Walt Disney Company — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended April 2, 2022; comparable periods ended April 3, 2021. Amounts are in U.S. dollars. Disney reports through Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP).
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Reported revenue | $19.25 billion, up 23% | $41.07 billion, up 29% |
| Income from continuing operations before tax | $1.10 billion, down 10% | $2.79 billion, versus $1.28 billion |
| Net income attributable to Disney | $470 million, down 48% | $1.57 billion, up 71% |
| Diluted EPS from continuing operations | $0.26, versus $0.50 | $0.89, versus $0.52 |
| Cash provided by continuing operations | Quarterly figure not provided in the presented cash-flow statement | $1.56 billion, versus $1.47 billion |
Quarterly segment operating income rose 50% to $3.70 billion: DPEP earned $1.76 billion versus a $406 million loss, while DMED fell 32% to $1.94 billion. For six months, segment operating income increased 83% to $6.96 billion; DPEP earned $4.21 billion versus a $525 million loss, while DMED declined 36% to $2.75 billion. Segment operating income is a non-GAAP measure.
Reported revenue includes a $1.023 billion reduction for early termination of certain content-licensing agreements. Before that reduction, segment revenue was $20.27 billion for the quarter and $42.09 billion for six months. The termination reflected Disney reclaiming previously licensed content primarily for its own streaming services.
Liquidity, debt and investment
- Cash and cash equivalents were $13.27 billion at April 2, down from $15.96 billion at October 2, 2021. Current assets were $31.43 billion and current liabilities $29.60 billion.
- Total borrowings were $52.02 billion, including $5.40 billion current and $46.62 billion long-term, down from $54.41 billion at fiscal year-end. Disney had $12.25 billion of unused bank-facility capacity.
- Six-month investing cash outflow was $2.02 billion, including $2.06 billion of parks, resorts and other property investment. Operating cash flow less property investment was approximately negative $504 million for the period.
- Management said available cash, operating cash flow, capital-market access and bank capacity were adequate for operating needs, debt maturities and planned investment. Disney met its bank-facility interest-coverage covenant by a significant margin.
Material changes and management commentary
- Theme-park recovery drove DPEP’s turnaround: domestic parks generally operated without significant COVID-related capacity restrictions, and attendance, per-capita spending and hotel occupancy improved. International parks and cruise operations still faced closures, capacity limits or travel restrictions.
- Streaming subscription revenue grew, supported by subscriber growth and price increases, but DTC operating losses widened to $887 million in the quarter from $290 million and to $1.48 billion for six months from $756 million. Disney+ had 137.7 million paid subscribers, ESPN+ 22.3 million and Hulu 45.6 million at quarter-end.
- DMED’s six-month operating decline reflected higher DTC losses, lower Linear Networks income and a loss in Content Sales/Licensing and Other. Programming and production costs increased, including from expanded streaming content and sports rights.
- The quarterly net-income decline also reflected a higher effective tax rate (45.8% versus 8.8%), a $158 million non-cash DraftKings investment loss versus a $305 million gain in the prior-year quarter, and the content-license termination. The six-month effective tax rate was 35.6% versus 9.7%.
- In response to events in Russia and Ukraine, Disney paused certain Russia operations, including theatrical distribution and Disney Channel distribution. Those businesses generated approximately 2% of company operating income. Disney recorded a $195 million impairment and said further exit charges were not anticipated to be material.
Outlook, risks and contingencies
- Disney expected fiscal 2022 produced and licensed content spending, including sports rights, to be as much as approximately $32 billion, about $7 billion above fiscal 2021, primarily to support DTC expansion; this assumed no significant COVID-related production disruptions.
- Fiscal 2022 capital expenditures were expected to be approximately $5.5 billion, versus $3.6 billion in fiscal 2021, reflecting cruise-ship expansion, facilities and DMED production and technology investment.
- The company paid no dividend for fiscal 2020 or 2021 and had not declared or paid a dividend for fiscal 2022 as of the filing. Management cited possible future measures if conditions required, including limiting capital spending or content investment, financing, or workforce actions.
- COVID-19 duration and severity, international restrictions, production or sports disruptions, content performance, streaming costs, foreign exchange and economic conditions could affect results. Management noted estimation uncertainty in content amortization, impairment testing, receivables and tax provisions.
- Disney was involved in various legal matters but management did not believe it had incurred a probable material loss from those actions. Gross unrecognized tax benefits were $2.4 billion; a reduction of about $0.2 billion in the next 12 months was reasonably possible.
Important facts for investors to verify
- How reported results compare after considering the $1.023 billion content-license termination and the unusually high effective tax rate.
- Whether DTC subscriber growth, pricing and advertising gains can improve streaming profitability as content and programming costs rise.
- Whether parks recovery persists, particularly in international markets and cruise operations, and how much of the rebound reflects comparisons with prior-year closures.
- Progress against the stated content-spending and capital-expenditure expectations, and the effect on cash generation and debt.
- Developments in Russia-related operations, COVID-related disruptions, tax matters and the Hulu and BAMTech redeemable noncontrolling-interest obligations.