.New Accounting Pronouncements
Accounting Pronouncements Adopted in Fiscal 2022
Simplifying the Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board (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 Company adopted the new guidance in the first quarter of fiscal 2022. The adoption did not have a material impact on our financial statements.
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. The guidance is applicable to contracts entered into before January 1, 2023. The Company adopted the new guidance in the first quarter of fiscal 2022. The adoption did not have a material impact on our financial statements.
Accounting Pronouncements Not Yet Adopted
Disclosures by Business Entities about Government Assistance
In November 2021, the FASB issued guidance requiring annual disclosures about transactions with a government that are accounted for by analogizing to a grant or contribution accounting model. The new guidance requires the disclosure of the nature of the transactions, the accounting for the transactions, and the effect of the transactions on the financial statements. The guidance is effective for annual periods beginning with the Company’s 2023 fiscal year (with early adoption permitted). The Company is currently assessing the impacts this guidance will have on its financial statements.
24
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
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, the impact of COVID-19 on our businesses and operations, results of operations and competition. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report. These statements are subject to known and unknown risks, uncertainties and other factors, including those described in “Risk Factors” in our 2021 Annual Report on Form 10-K, that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. You should not place undue reliance on the forward-looking statements. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.
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
25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
CONSOLIDATED RESULTS
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions, except per share data) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Services | $ | 19,542 | $ | 14,871 | 31 % | ||||||||||||
| Products | 2,277 | 1,378 | 65 % | ||||||||||||||
| Total revenues | 21,819 | 16,249 | 34 % | ||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | (13,161) | (10,738) | (23) % | ||||||||||||||
| Cost of products (exclusive of depreciation and amortization) | (1,406) | (1,037) | (36) % | ||||||||||||||
| Selling, general, administrative and other | (3,787) | (2,917) | (30) % | ||||||||||||||
| Depreciation and amortization | (1,269) | (1,298) | 2 % | ||||||||||||||
| Total costs and expenses | (19,623) | (15,990) | (23) % | ||||||||||||||
| Restructuring and impairment charges | — | (113) | 100 % | ||||||||||||||
| Other expense, net | (436) | — | nm | ||||||||||||||
| Interest expense, net | (311) | (324) | 4 % | ||||||||||||||
| Equity in the income of investees | 239 | 224 | 7 % | ||||||||||||||
| Income from continuing operations before income taxes | 1,688 | 46 | >100 % | ||||||||||||||
| Income taxes on continuing operations | (488) | (16) | >(100) % | ||||||||||||||
| Net income from continuing operations | 1,200 | 30 | >100 % | ||||||||||||||
| Loss from discontinued operations, net of income tax benefit of $14 and $4, respectively | (48) | (12) | >(100) % | ||||||||||||||
| Net income | 1,152 | 18 | >100 % | ||||||||||||||
| Net income from continuing operations attributable to noncontrolling interests | (48) | (1) | >(100) % | ||||||||||||||
| Net income attributable to Disney | $ | 1,104 | $ | 17 | >100 % | ||||||||||||
| Diluted earnings per share from continuing operations attributable to Disney | $ | 0.63 | $ | 0.02 | >100 % | ||||||||||||
SIGNIFICANT DEVELOPMENTS
COVID-19 Pandemic
Since early 2020, the world has been, and continues to be, impacted by COVID-19 and its variants. COVID-19 and measures to prevent its spread have impacted our segments in a number of ways, most significantly at the DPEP segment where our theme parks and resorts were closed and cruise ship sailings and guided tours were suspended. These operations resumed at various points since May 2020, initially at reduced operating capacities as a result of COVID-19 restrictions. In fiscal 2020 and 2021, we delayed, or in some cases, shortened or canceled, theatrical releases. In addition, we experienced significant disruptions in the production and availability of content, including the delay of key live sports programming during fiscal 2020 and fiscal 2021.
The most significant impact on operating income since the onset of COVID-19 has been at the DPEP segment due to revenue lost. In fiscal 2022, our domestic parks and experiences are generally operating without significant mandatory COVID-19-related capacity restrictions, such as those that were in place during the prior-year quarter; however, we continue to manage capacity to address ongoing COVID-19 considerations with respect to guest and cast health and safety. Certain of our international operations continue to be impacted by mandatory COVID-19-related capacity and travel restrictions. At the DMED segment, our film and television productions have generally resumed, although we have seen disruptions of production activities depending on local circumstances. We have generally been able to release our films theatrically in the current quarter, although certain markets continue to impose restrictions on theater openings and capacity.
We have incurred, and will continue to incur, costs to address government regulations and the safety of our employees, guests and talent, of which certain costs are capitalized and will be amortized over future periods.
The impact of the disruptions on our businesses and costs to address government regulations and the safety of our employees, guests and talent (and the extent of their adverse impact on our financial and operational results) will depend on the length of time that such disruptions continue. This will, in turn, depend on the duration and severity of the impacts of
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
COVID-19 and its variants, 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.
CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER
Revenues for the quarter increased 34%, or $5.6 billion, to $21.8 billion; net income attributable to Disney increased to $1.1 billion from $17 million; and diluted earnings per share from continuing operations attributable to Disney (EPS) was $0.63 compared to $0.02 in the prior-year quarter. The EPS increase for the quarter was due to higher segment operating results at DPEP, partially offset by lower operating results at DMED.
Revenues
Service revenues for the quarter increased 31%, or $4.7 billion, to $19.5 billion due to increased volumes at our theme parks and resorts, higher DTC subscription revenue and higher theatrical revenues. The increase in theme parks and resorts volumes reflects the impact of operating with mandatory capacity restrictions in the prior-year quarter as a result of COVID-19. The increase in subscription revenue was due to subscriber growth and higher retail pricing at Disney+, Hulu, and to a lesser extent, ESPN+.
Product revenues for the quarter increased 65%, or $0.9 billion to $2.3 billion due to higher merchandise, food and beverage sales at our theme parks and resorts.
Costs and expenses
Cost of services for the quarter increased 23%, or $2.4 billion, to $13.2 billion due to higher programming and production costs and technical support expenses at Direct-to-Consumer, increased volumes at our theme parks and resorts, higher sports programming costs at Linear Networks and higher theatrical production cost amortization and theatrical distribution costs at Content Sales/Licensing and Other.
Cost of products for the quarter increased 36%, or $0.4 billion, to $1.4 billion due to higher merchandise, food and beverage sales at our theme parks and resorts.
Selling, general, administrative and other costs increased 30%, or $0.9 billion, to $3.8 billion due to higher marketing costs.
Restructuring and impairment charges
Restructuring and impairment charges of $113 million for the prior-year quarter were due to severance.
Other expense, net
In the current quarter, the Company recognized $436 million in Other expense, net due to a non-cash loss of $432 million to adjust its investment in DraftKings to fair value.
In the prior-year quarter, the Company recognized $186 million non-cash loss to adjust its investment in DraftKings to fair value, offset by a $186 million non-cash gain to adjust its investment in fuboTV to fair value.
Interest expense, net
Interest expense, net is as follows:
| Quarter Ended | |||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | % Change Better (Worse) | ||||||||||||||
| Interest expense | $ | (361) | $ | (404) | 11 % | ||||||||||||
| Interest income, investment income (loss) and other | 50 | 80 | (38) % | ||||||||||||||
| Interest expense, net | $ | (311) | $ | (324) | 4 % | ||||||||||||
The decrease in interest expense was due to lower average debt balances and higher capitalized interest.
