Walt Disney Co. — Q1 FY2022 Form 10-Q
Reporting period: Quarter ended January 1, 2022; comparative quarter ended January 2, 2021. Figures are in U.S. dollars unless stated otherwise. Disney reported under two segments: Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP).
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $21.819 billion | $16.249 billion | +34% |
| Income from continuing operations before taxes | $1.688 billion | $46 million | More than doubled |
| Net income attributable to Disney | $1.104 billion | $17 million | More than doubled |
| Diluted EPS from continuing operations | $0.63 | $0.02 | Increased |
| Cash from continuing operations | $(209) million | $75 million | Declined |
| Investments in parks, resorts and other property | $981 million | $760 million | Increased |
Revenue growth reflected higher park and resort activity, DTC subscription revenue and theatrical releases. Costs also rose: total costs and expenses increased 23% to $19.623 billion. The effective tax rate on continuing operations was 28.9%, compared with 34.8%.
Segments and material changes
- DPEP: Revenue rose to $7.234 billion from $3.588 billion, and segment operating income was $2.450 billion versus a $119 million loss. Domestic parks generally operated without the prior-year’s significant mandatory capacity restrictions; attendance and guest spending improved. Some international operations remained subject to restrictions.
- DMED: Revenue increased 15% to $14.585 billion, but segment operating income fell 44% to $808 million. Linear Networks income declined 13% to $1.499 billion; DTC operating loss widened to $593 million from $466 million; Content Sales/Licensing moved to a $98 million loss from $188 million income, partly reflecting higher theatrical marketing and production costs.
- Streaming: Paid subscribers at quarter-end were 129.8 million for Disney+, 21.3 million for ESPN+, and 45.3 million for Hulu. DTC revenue increased 34% to $4.690 billion, while costs and expenses grew and the operating loss widened.
- Reported earnings items: Other expense of $436 million included a $432 million non-cash loss from marking the DraftKings investment to fair value. The prior-year quarter included a $186 million DraftKings loss offset by a $186 million fuboTV gain. Continuing operations also included $595 million of TFCF and Hulu acquisition amortization. Discontinued operations included a $58 million loss on the November 2021 sale of the Fox sports media business in Mexico.
Financial position, cash flow and liquidity
- At January 1, 2022, cash and cash equivalents were $14.444 billion, down from $15.959 billion at October 2, 2021. Total current assets were $32.913 billion and current liabilities were $30.037 billion.
- Borrowings totaled $54.132 billion, comprising $6.783 billion current and $47.349 billion long-term. Cash used in continuing operating activities was $209 million; continuing investing activities used $987 million and financing activities used $280 million. Cash, cash equivalents and restricted cash decreased $1.515 billion during the quarter.
- Disney reported $12.25 billion of unused bank-facility capacity and said it met its interest-coverage covenant by a significant margin. Management described its financial condition as strong and liquidity resources as adequate for operations, debt maturities and planned investment.
- No dividend had been declared or paid for FY2022 as of the filing. The company said it might continue not to declare dividends and could take other cash-preservation actions depending on COVID-19 impacts.
Outlook, commentary and risks
- Management expected FY2022 produced and licensed content spending, including sports rights, to be as much as approximately $33 billion, compared with $25 billion in FY2021; the increase supports DTC expansion and assumes no significant production disruptions from COVID-19.
- FY2022 capital expenditures were expected to be approximately $6.1 billion, versus $3.6 billion in FY2021, driven by cruise-ship fleet expansion, corporate facilities, and DMED production facilities and technology.
- COVID-19 remained a key uncertainty: international park capacity and travel restrictions continued, production could be disrupted, and future impacts depended on the pandemic’s duration and severity and related public responses. Disney also cited potential effects on content costs, revenues, asset valuations and cash flows.
- Other disclosed sensitivities include subscriber and advertising trends, sports-rights and production costs, theatrical performance, foreign exchange, interest rates, investment valuations and estimates for content amortization and impairment. The filing reported no material change in risk factors from the FY2021 Form 10-K.
- Disney disclosed ongoing legal matters but said management did not believe the company had incurred a probable material loss from them. Unrecognized tax benefits were approximately $2.6 billion; a reduction of about $0.3 billion over the next 12 months was reasonably possible as tax matters are resolved.
Important facts for investors to verify
- Whether parks’ recovery and international reopening conditions continue to support DPEP revenue and profitability.
- Whether DTC subscriber growth and pricing improvements can offset rising programming, production, technology and marketing costs and narrow the segment’s losses.
- Whether DMED’s weaker segment income persists, particularly in Linear Networks and Content Sales/Licensing.
- Actual FY2022 content spending and capital expenditures versus management’s stated estimates, and their effect on operating cash flow and liquidity.
- COVID-19-related disruptions, debt maturities and the timing and potential cost of Hulu’s contractual redemption arrangements, including the guaranteed floor value described in the filing.