Business context and reporting period
The Walt Disney Company’s unaudited fiscal third quarter and nine months ended June 27, 2020. Results were heavily affected by COVID-19 closures and disruption. Nine-month comparisons also reflect TFCF and Hulu being consolidated for a longer period in fiscal 2020 than in fiscal 2019.
Financial results and key metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $11,779 | $20,262 | $50,681 | $50,489 |
| Segment operating income | $1,099 | $3,952 | $7,502 | $11,422 |
| Net income (loss) attributable to Disney | $(4,721) | $1,760 | $(2,154) | $10,000 |
| Diluted EPS, total | $(2.61) | $0.97 | $(1.19) | $6.19 |
| Operating cash flow, continuing operations | Not provided for quarter | Not provided for quarter | $5,949 | $4,266 |
- Q3 revenue fell 42%; services revenue declined 38% and products revenue 76%. Nine-month revenue was nearly flat, while segment operating income fell 34%.
- Q3 segment operating income was down 72%. Parks, Experiences and Products reported a $1,960 million operating loss; Direct-to-Consumer & International reported a $706 million loss. Media Networks operating income rose 48% to $3,153 million; Studio Entertainment fell 16% to $668 million.
- Reported Q3 results included $5,047 million of restructuring and impairment charges, primarily $4,953 million of International Channels impairments. The company impaired $3.1 billion of goodwill and $1.9 billion of distribution-agreement intangible assets.
- Nine-month investing cash outflow from continuing operations was $3,320 million, including $3,293 million of parks, resorts and other property investment. Financing activities provided $14,919 million.
- Cash and cash equivalents were $23.1 billion at June 27, 2020, versus $5.4 billion at September 28, 2019. Borrowings totaled $64.4 billion, versus $47.0 billion; current borrowings were $10.2 billion. The company reported $17.25 billion of unused bank facility capacity and said it met its interest-coverage covenant by a significant margin.
- Disney+ had 57.5 million paid subscribers at quarter-end. Hulu had 35.5 million subscribers, including 32.1 million SVOD-only and 3.4 million Live TV + SVOD; ESPN+ had 8.5 million.
Material changes, outlook and risks
- Management estimated COVID-19 reduced segment operating income by approximately $2.9 billion in the quarter and $4.3 billion over nine months. Parks, Experiences and Products alone was adversely affected by approximately $3.5 billion and $4.6 billion, respectively, before considering the company-wide net impact. Management expected COVID-19 to affect results at least through fiscal 2021.
- Parks and resorts were closed or operating at reduced capacity; cruise sailings, guided tours and stage plays were suspended; theatrical releases and content production were delayed or modified. Hong Kong Disneyland reopened in June and closed again in July. Reopenings brought added health and safety costs; Disney estimated these could total about $1 billion over the following 15 months.
- Disney issued senior notes in March and May and added a $5 billion credit facility in April to strengthen liquidity. It suspended certain capital projects and discretionary spending, reduced management compensation, and furloughed over 120,000 employees; approximately 35% had returned from furlough by the end of July.
- The Board did not declare a dividend payable in July 2020 for the first half of fiscal 2020. Management said fiscal 2020 capital expenditures were expected to be approximately $0.7 billion below fiscal 2019’s $4.9 billion.
- Management cited continuing uncertainty around closures, consumer demand, advertising, sports and film availability, refunds, receivable collections, and future impairments. Standard & Poor’s placed the long-term rating on CreditWatch with negative implications and Fitch placed its rating on Negative Outlook.
- Comparability includes unusual items: Q3 included a $382 million non-cash DraftKings gain; prior-year nine-month results included a $4.794 billion Hulu gain. The effective tax rate is unusually affected by the non-deductible International Channels goodwill impairment.
Important facts for investors to verify
- Whether park, resort and cruise operations can reopen and recover attendance, occupancy and customer spending without renewed closures or materially higher safety costs.
- Whether streaming subscriber growth can translate into improved profitability, given Direct-to-Consumer & International’s increased operating loss and Disney’s planned international expansion.
- How long COVID-19 disrupts sports, film and television production, advertising, theatrical releases and affiliate relationships, and whether management’s estimated impacts remain representative.
- Debt, liquidity and ratings trends, including financing needs, debt maturities, covenant headroom and the effect of the suspended dividend and reduced capital spending.
- Whether the International Channels impairment assumptions, receivables allowance and other COVID-sensitive asset and pension estimates require further changes.