The decrease in interest income, investment income (loss) and other was due to lower investment gains, partially offset by a favorable comparison of pension and postretirement benefit costs, other than service cost, which was a benefit in the current quarter and an expense in the prior-year quarter.
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Effective Income Tax Rate
| Quarter Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Income from continuing operations before income taxes | $ | 1,688 | $ | 46 | |||||||
| Income tax on continuing operations | 488 | 16 | |||||||||
| Effective income tax rate - continuing operations | 28.9% | 34.8% | |||||||||
The effective income tax rate in the current quarter was higher than the U.S. statutory rate due to unfavorable adjustments related to prior years. The effective income tax rate in the prior-year quarter was higher than the U.S. statutory rate primarily due to an unfavorable impact from foreign earnings taxed at rates higher than the U.S. statutory rate, partially offset by favorable adjustments related to prior years.
Noncontrolling Interests
| Quarter Ended | |||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | % Change Better (Worse) | ||||||||||||||
| Net income from continuing operations attributable to noncontrolling interests | $ | (48) | $ | (1) | >(100) % | ||||||||||||
The increase in net income from continuing operations attributable to noncontrolling interests was driven by lower losses at Hong Kong Disneyland Resort and Shanghai Disney Resort, partially offset by a higher loss at our DTC sports business.
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 1, 2022 were impacted by the following:
•TFCF and Hulu acquisition amortization of $595 million
•Other expense of $436 million due to the DraftKings loss of $432 million
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
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 1, 2022: | |||||||||||||||||||||||
| TFCF and Hulu acquisition amortization | $ | (595) | $ | 139 | $ | (456) | $ | (0.24) | |||||||||||||||
| Other expense, net | (436) | 102 | (334) | (0.18) | |||||||||||||||||||
| Total | $ | (1,031) | $ | 241 | $ | (790) | $ | (0.43) | |||||||||||||||
| Quarter Ended January 2, 2021: | |||||||||||||||||||||||
| TFCF and Hulu acquisition amortization | $ | (617) | $ | 144 | $ | (473) | $ | (0.25) | |||||||||||||||
| Restructuring and impairment charges | (113) | 28 | (85) | (0.05) | |||||||||||||||||||
| Total | $ | (730) | $ | 172 | $ | (558) | $ | (0.30) | |||||||||||||||
(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.
28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended January 1, 2022 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
DMED 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 availability of and demand for sports programming. In general, domestic advertising revenues are typically somewhat higher during the fall and somewhat lower during the summer months. In addition, advertising revenues generated from sports programming are impacted by the 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 multi-channel video programming distributors (i.e. cable, satellite telecommunications and digital over-the-top service providers). Theatrical release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
DPEP 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 generally results in higher revenues during the Company’s 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
Below is a discussion of the major revenue and expense categories for our business segments. Costs and expenses for each segment consist of operating expenses, selling, general, administrative and other costs, and depreciation and amortization. Selling, general, administrative and other costs include third-party and internal marketing expenses.
Our DMED segment primarily generates revenue across three significant lines of business/distribution platforms: Linear Networks, Direct-to-Consumer and Content Sales/Licensing. Programming and production costs are generally allocated across these businesses based on the estimated relative value of the distribution windows. Programming and production costs to support these businesses/distribution platforms are largely incurred across three content creation groups: Studios, General Entertainment and Sports. 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 programming such as news and sports. Costs for initial marketing campaigns are generally recognized in the distribution platform of initial exploitation.
The Linear Networks business generates revenue from affiliate fees and advertising sales and from fees from sub-licensing of sports programming to third parties. Operating expenses include programming and production costs, technical support costs, operating labor and distribution costs.
The Direct-to-Consumer business generates revenue from subscription fees, advertising sales and pay-per-view and Premier Access fees. Operating expenses include programming and production costs, technology support costs, operating labor and distribution costs. Operating expenses also includes fees paid to Linear Networks for the right to air the linear networks feed and other services.
The Content Sales/Licensing business generates revenue from the sale of film and episodic television content in the TV/SVOD and home entertainment markets, distribution of films in the theatrical market, licensing of our music rights, sales of tickets to stage play performances and licensing of our IP for use in stage plays. Operating expenses include programming and production costs, distribution expenses and costs of sales.
Our DPEP segment primarily generates revenue from the sale of admissions to theme parks, the sale of food, beverage and merchandise at our theme parks and resorts, charges for room nights at hotels, sales of cruise vacations, sales and rentals of vacation club properties, royalties from licensing our IP for use on consumer goods and the sale of branded merchandise. Revenues are also generated from sponsorships and co-branding opportunities, real estate rent and sales, and royalties from Tokyo Disney Resort. Significant expenses include operating labor, costs of goods sold, infrastructure costs, depreciation and other operating expenses. Infrastructure costs include information systems expense, repairs and maintenance, utilities and fuel, property taxes, retail occupancy costs, insurance and transportation. Other operating expenses include costs for such items as supplies, commissions and entertainment offerings.
The Company evaluates the performance of its operating segments based on segment operating income, and management uses total segment operating income as a measure of the overall performance of the operating businesses separate from non-
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
operating factors. Total segment operating income is not a financial measure defined by GAAP, should be reviewed in conjunction with the relevant GAAP financial measure and may not be comparable to similarly titled measures reported by other companies. The Company believes that information about total segment operating income assists investors by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from factors other than business operations that affect net income, thus providing separate insight into both operations and other factors that affect reported 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 1, 2022 | January 2, 2021 | |||||||||||||||
| Income from continuing operations before income taxes | $ | 1,688 | $ | 46 | >100 % | ||||||||||||
| Add (subtract): | |||||||||||||||||
| Corporate and unallocated shared expenses | 228 | 232 | 2 % | ||||||||||||||
| Restructuring and impairment charges | — | 113 | 100 % | ||||||||||||||
| Other expense, net | 436 | — | nm | ||||||||||||||
| Interest expense, net | 311 | 324 | 4 % | ||||||||||||||
| TFCF and Hulu acquisition amortization | 595 | 617 | 4 % | ||||||||||||||
| Total segment operating income | $ | 3,258 | $ | 1,332 | >100 % | ||||||||||||
The following is a summary of segment revenue and operating income (loss):
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Disney Media and Entertainment Distribution | $ | 14,585 | $ | 12,661 | 15 % | ||||||||||||
| Disney Parks, Experiences and Products | 7,234 | 3,588 | >100 % | ||||||||||||||
| $ | 21,819 | $ | 16,249 | 34 % | |||||||||||||
| Segment operating income: | |||||||||||||||||
| Disney Media and Entertainment Distribution | $ | 808 | $ | 1,451 | (44) % | ||||||||||||
| Disney Parks, Experiences and Products | 2,450 | (119) | nm | ||||||||||||||
| $ | 3,258 | $ | 1,332 | >100 % | |||||||||||||
Depreciation expense is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Disney Media and Entertainment Distribution | $ | 153 | $ | 167 | 8 % | ||||||||||||
| Disney Parks, Experiences and Products | |||||||||||||||||
| Domestic | 398 | 388 | (3) % | ||||||||||||||
| International | 168 | 176 | 5 % | ||||||||||||||
| Total Disney Parks, Experiences and Products | 566 | 564 | — % | ||||||||||||||
| Corporate | 48 | 46 | (4) % | ||||||||||||||
| Total depreciation expense | $ | 767 | $ | 777 | 1 % | ||||||||||||
30
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 1, 2022 | January 2, 2021 | |||||||||||||||
| Disney Media and Entertainment Distribution | $ | 40 | $ | 47 | 15 % | ||||||||||||
| Disney Parks, Experiences and Products | 27 | 27 | — % | ||||||||||||||
| TFCF and Hulu | 435 | 447 | 3 % | ||||||||||||||
| Total amortization of intangible assets | $ | 502 | $ | 521 | 4 % | ||||||||||||
BUSINESS SEGMENT RESULTS - Current Quarter Results Compared to Prior-Year Quarter
Disney Media and Entertainment Distribution
Revenue and operating results for the DMED segment are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Linear Networks | $ | 7,706 | $ | 7,693 | — % | ||||||||||||
| Direct-to-Consumer | 4,690 | 3,504 | 34 % | ||||||||||||||
| Content Sales/Licensing and Other | 2,433 | 1,702 | 43 % | ||||||||||||||
Elimination of Intrasegment Revenue(1) | (244) | (238) | (3) % | ||||||||||||||
| $ | 14,585 | $ | 12,661 | 15 % | |||||||||||||
| Segment operating income (loss): | |||||||||||||||||
| Linear Networks | $ | 1,499 | $ | 1,729 | (13) % | ||||||||||||
| Direct-to-Consumer | (593) | (466) | (27) % | ||||||||||||||
| Content Sales/Licensing and Other | (98) | 188 | nm | ||||||||||||||
| $ | 808 | $ | 1,451 | (44) % | |||||||||||||
(1) Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services.
