Business context and reporting period
The Walt Disney Company’s unaudited Form 10-Q covers the quarter ended January 2, 2021, compared with the quarter ended December 28, 2019. The comparison reflects the substantial effects of COVID-19. Disney reorganized its media and entertainment businesses into Disney Media and Entertainment Distribution (DMED) and recast prior-period segment results; Parks, Experiences and Products (DPEP) remained a separate segment.
Financial performance and position
| Metric | Quarter ended Jan. 2, 2021 | Prior comparable quarter |
|---|---|---|
| Revenue | $16.249 billion | $20.877 billion |
| Income from continuing operations before tax | $46 million | $2.626 billion |
| Net income attributable to Disney | $17 million | $2.107 billion |
| Diluted EPS from continuing operations | $0.02 | $1.17 |
| Cash from continuing operations | $75 million | $1.630 billion |
| Capital expenditures | $760 million | $1.338 billion |
- Revenue fell 22%; Disney-attributable net income fell approximately 99%. Total segment operating income decreased 67%, to $1.332 billion from $3.996 billion.
- DMED revenue was $12.661 billion, down 5%, and segment operating income was $1.451 billion, down 2%. DTC revenue rose 73% to $3.504 billion; its operating loss narrowed to $466 million from $1.110 billion. Linear Networks operating income declined 4% to $1.729 billion. Content Sales/Licensing and Other operating income fell 76% to $188 million.
- DPEP revenue dropped 53% to $3.588 billion, and the segment recorded a $119 million operating loss versus $2.522 billion of income. Management estimated COVID-19 reduced current-quarter DPEP operating income by approximately $2.6 billion, net of mitigation savings.
- Consolidated pretax margin was approximately 0.3% versus 12.6% in the prior comparable quarter, calculated from reported pretax income and revenue. Disney reported $113 million of restructuring and impairment charges and $617 million of TFCF and Hulu acquisition amortization. A non-cash $186 million gain on the fuboTV investment was offset by a $186 million non-cash loss on DraftKings.
- Cash and cash equivalents were $17.068 billion at quarter-end, down from $17.914 billion at October 3, 2020. Total borrowings were $58.275 billion, including $5.397 billion current and $52.878 billion long-term. Unused bank-facility capacity was $17.250 billion; the company said it met its interest-coverage covenant by a significant margin.
- Current assets were $34.874 billion and current liabilities $26.546 billion. Total assets were $201.888 billion and total equity $88.728 billion. Cash from continuing operations less capital expenditures was approximately negative $685 million, a simple calculation from reported figures.
Material changes and management commentary
- COVID-19 closures and capacity limits sharply reduced park admissions, hotel and vacation revenue, merchandise sales, and cruise activity. Disneyland Resort and Disney’s cruise business were closed or suspended for the entire quarter; several other parks operated at reduced capacity or closed during the period.
- Theatrical releases and stage performances were delayed, shortened, canceled, or suspended. Theatrical distribution revenue fell 98%. Lower film release activity reduced related amortization, marketing, and distribution costs.
- Streaming growth was significant: paid subscribers at quarter-end were Disney+ 94.9 million, ESPN+ 12.1 million, and Hulu 39.4 million. Disney+ average monthly revenue per paid subscriber declined 28% to $4.03, largely due to the lower-revenue Disney+ Hotstar mix.
- Management expected COVID-19 to adversely affect results at least through fiscal 2021 and estimated approximately $1 billion of fiscal 2021 incremental health and safety costs. Disney expected fiscal 2021 capital expenditures to be comparable to fiscal 2020’s $4.0 billion.
- Management stated that cash, liquid assets, operating cash flow, capital-market access, and borrowing capacity together were adequate for operating needs, debt maturities, and investment plans, while noting continued uncertainty and potential reliance on external financing. Disney paid no dividend with respect to fiscal 2020 operations.
- The effective tax rate on continuing operations was 34.8%, versus 17.4%; management attributed the increase principally to foreign losses for which no tax benefit could be recognized, partly offset by employee share-based award tax benefits. Because COVID-19 made full-year earnings estimates uncertain, the interim tax provision used a statutory-rate-based method.
Risks, contingencies, and unusual items
- Key risks include the uncertain duration and recurrence of COVID-19 disruptions; restrictions, guest demand, content-production interruptions, sports availability, and added safety costs; and possible changes in customer behavior, advertising, affiliate subscriptions, and payment timing.
- Management warned that reduced cash flow, elevated leverage, further credit-rating downgrades, asset impairments, and greater uncertainty in receivable collectability could adversely affect results. At quarter-end, trade accounts receivable were $14.2 billion with a $0.3 billion allowance for credit losses.
- Credit ratings were Moody’s A2/P-1, S&P BBB+/A-2, and Fitch A-/F2; S&P and Fitch had negative outlooks on long-term ratings. The filing notes that leverage had increased following the TFCF acquisition and the pandemic’s impact.
- Disney reported various legal proceedings but said management did not believe any involved a probable material loss. It guaranteed up to $232 million of remaining debt service obligations related to Anaheim infrastructure bonds; tax revenues had exceeded debt service to date.
- Other potential exposures include future pension contributions, tax matters, content-cost and goodwill impairment judgments, and foreign-exchange, interest-rate, and LIBOR-transition risks. Management expected fiscal 2021 pension and postretirement contributions of approximately $0.5–$0.6 billion.
Important facts for investors to verify
- Whether park capacity, cruise operations, and theatrical and television production recover as assumed, and how actual COVID-related costs compare with management’s estimates.
- Whether DTC subscriber growth can translate into improved profitability, including the effects of subscriber mix, content spending, and average revenue per subscriber.
- Cash generation, debt maturities, borrowing costs, ratings outlooks, and continued access to credit facilities and capital markets.
- Whether content licensing shifts, sports-rights costs, and release timing affect future revenue and content-asset amortization or impairment.
- Whether restructuring, pension funding, credit losses, tax exposures, and other contingencies develop materially differently from management’s estimates.
This is an interim quarter; Disney cautioned that results are not necessarily indicative of the full fiscal year, and seasonality also affects its businesses.