Walt Disney Co. 10-Q Summary
Business context and reporting period. The filing covers the fiscal third quarter ended July 2, 2022, and the nine months ended that date. Disney reports two segments: Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP). Comparisons are with the quarter and nine-month period ended July 3, 2021. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $21,504, up 26% | $62,572, up 28% |
| Income from continuing operations before tax | $2,119, versus $995 | $4,909, versus $2,271 |
| Net income attributable to Disney | $1,409, versus $918 | $2,983, versus $1,836 |
| Diluted continuing-operations EPS | $0.77, versus $0.50 | $1.66, versus $1.02 |
| Segment operating income | $3,567, up 50% | $10,524, up 70% |
| Operating cash flow from continuing operations | Not separately reported in the supplied filing text | $3,478, versus $2,934 |
Nine-month segment revenue was $63,595 before a $1,023 reduction for early termination of prior content licenses; reported consolidated revenue was $62,572. Segment operating income is a non-GAAP measure, reconciled in the filing to pretax income.
Segment performance. In the quarter, DMED revenue rose 11% to $14,110 while operating income fell 32% to $1,381. DPEP revenue rose 70% to $7,394 and operating income increased to $2,186 from $356. Direct-to-Consumer (DTC), within DMED, generated $5,058 of quarterly revenue and an operating loss of $1,061, compared with a $293 loss a year earlier. For the nine months, DTC revenue rose 25% to $14,651 while its operating loss widened to $2,541 from $1,049.
Cash, debt and liquidity. At July 2, cash and cash equivalents were $12,959, down from $15,959 at October 2, 2021. Total borrowings were $51,602, including $5,580 current and $46,022 long-term, versus $54,406 at the prior fiscal year-end. Current assets of $31,422 exceeded current liabilities of $30,704 by $718. Nine-month investing cash use was $3,872, including $3,795 for parks, resorts and other property; financing cash use was $2,247. Operating cash flow less property investment was negative $317 for the period.
Disney reported $12,250 of unused committed bank-facility capacity and said it met its interest-coverage covenant by a significant margin. Management described the company’s financial condition as strong and its available cash, operating cash flow, market access and facilities as adequate to fund operations, debt maturities and planned investment. Disney had not declared or paid a dividend for fiscal 2022.
Material changes versus the prior comparable periods
- Parks recovery drove earnings growth. DPEP’s results benefited from higher attendance, guest spending and hotel occupancy as domestic parks largely operated without significant COVID-related capacity restrictions. Prior-year comparisons also included closures or restricted operations at several parks and suspended cruise sailings.
- Streaming growth came with higher losses. Quarterly DTC subscription revenue increased 23%; paid subscriptions at quarter-end were 152.1 million for Disney+ including Hotstar, 22.8 million for ESPN+ and 46.2 million for Hulu. Higher programming, production, technology and marketing costs contributed to the larger DTC loss.
- DMED operating income declined. Quarterly linear networks income improved, but DTC losses widened and content sales/licensing moved from $132 of income to a $27 loss. Nine-month DMED operating income fell 35%, mainly reflecting increased DTC losses and weaker content sales/licensing results.
- Non-operating items affected comparisons. Nine-month results included a $726 non-cash loss on the DraftKings investment, compared with a $98 loss in the prior period, which had also included gains from the sales of fuboTV and a German free-to-air television interest. The current period’s $1,023 content-license termination adjustment reduced reported revenue.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2022 spending on produced and licensed content, including sports rights, to be approximately $30 billion, about $5 billion above fiscal 2021. It expected capital expenditures of approximately $5.0 billion, versus $3.6 billion in fiscal 2021, primarily for cruise-ship expansion and corporate facilities. These are spending expectations, not earnings guidance.
- Disney paused certain Russia operations in March 2022. Those businesses generated approximately 2% of company operating income; the nine-month period included $237 of charges, primarily impairment of Russia-related assets. Further exit charges were possible but not expected to be material.
- COVID-19 continued to affect certain international parks through closures, capacity limits and travel restrictions. Management noted possible ongoing production disruptions, added health and safety costs, and uncertainty around future operating and financial effects.
- Disney’s $8.6 billion recorded redeemable noncontrolling interest in Hulu reflects the agreement under which NBCUniversal may require Disney to purchase its stake beginning in January 2024, at the greater of fair value or a guaranteed floor value for Hulu of $27.5 billion. Management’s estimate of future redemption value involves significant judgment.
- The company disclosed $2.4 billion of gross unrecognized tax benefits; it said these could decrease by $0.1 billion in the next 12 months as tax matters are resolved. Disney stated it did not believe the legal actions described had resulted in a probable material loss.
- Results are subject to seasonality and uncertainties including COVID-19, production and sports-programming availability, foreign exchange, subscriber and advertising trends, content performance, and estimates used for content amortization and impairment. The filing said there had been no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether DTC subscriber growth and pricing can improve profitability as programming, production and marketing costs rise.
- Whether park attendance, guest spending and international operations remain resilient, particularly amid COVID-related restrictions and travel uncertainty.
- Progress against the approximately $30 billion content-spending and $5.0 billion capital-expenditure expectations for fiscal 2022, and the resulting effect on cash flow.
- How reported results are affected by the $1,023 content-license termination adjustment and the non-cash DraftKings investment loss.
- Hulu’s valuation and the potential cost and timing of the NBCUniversal stake redemption beginning in 2024.
- Debt, liquidity and cash trends: cash fell by approximately $3.0 billion over the nine-month period, while property investment exceeded operating cash flow by $317 million.