Linear Networks
Operating results for Linear Networks are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenues | |||||||||||||||||
| Affiliate fees | $ | 4,615 | $ | 4,640 | (1) % | ||||||||||||
| Advertising | 2,839 | 2,835 | — % | ||||||||||||||
| Other | 252 | 218 | 16 % | ||||||||||||||
| Total revenues | 7,706 | 7,693 | — % | ||||||||||||||
| Operating expenses | (5,656) | (5,421) | (4) % | ||||||||||||||
| Selling, general, administrative and other | (755) | (724) | (4) % | ||||||||||||||
| Depreciation and amortization | (38) | (53) | 28 % | ||||||||||||||
| Equity in the income of investees | 242 | 234 | 3 % | ||||||||||||||
| Operating Income | $ | 1,499 | $ | 1,729 | (13) % | ||||||||||||
31
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 1, 2022 | January 2, 2021 | |||||||||||||||
| Domestic Channels | $ | 3,862 | $ | 3,773 | 2 % | ||||||||||||
| International Channels | 753 | 867 | (13) % | ||||||||||||||
| $ | 4,615 | $ | 4,640 | (1) % | |||||||||||||
The increase in affiliate revenue at the Domestic Channels was due to an increase of 6% from higher contractual rates, partially offset by a decrease of 4% from fewer subscribers.
The decrease in affiliate revenue at the International Channels was due to decreases of 12% from fewer subscribers driven by channel closures in Europe and Asia and 3% from an unfavorable foreign exchange impact, partially offset by an increase of 2% from higher contractual rates.
Advertising revenue is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Cable | $ | 1,293 | $ | 1,217 | 6 % | ||||||||||||
| Broadcasting | 900 | 984 | (9) % | ||||||||||||||
| Domestic Channels | 2,193 | 2,201 | — % | ||||||||||||||
| International Channels | 646 | 634 | 2 % | ||||||||||||||
| $ | 2,839 | $ | 2,835 | — % | |||||||||||||
The increase in Cable advertising revenue was due to an increase of 6% from higher impressions, partially offset by a decrease of 1% from lower rates. The increase in impressions reflected more units delivered and higher average viewership.
The decrease in Broadcasting advertising revenue was due to decreases of 12% from fewer impressions at ABC, reflecting lower average viewership, and 8% from the owned television stations, partially offset by an increase of 11% from higher rates at ABC. The decrease at the owned television stations was due to lower political advertising.
The increase in International Channels advertising revenue was due to an increase of 6% from higher rates, partially offset by decreases of 3% from an unfavorable foreign exchange impact and 1% from fewer impressions, reflecting lower average viewership. The decrease in viewership was driven by COVID-19-related timing shifts of Indian Premier League (IPL) cricket matches, which resulted in fewer matches in the current quarter compared to the prior-year quarter. This decrease was partially offset by an increase from the airing of International Cricket Council (ICC) T20 World Cup matches in the current quarter. The ICC T20 World Cup generally occurs every two years and was not held in the prior-year quarter due to COVID-19. IPL cricket matches typically occur in our second and third fiscal quarters. As a result of COVID-19-related timing shifts, we aired 13 matches in the current quarter and 44 matches in the prior-year quarter.
Other revenue increased $34 million, to $252 million from $218 million, due to sub-licensing fees from ICC T20 World Cup matches in the current quarter, partially offset by lower sub-licensing fees as a result of fewer IPL cricket matches in the current quarter compared to the prior-year quarter.
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Cable | $ | (3,583) | $ | (3,404) | (5) % | ||||||||||||
| Broadcasting | (800) | (747) | (7) % | ||||||||||||||
| Domestic Channels | (4,383) | (4,151) | (6) % | ||||||||||||||
| International Channels | (894) | (914) | 2 % | ||||||||||||||
| $ | (5,277) | $ | (5,065) | (4) % | |||||||||||||
The increase in programming and production costs at Cable was primarily due to higher rights costs for the College Football Playoffs (CFP), NFL and MLB and an increase in sports production costs due to the cancellation of events in the prior-year quarter. These increases were partially offset by lower costs for NBA and golf programming. The increases in CFP and NFL rights costs were due to higher contractual rates. Higher MLB rights costs were due to airing one playoff game in the current quarter, compared to airing no MLB games in the prior-year quarter. Lower NBA and golf programming costs were due to the shift of certain NBA games and the Masters out of fiscal 2020 and into the first quarter of fiscal 2021 due to COVID-19.
The increase in programming and production costs at Broadcasting was due to a higher cost mix of programming aired on ABC in the current quarter.
Programming and production costs at the International Channels decreased due to lower costs for general entertainment programming, the impact of channel closures and a favorable foreign exchange impact, partially offset by an increase in sports programming costs. The decrease in general entertainment programming costs was driven by a lower cost mix of programming in the current quarter. The increase in sports programming costs was due to higher costs for cricket programming, partially offset by lower soccer programming costs reflecting fewer games in the current quarter. Higher costs for cricket programming were driven by costs for ICC T20 World Cup matches in the current quarter, partially offset by the impact of fewer IPL matches in the current quarter compared to the prior-year quarter.
Operating Income from Linear Networks
Operating income from Linear Networks decreased $230 million, to $1,499 million from $1,729 million, due to decreases at Cable and Broadcasting.
The following table provides supplemental revenue and operating income detail for Linear Networks:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Supplemental revenue detail | |||||||||||||||||
| Domestic Channels | $ | 6,152 | $ | 6,070 | 1 % | ||||||||||||
| International Channels | 1,554 | 1,623 | (4) % | ||||||||||||||
| $ | 7,706 | $ | 7,693 | — % | |||||||||||||
| Supplemental operating income detail | |||||||||||||||||
| Domestic Channels | $ | 888 | $ | 1,120 | (21) % | ||||||||||||
| International Channels | 369 | 375 | (2) % | ||||||||||||||
| Equity in the income of investees | 242 | 234 | 3 % | ||||||||||||||
| $ | 1,499 | $ | 1,729 | (13) % | |||||||||||||
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Direct-to-Consumer
Operating results for Direct-to-Consumer are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenues | |||||||||||||||||
| Subscription fees | $ | 3,598 | $ | 2,546 | 41 % | ||||||||||||
| Advertising | 980 | 882 | 11 % | ||||||||||||||
| TV/SVOD distribution and other | 112 | 76 | 47 % | ||||||||||||||
| Total revenues | 4,690 | 3,504 | 34 % | ||||||||||||||
| Operating expenses | (3,922) | (2,921) | (34) % | ||||||||||||||
| Selling, general, administrative and other | (1,275) | (970) | (31) % | ||||||||||||||
| Depreciation and amortization | (86) | (79) | (9) % | ||||||||||||||
| Operating Loss | $ | (593) | $ | (466) | (27) % | ||||||||||||
Revenues
The increase in subscription fees was due to increases of 23% from higher subscribers, driven by growth at Disney+, Hulu, and ESPN+, and 18% from higher rates due to increases in retail pricing at Disney+, Hulu, and to a lesser extent, ESPN+.
Higher advertising revenue reflected increases of 6% from higher rates due to an increase at Hulu and 5% from higher impressions due to increases at Disney+ and ESPN+.
The increase in TV/SVOD distribution and other revenue was due to higher Ultimate Fighting Championship (UFC) pay-per-view fees, which reflected an increase in average buys per event and higher pricing, partially offset by the impact of airing two events in the current quarter compared to three events in the prior-year quarter.
The following tables present additional information about our Disney+, ESPN+ and Hulu Direct-to-Consumer (DTC) product offerings(1).
Paid subscribers(2) as of:
| (in millions) | January 1, 2022 | January 2, 2021 | % Change Better (Worse) | ||||||||||||||
| Disney+ | |||||||||||||||||
| Domestic (U.S. and Canada) | 42.9 | 36.3 | 18 % | ||||||||||||||
International (excluding Disney+ Hotstar)(3) | 41.1 | 29.4 | 40 % | ||||||||||||||
Disney+ (excluding Disney+ Hotstar)(4) | 84.0 | 65.7 | 28 % | ||||||||||||||
| Disney+ Hotstar | 45.9 | 29.2 | 57 % | ||||||||||||||
Total Disney+(4) | 129.8 | 94.9 | 37 % | ||||||||||||||
| ESPN+ | 21.3 | 12.1 | 76 % | ||||||||||||||
| Hulu | |||||||||||||||||
| SVOD Only | 40.9 | 35.4 | 16 % | ||||||||||||||
| Live TV + SVOD | 4.3 | 4.0 | 8 % | ||||||||||||||
Total Hulu(4) | 45.3 | 39.4 | 15 % | ||||||||||||||
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Average Monthly Revenue Per Paid Subscriber(5) for the quarter ended:
| % Change Better (Worse) | |||||||||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||||||||
| Disney+ | |||||||||||||||||
| Domestic (U.S. and Canada) | $ | 6.68 | $ | 5.80 | 15 % | ||||||||||||
International (excluding Disney+ Hotstar)(3) | 5.96 | 4.73 | 26 % | ||||||||||||||
| Disney+ (excluding Disney+ Hotstar) | 6.33 | 5.37 | 18 % | ||||||||||||||
| Disney+ Hotstar | 1.03 | 0.98 | 5 % | ||||||||||||||
| Disney+ | 4.41 | 4.03 | 9 % | ||||||||||||||
| ESPN+ | 5.16 | 4.48 | 15 % | ||||||||||||||
| Hulu | |||||||||||||||||
| SVOD Only | 12.96 | 13.51 | (4) % | ||||||||||||||
| Live TV + SVOD | 87.01 | 75.11 | 16 % | ||||||||||||||
(1)In the U.S., Disney+, ESPN+ and Hulu SVOD Only are each offered as a standalone service or as a package that includes all three services (the SVOD Bundle). Effective December 21, 2021, Hulu Live TV + SVOD includes Disney+ and ESPN+ (new Hulu Live TV + SVOD offering), whereas previously, Hulu Live TV + SVOD was offered as a standalone service or with Disney+ and ESPN+ as optional additions (old Hulu Live TV + SVOD offering). Disney+ is available in more than 80 countries and territories outside the U.S. and Canada. In India and certain other Southeast Asian countries, our service is branded Disney+ Hotstar. In certain Latin American countries, we offer Disney+ as well as Star+, a general entertainment SVOD service, which is available on a standalone basis or together with Disney+. Depending on the market, our services can be purchased on our websites, through third party platforms/apps or via wholesale arrangements.
(2)Reflects subscribers for which we recognized subscription revenue. Subscribers cease to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method. Subscribers to the SVOD Bundle are counted as a paid subscriber for each service included in the SVOD Bundle and subscribers to the old Hulu Live TV + SVOD offering and new Hulu Live TV + SVOD offering are counted as one paid subscriber for each of the Hulu Live TV + SVOD, Disney+ and ESPN+ offerings. Subscribers include those who receive a service through wholesale arrangements including those for which we receive a fee for the distribution of the service to each subscriber of an existing content distribution tier. In Latin America, if a subscriber has either the standalone Disney+ or Star+ service or both the Disney+ and Star+ services, they are counted as one Disney+ paid subscriber. When we aggregate the total number of paid subscribers across our DTC streaming services, we refer to them as paid subscriptions.
(3)Includes the Disney+ service outside the U.S. and Canada and the Star+ service in Latin America.
(4)Total may not equal the sum of the column due to rounding.
(5)Revenue per paid subscriber is calculated based on 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. Revenue includes subscription fees, advertising (excluding revenue earned from selling advertising spots to other Company businesses) and premium and feature add-on revenue but excludes Premier Access and Pay-Per-View revenue. The average revenue per paid subscriber is net of discounts on the SVOD Bundle or other offerings that carry more than one service. Revenue is allocated to each service based on the relative retail price of each service on a standalone basis. Starting in December 2021, revenue for the new Hulu Live TV + SVOD offering is allocated to the SVOD services based on the wholesale price of the SVOD Bundle. In general, wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third party platforms.
The average monthly revenue per paid subscriber for domestic Disney+ increased from $5.80 to $6.68 due to an increase in retail pricing and a lower mix of wholesale subscribers, partially offset by a higher mix of subscribers to the SVOD Bundle.
The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) increased from $4.73 to $5.96 due to increases in retail pricing.
The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.98 to $1.03 due to launches in new territories with higher average prices, partially offset by a higher mix of wholesale subscribers.
35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The average monthly revenue per paid subscriber for ESPN+ increased from $4.48 to $5.16 primarily due to an increase in retail pricing and higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to the SVOD Bundle.
The average monthly revenue per paid subscriber for the Hulu SVOD Only service decreased from $13.51 to $12.96 due to lower per-subscriber advertising revenue and a higher mix of subscribers to the SVOD Bundle, partially offset by an increase in retail pricing.
The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $75.11 to $87.01 due to increases in retail pricing and higher per-subscriber advertising revenue, partially offset by the impact of the new Hulu Live TV + SVOD offering.
Costs and Expenses
Operating expenses are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Programming and production costs | |||||||||||||||||
| Disney+ | $ | (920) | $ | (515) | (79) % | ||||||||||||
| Hulu | (1,832) | (1,624) | (13) % | ||||||||||||||
| ESPN+ and other | (427) | (240) | (78) % | ||||||||||||||
| Total programming and production costs | (3,179) | (2,379) | (34) % | ||||||||||||||
| Other operating expense | (743) | (542) | (37) % | ||||||||||||||
| $ | (3,922) | $ | (2,921) | (34) % | |||||||||||||
The increase in programming and production costs at Disney+ was due to more content provided on the service.
Higher programming and production costs at Hulu were due to higher subscriber-based fees for programming the Live TV service due to rate increases and the carriage of more networks.
The increase in programming and production costs at ESPN+ and other was primarily due to new National Hockey League programming.
Other operating expenses increased primarily due to higher technology and distribution costs driven by growth in existing markets and to a lesser extent, expansion to new markets.
Selling, general, administrative and other costs increased $305 million, to $1,275 million from $970 million, due to higher marketing costs primarily due to growth in existing markets and to a lesser extent, expansion to new markets.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer increased $127 million, to $593 million from $466 million, due to higher losses at Disney+, and to a lesser extent, ESPN+, partially offset by improved results at Hulu.
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Supplemental Historical Information for Direct-to-Consumer
The following tables present the number of paid subscribers for Disney+, ESPN+ and Hulu as of:
| (in millions) | October 2, 2021 | July 3, 2021 | April 3, 2021 | January 2, 2021 | |||||||||||||||||||
| Disney+ | |||||||||||||||||||||||
| Domestic | 38.8 | 37.9 | 37.3 | 36.3 | |||||||||||||||||||
| International (excluding Disney+ Hotstar) | 36.0 | 33.2 | 31.1 | 29.4 | |||||||||||||||||||
Disney+ (excluding Disney+ Hotstar) (1) | 74.8 | 71.1 | 68.4 | 65.7 | |||||||||||||||||||
| Disney+ Hotstar | 43.3 | 44.9 | 35.2 | 29.2 | |||||||||||||||||||
Total Disney+ (1) | 118.1 | 116.0 | 103.6 | 94.9 | |||||||||||||||||||
| ESPN+ | 17.1 | 14.9 | 13.8 | 12.1 | |||||||||||||||||||
| Hulu | |||||||||||||||||||||||
| SVOD Only | 39.7 | 39.1 | 37.8 | 35.4 | |||||||||||||||||||
| Live TV + SVOD | 4.0 | 3.7 | 3.8 | 4.0 | |||||||||||||||||||
Total Hulu (1) | 43.8 | 42.8 | 41.6 | 39.4 | |||||||||||||||||||
| (in millions) | October 3, 2020 | June 27, 2020 | March 28, 2020 | December 28, 2019 | |||||||||||||||||||
| Disney+ | |||||||||||||||||||||||
| Domestic | 33.8 | 31.3 | 28.4 | 25.0 | |||||||||||||||||||
| International (excluding Disney+ Hotstar) | 19.5 | 17.5 | 5.1 | 1.5 | |||||||||||||||||||
Disney+ (excluding Disney+ Hotstar) (1) | 53.3 | 48.8 | 33.5 | 26.5 | |||||||||||||||||||
| Disney+ Hotstar | 20.3 | 8.7 | — | — | |||||||||||||||||||
Total Disney+ (1) | 73.7 | 57.5 | 33.5 | 26.5 | |||||||||||||||||||
| ESPN+ | 10.3 | 8.5 | 7.9 | 6.6 | |||||||||||||||||||
| Hulu | |||||||||||||||||||||||
| SVOD Only | 32.5 | 32.1 | 28.8 | 27.2 | |||||||||||||||||||
| Live TV + SVOD | 4.1 | 3.4 | 3.3 | 3.2 | |||||||||||||||||||
Total Hulu (1) | 36.6 | 35.5 | 32.1 | 30.4 | |||||||||||||||||||
(1)Total may not equal the sum of the column due to rounding
37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The following tables present the average monthly revenue per paid subscriber for the quarter ended:
| October 2, 2021 | July 3, 2021 | April 3, 2021 | January 2, 2021 | ||||||||||||||||||||
| Disney+ | |||||||||||||||||||||||
| Domestic | $ | 6.81 | $ | 6.62 | $ | 6.01 | $ | 5.80 | |||||||||||||||
| International (excluding Disney+ Hotstar) | 5.52 | 5.52 | 5.14 | 4.73 | |||||||||||||||||||
| Disney+ (excluding Disney+ Hotstar) | 6.24 | 6.12 | 5.61 | 5.37 | |||||||||||||||||||
| Disney+ Hotstar | 0.64 | 0.78 | 0.49 | 0.98 | |||||||||||||||||||
| Disney+ | 4.12 | 4.16 | 3.99 | 4.03 | |||||||||||||||||||
| ESPN+ | 4.74 | 4.47 | 4.55 | 4.48 | |||||||||||||||||||
| Hulu | |||||||||||||||||||||||
| SVOD Only | 12.75 | 13.15 | 12.08 | 13.51 | |||||||||||||||||||
| Live TV + SVOD | 84.89 | 84.09 | 81.83 | 75.11 | |||||||||||||||||||
| October 3, 2020 | June 27, 2020 | March 28, 2020 | December 28, 2019 | ||||||||||||||||||||
| Disney+ | |||||||||||||||||||||||
| Domestic | $ | 5.68 | $ | 5.71 | $ | 5.64 | $ | 5.55 | |||||||||||||||
| International (excluding Disney+ Hotstar) | 4.61 | 4.50 | 5.50 | 5.60 | |||||||||||||||||||
| Disney+ (excluding Disney+ Hotstar) | 5.30 | 5.31 | 5.63 | 5.56 | |||||||||||||||||||
| Disney+ Hotstar | 0.98 | 0.57 | — | — | |||||||||||||||||||
| Disney+ | 4.52 | 4.62 | 5.63 | 5.56 | |||||||||||||||||||
| ESPN+ | 4.54 | 4.18 | 4.24 | 4.44 | |||||||||||||||||||
| Hulu | |||||||||||||||||||||||
| SVOD Only | 12.59 | 11.39 | 12.06 | 13.15 | |||||||||||||||||||
| Live TV + SVOD | 71.90 | 68.11 | 67.75 | 59.47 | |||||||||||||||||||
The following tables present operating expenses for the quarter ended:
| (in millions) | October 2, 2021 | July 3, 2021 | April 3, 2021 | January 2, 2021 | |||||||||||||||||||
| Programming and production costs | |||||||||||||||||||||||
| Disney+ | $ | (974) | $ | (772) | $ | (654) | $ | (515) | |||||||||||||||
| Hulu | (1,730) | (1,700) | (1,626) | (1,624) | |||||||||||||||||||
| ESPN+ and other | (278) | (297) | (306) | (240) | |||||||||||||||||||
| Total programming and production costs | (2,982) | (2,769) | (2,586) | (2,379) | |||||||||||||||||||
| Other operating expense | (703) | (645) | (628) | (542) | |||||||||||||||||||
| $ | (3,685) | $ | (3,414) | $ | (3,214) | $ | (2,921) | ||||||||||||||||
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
| (in millions) | October 3, 2020 | June 27, 2020 | March 28, 2020 | December 28, 2019 | |||||||||||||||||||
| Programming and production costs | |||||||||||||||||||||||
| Disney+ | $ | (490) | $ | (352) | $ | (291) | $ | (219) | |||||||||||||||
| Hulu | (1,480) | (1,517) | (1,396) | (1,428) | |||||||||||||||||||
| ESPN+ and other | (222) | (179) | (277) | (273) | |||||||||||||||||||
| Total programming and production costs | (2,192) | (2,048) | (1,964) | (1,920) | |||||||||||||||||||
| Other operating expense | (532) | (498) | (501) | (423) | |||||||||||||||||||
| $ | (2,724) | $ | (2,546) | $ | (2,465) | $ | (2,343) | ||||||||||||||||
Content Sales/Licensing and Other
Operating results for Content Sales/Licensing and Other are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenues | |||||||||||||||||
| TV/SVOD distribution | $ | 1,195 | $ | 1,022 | 17 % | ||||||||||||
| Theatrical distribution | 529 | 31 | >100 % | ||||||||||||||
| Home entertainment | 294 | 300 | (2) % | ||||||||||||||
| Other | 415 | 349 | 19 % | ||||||||||||||
| Total revenues | 2,433 | 1,702 | 43 % | ||||||||||||||
| Operating expenses | (1,625) | (1,074) | (51) % | ||||||||||||||
| Selling, general, administrative and other | (840) | (359) | >(100) % | ||||||||||||||
| Depreciation and amortization | (69) | (82) | 16 % | ||||||||||||||
| Equity in the income of investees | 3 | 1 | >100 % | ||||||||||||||
| Operating Income | $ | (98) | $ | 188 | nm | ||||||||||||
Revenues
The increase in TV/SVOD distribution revenue reflected higher sales of both episodic television and theatrical film content. The increase in episodic television content sales was primarily due to the sale of more significant titles in the current quarter. Higher theatrical film content sales were driven by an increase in sales of library content and more title availabilities in the free television window.
The increase in theatrical distribution revenue was due to the release of nine titles in the current quarter compared to no significant releases in the prior-year quarter as a result of COVID-19, and to a lesser extent, revenue from the co-production of Marvel’s Spider-Man: No Way Home. Significant releases in the current quarter included Eternals and Encanto.
The increase in other revenue was due to higher sales from stage plays as a result of more performances in the current quarter.
Costs and Expenses
Operating expenses are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Programming and production costs | $ | (1,260) | $ | (877) | (44) % | ||||||||||||
| Cost of goods sold and distribution costs | (365) | (197) | (85) % | ||||||||||||||
| $ | (1,625) | $ | (1,074) | (51) % | |||||||||||||
The increase in programming and production costs was due to higher production cost amortization driven by an increase in theatrical revenue and higher film cost impairments.
39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The increase in cost of goods sold and distribution costs was due to higher costs for stage plays as a result of more performances in the current quarter and an increase in theatrical distribution costs as a result of more theatrical releases.
Selling, general administrative and other costs increased $481 million, to $840 million from $359 million, due to higher theatrical marketing costs.
Operating Income from Content Sales/Licensing and Other
Operating income from Content Sales/Licensing and Other decreased $286 million, to a loss of $98 million from income of $188 million, due to lower theatrical distribution results and higher film cost impairments, partially offset by higher TV/SVOD 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 DMED segment that are excluded from segment operating income:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
TFCF and Hulu acquisition amortization(1) | $ | (593) | $ | (615) | 4 % | ||||||||||||
| Restructuring and impairment charges | — | (81) | 100 % | ||||||||||||||
(1)In the current quarter, amortization of step-up on film and television costs was $157 million and amortization of intangible assets was $433 million. In the prior-year quarter, amortization of step-up on film and television costs was $167 million and amortization of intangible assets was $445 million.
Disney Parks, Experiences and Products
Operating results for the DPEP segment are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenues | |||||||||||||||||
| Theme park admissions | $ | 2,152 | $ | 549 | >100 % | ||||||||||||
| Parks & Experiences merchandise, food and beverage | 1,626 | 553 | >100 % | ||||||||||||||
| Resorts and vacations | 1,445 | 433 | >100 % | ||||||||||||||
| Merchandise licensing and retail | 1,563 | 1,698 | (8) % | ||||||||||||||
| Parks licensing and other | 448 | 355 | 26 % | ||||||||||||||
| Total revenues | 7,234 | 3,588 | >100 % | ||||||||||||||
| Operating expenses | (3,451) | (2,430) | (42) % | ||||||||||||||
| Selling, general, administrative and other | (737) | (678) | (9) % | ||||||||||||||
| Depreciation and amortization | (593) | (591) | — % | ||||||||||||||
| Equity in the loss of investees | (3) | (8) | 63 % | ||||||||||||||
| Operating Income (Loss) | $ | 2,450 | $ | (119) | nm | ||||||||||||
COVID-19
Revenues at DPEP benefited from the comparison to the significant adverse impact of closures/reduced operating capacity as a result of the impact of COVID-19 on our theme parks and experiences in the prior-year quarter. In fiscal 2022, our domestic parks and experiences are generally operating without significant mandatory COVID-19-related capacity restrictions, such as those that were in place during the prior year; however, we continue to manage capacity to address ongoing COVID-19 considerations with respect to guest and cast health and safety. Certain of our international operations continue to be impacted by mandatory COVID-19-related capacity and travel restrictions.
Walt Disney World Resort, Shanghai Disney Resort and Tokyo Disney Resort were open for the entire quarter in both the current and prior years. Disneyland Resort and Disneyland Paris were open for the entire current quarter, whereas Disneyland Resort was closed for all of the prior-year quarter and Disneyland Paris was closed for approximately 65 days in the prior-year
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
quarter. Hong Kong Disneyland Resort was open for 68 days in the current quarter and 42 days in the prior-year quarter. Cruise ships operated at reduced capacities in the current quarter while sailings were suspended in the prior-year quarter.
Revenues
The increase in theme park admissions revenue was due to attendance growth and higher average per capita ticket revenue, which was due to attendance mix and the introduction of Genie+ and Lightning Lane.
Parks & Experiences merchandise, food and beverage revenue growth was due to higher volumes.
The increase in resorts and vacations revenue was primarily due to increases in occupied hotel room nights, passenger cruise days and average daily hotel room rates.
Merchandise licensing and retail revenue was lower due to a decrease of 9% from retail due to the closure of a substantial number of Disney-branded retail stores in North America and Europe in the second half of fiscal year 2021.
The increase in parks licensing and other revenue was due to higher sponsorship revenue.
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 1, 2022 | Jan 2, 2021 | Jan 1, 2022 | Jan 2, 2021 | Jan 1, 2022 | Jan 2, 2021 | ||||||||||||||||||||||||||||||
| Parks | |||||||||||||||||||||||||||||||||||
| Increase (decrease) | |||||||||||||||||||||||||||||||||||
Attendance(2) | >100% | (74) % | >100% | (61) % | >100% | (71) % | |||||||||||||||||||||||||||||
Per Capita Guest Spending(3) | 30 % | 1 % | 14 % | (9) % | 32 % | (5) % | |||||||||||||||||||||||||||||
| Hotels | |||||||||||||||||||||||||||||||||||
Occupancy(4) | 73 % | 28 % | 52 % | 13 % | 68 % | 24 % | |||||||||||||||||||||||||||||
Available Room Nights (in thousands)(5) | 2,542 | 2,644 | 799 | 799 | 3,341 | 3,443 | |||||||||||||||||||||||||||||
Per Room Guest Spending(6) | $473 | $363 | $380 | $372 | $456 | $364 | |||||||||||||||||||||||||||||
(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.
41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and Expenses
Operating expenses are as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Operating labor | $ | (1,515) | $ | (1,030) | (47) % | ||||||||||||
| Cost of goods sold and distribution costs | (798) | (587) | (36) % | ||||||||||||||
| Infrastructure costs | (576) | (522) | (10) % | ||||||||||||||
| Other operating expense | (562) | (291) | (93) % | ||||||||||||||
| $ | (3,451) | $ | (2,430) | (42) % | |||||||||||||
The increases in operating labor, cost of goods sold and distribution costs and other operating expenses were due to higher volumes while the increase in infrastructure costs was due to higher volumes and increased technology spending.
Selling, general, administrative and other costs increased $59 million, to $737 million from $678 million, due to higher marketing spend.
Segment Operating Income (Loss)
Segment operating income increased from a loss of $0.1 billion to a profit of $2.5 billion due to increases at our domestic parks and resorts and, to a lesser extent, international parks and resorts, partially offset by a decrease at our consumer products business.
The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Supplemental revenue detail | |||||||||||||||||
| Parks & Experiences | |||||||||||||||||
| Domestic | $ | 4,800 | $ | 1,489 | >100 % | ||||||||||||
| International | 861 | 378 | >100 % | ||||||||||||||
| Consumer Products | 1,573 | 1,721 | (9) % | ||||||||||||||
| $ | 7,234 | $ | 3,588 | >100 % | |||||||||||||
| Supplemental operating income (loss) detail | |||||||||||||||||
| Parks & Experiences | |||||||||||||||||
| Domestic | $ | 1,555 | $ | (798) | nm | ||||||||||||
| International | 21 | (262) | nm | ||||||||||||||
| Consumer Products | 874 | 941 | (7) % | ||||||||||||||
| $ | 2,450 | $ | (119) | 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 DPEP segment that are excluded from segment operating income:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Restructuring and impairment charges | $ | — | $ | (28) | 100 % | ||||||||||||
| TFCF and Hulu acquisition amortization | (2) | (2) | — % | ||||||||||||||
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
CORPORATE AND UNALLOCATED SHARED EXPENSES
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Corporate and unallocated shared expenses | $ | (228) | $ | (232) | 2 % | ||||||||||||
FINANCIAL CONDITION
The change in cash and cash equivalents is as follows:
| Quarter Ended | % Change Better (Worse) | ||||||||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Cash (used in) provided by operations - continuing operations | $ | (209) | $ | 75 | nm | ||||||||||||
| Cash used in investing activities - continuing operations | (987) | (732) | (35) % | ||||||||||||||
| Cash used in financing activities - continuing operations | (280) | (333) | 16 % | ||||||||||||||
| Cash provided by operations - discontinued operations | 8 | 9 | >100 % | ||||||||||||||
| Cash used in financing activities - discontinued operations | (12) | — | nm | ||||||||||||||
| Impact of exchange rates on cash, cash equivalents and restricted cash | (35) | 139 | nm | ||||||||||||||
| Change in cash, cash equivalents and restricted cash | $ | (1,515) | $ | (842) | nm | ||||||||||||
Operating Activities
Cash used in continuing operating activities was $0.2 billion for the current quarter compared to cash provided by continuing operating activities of $0.1 billion in the prior-year quarter. The decrease in cash provided by operations was due to lower operating cash flow at DMED, partially offset by higher operating cash flow at DPEP. The decrease in operating cash flow at DMED was due to higher operating cash disbursements and higher spending on film and television productions, partially offset by higher operating cash receipts. Higher operating cash disbursements were driven by increased operating expenses while higher operating cash receipts were due to revenue growth. The increase in operating cash flow at DPEP was due to higher operating cash receipts driven by higher revenue, partially offset by an increase in operating cash disbursements due to higher operating expenses.
Produced and licensed programming costs
The DMED 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.
43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The Company’s film and television production and programming activity for the quarter ended January 1, 2022 and January 2, 2021 are as follows:
| Quarter Ended | |||||||||||
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||
| Beginning balances: | |||||||||||
| Produced and licensed programming assets | $ | 31,732 | $ | 27,193 | |||||||
| Programming liabilities | (4,113) | (4,099) | |||||||||
| 27,619 | 23,094 | ||||||||||
| Spending: | |||||||||||
| Programming licenses and rights | 3,357 | 2,709 | |||||||||
| Produced film and television content | 3,598 | 2,869 | |||||||||
| 6,955 | 5,578 | ||||||||||
| Amortization: | |||||||||||
| Programming licenses and rights | (4,811) | (4,539) | |||||||||
| Produced film and television content | (2,651) | (1,810) | |||||||||
| (7,462) | (6,349) | ||||||||||
| Change in internally produced and licensed content costs | (507) | (771) | |||||||||
| Other non-cash activity | 205 | 185 | |||||||||
| Ending balances: | |||||||||||
| Produced and licensed programming assets | 31,794 | 27,352 | |||||||||
| Programming liabilities | (4,477) | (4,844) | |||||||||
| $ | 27,317 | $ | 22,508 | ||||||||
The Company currently expects its fiscal 2022 spend on produced and licensed content, including sports rights, to be as much as approximately $33 billion, or approximately $8 billion more than fiscal 2021 spend of $25 billion. The increase is driven by higher spend to support our DTC expansion and generally assumes no significant disruptions to production due to COVID-19.
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 1, 2022 and January 2, 2021 are as follows:
| (in millions) | January 1, 2022 | January 2, 2021 | |||||||||
| Disney Media and Entertainment Distribution | $ | 169 | $ | 177 | |||||||
| Disney Parks, Experiences and Products | |||||||||||
| Domestic | 457 | 336 | |||||||||
| International | 202 | 183 | |||||||||
| Total Disney Parks, Experiences and Products | 659 | 519 | |||||||||
| Corporate | 153 | 64 | |||||||||
| $ | 981 | $ | 760 | ||||||||
Capital expenditures at the DMED segment primarily reflect investments in technology and in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities.
Capital expenditures for the DPEP segment are principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and technology. The increase in the current period compared to the prior-year period was primarily due to the temporary suspension of certain capital projects in the prior-year period as a result of COVID-19.
Capital expenditures at Corporate primarily reflect investments in corporate facilities, technology and equipment. The increase in the current period compared to the prior-year period was driven by higher spend on corporate facilities.
44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The Company currently expects its fiscal 2022 capital expenditures will be approximately $6.1 billion compared to fiscal 2021 capital expenditures of $3.6 billion. The expected increase in capital expenditures is due to higher spending on cruise ship fleet expansion, corporate facilities and production facilities and technology at the DMED segment.
Financing Activities
Cash used in financing activities was $0.3 billion in the both the current quarter and the prior-year quarter. In the current quarter, the Company had a decrease in net borrowings of $0.1 billion compared to a decrease in net borrowings of $0.3 billion in the prior-year quarter. The lower decrease in net borrowings was partially offset by lower proceeds from exercise of stock options ($33 million in the current quarter compared to $209 million in the prior-year quarter.)
See Note 5 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the quarter ended January 1, 2022 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 2022, March 2023 and March 2025, and incremental term debt issuances, to retire or refinance other borrowings before or as they come due.
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 had an adverse impact on the Company’s operating cash flows in fiscal 2020 and 2021. 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. Depending on the unknowable duration and severity of the future impacts of COVID-19 and its variants, the Company may take mitigating actions in the future such as continuing to not declare dividends (the Company did not pay a dividend with respect to fiscal 2020 and 2021 operations and has not declared or paid a dividend with respect to fiscal 2022 operations); reducing or not making certain payments, such as some contributions to our pension and postretirement medical plans; raising financing; suspending capital spending; reducing film and television content investments; or implementing furloughs or reductions in force. The impacts on our operating cash flows are subject to uncertainty and may require us to rely more heavily on external funding sources, such as debt and other types of financing.
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 1, 2022, Moody’s Investors Service’s long- and short-term debt ratings for the Company were A2 and P-1 (Stable), respectively, Standard and Poor’s long- and short-term debt ratings for the Company were BBB+ and A-2 (Stable), respectively, and Fitch’s long- and short-term debt ratings for the Company were A- and F2 (Stable), respectively. The Company’s bank facilities contain only one financial covenant, relating to interest coverage, which the Company met on January 1, 2022, 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.
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 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).
45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
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 1, 2022 was as follows:
| TWDC | Legacy Disney | ||||||||||||||||||||||
| (in millions) | Par Value | Carrying Value | Par Value | Carrying Value | |||||||||||||||||||
| Registered debt with unconditional guarantee | $ | 37,339 | $ | 39,008 | $ | 10,588 | $ | 10,617 | |||||||||||||||
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 is 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 GAAP.
| Results of operations (in millions) | Quarter Ended January 1, 2022: | ||||
| Revenues | $ | — | |||
| Costs and expenses | — | ||||
| Net income (loss) from continuing operations | (291) | ||||
| Net income (loss) | (291) | ||||
| Net income (loss) attributable to TWDC shareholders | (291) | ||||
| Balance Sheet (in millions) | January 1, 2022 | October 2, 2021 | |||||||||
| Current assets | $ | 8,451 | $ | 9,506 | |||||||
| Noncurrent assets | 1,727 | 1,689 | |||||||||
| Current liabilities | 7,662 | 6,878 | |||||||||
| Noncurrent liabilities (excluding intercompany to non-Guarantors) | 50,154 | 51,439 | |||||||||
| Intercompany payables to non-Guarantors | 147,209 | 147,629 | |||||||||
COMMITMENTS AND CONTINGENCIES
Legal Matters
As disclosed in Note 13 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters.
Guarantees
See Note 15 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.
Tax Matters
As disclosed in Note 10 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K, the Company has exposure for certain tax matters.
46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Contractual Commitments
See Note 15 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.
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 2021 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 7 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, which may include imputed license fees for content that is used on our DTC streaming services, 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.
Revenue Recognition
The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. Refer to Note 2 to the Consolidated Financial Statements in the 2021 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. See Note 11 to the Consolidated Financial Statements in the 2021 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.
47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
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. The Company performs its annual test of goodwill and indefinite-lived intangible assets for impairment in its fiscal fourth quarter.
Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. To test goodwill for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of a reporting unit exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows of the reporting unit.
The quantitative assessment compares the fair value of each goodwill 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 as well as the discount rates used to calculate the present value of future cash flows. 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. We believe our estimates are consistent with how a marketplace participant would value our reporting units. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.
To test its other indefinite-lived intangible assets for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of each of its indefinite-lived intangible assets exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows.
The quantitative assessment compares the fair value of an indefinite-lived intangible asset to its carrying amount. 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 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 the significant assets of an asset group to the carrying amount 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 and could include assets used across multiple businesses. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the asset group and the carrying amount 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
48
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
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 inherent in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded.
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. See Note 3 to the Condensed Consolidated Financial Statements for additional discussion.
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 13 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 and may make changes to these estimates and judgments over time. This could result in meaningful impacts to our financial statements in future periods as discussed below.
Produced and Acquired/Licensed Content Costs
Certain of our completed or in progress film and television productions have had their initial release dates delayed. 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 live sporting events continuing uninterrupted, 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.
49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
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 estimate of cash flow projections, we may need to impair some of these assets.
Income Tax (See Note 8 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, 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 our hedging instruments in different periods than the hedged transaction.
New Accounting Pronouncements
See Note 17 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.
50
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 15 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 1, 2022, 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 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
51
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As disclosed in Note 13 to the Condensed Consolidated Financial Statements, the Company is engaged in certain legal matters, and the disclosure set forth in Note 13 relating to certain legal matters is incorporated herein by reference.
ITEM 1A. Risk Factors
For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance, including those described in “Risk Factors” in our 2021 Annual Report on Form 10-K and 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. There have been no material changes in our risk factors from those disclosed in our 2021 Annual Report on Form 10-K.
52
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 1, 2022:
| 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 3, 2021 - October 31, 2021 | 16,599 | $ | 171.24 | — | na | |||||||||||||||||||||
| November 1, 2021 - November 30, 2021 | 23,036 | 157.38 | — | na | ||||||||||||||||||||||
| December 1, 2021 - January 1, 2022 | 28,624 | 147.64 | — | na | ||||||||||||||||||||||
| Total | 68,259 | 156.67 | — | na | ||||||||||||||||||||||
(1)68,259 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.
53
ITEM 5. Other Items
None.
54
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 | Filed herewith | |||||||||||||
| 10.2 | Exhibit 10.1 to the Current Report on Form 8-K of the Company filed December 21, 2021 | |||||||||||||
| 10.3 | Filed herewith | |||||||||||||
| 10.4 | Filed herewith | |||||||||||||
| 10.5 | Filed herewith | |||||||||||||
| 10.6 | Filed herewith | |||||||||||||
| 10.7 | Filed herewith | |||||||||||||
| 10.8 | Filed herewith | |||||||||||||
| 10.9 | Filed herewith | |||||||||||||
| 10.10 | Filed herewith | |||||||||||||
| 10.11 | Filed herewith | |||||||||||||
| 10.12 | 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 1, 2022 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. | ||||
55
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 9, 2022
Burbank, California
56