Walt Disney Co. Form 10-Q Summary
Business context and reporting period
Quarterly period ended March 28, 2020, the second quarter and first six months of Disney’s fiscal 2020. Comparisons are with the quarter and six months ended March 30, 2019. Disney’s four reportable segments are Media Networks; Parks, Experiences and Products; Studio Entertainment; and Direct-to-Consumer & International. TFCF (21st Century Fox) and Hulu were consolidated beginning March 20, 2019, making year-over-year comparisons materially affected by the acquisition.
Key financial metrics
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $18.0 billion, up 21% | $38.9 billion, up 29% |
| Segment operating income | $2.4 billion, down 37% | $6.4 billion, down 14% |
| Income from continuing operations | $535 million | $2.7 billion |
| Net income attributable to Disney | $460 million, down 92% | $2.6 billion, down 69% |
| Diluted EPS from continuing operations | $0.26, versus $3.53 | $1.44, versus $5.42 |
Quarterly segment operating income was about 13.4% of revenue, versus 25.6% a year earlier; this is a calculated segment measure, not a reported GAAP operating margin. The prior-year comparison included a $4.9 billion Hulu remeasurement gain. Disney reported no consolidated gross margin.
- Cash flow: Six-month operating cash flow from continuing operations was $4.8 billion, down 20%. Investing activities used $2.6 billion, including $2.6 billion of parks, resorts and other property investment. Operating cash flow less that investment was approximately $2.2 billion.
- Cash and liquidity: Cash and cash equivalents were $14.3 billion at March 28, up from $5.4 billion at September 28, 2019. Current assets were $33.3 billion and current liabilities $35.5 billion. Disney reported $12.25 billion of unused bank facilities at quarter-end and added a $5.0 billion facility in April.
- Debt: Borrowings totaled $55.4 billion, including $12.7 billion classified as current; cash was $14.3 billion. Debt increased from $47.0 billion at fiscal year-end, principally reflecting financing activity. Interest expense, net, was $300 million for the quarter and $583 million for six months.
- Segments: Quarterly Parks, Experiences and Products operating income fell 58% to $639 million; management estimated COVID-19 reduced it by approximately $1.0 billion. Direct-to-Consumer & International reported an $812 million quarterly operating loss, versus $385 million. Media Networks operating income rose 7% to $2.4 billion; Studio Entertainment fell 8% to $466 million.
Material changes versus the prior comparable period
Revenue growth primarily reflected the inclusion of TFCF and Hulu and the launch of Disney+. Yet consolidated earnings fell sharply: the prior-year quarter and six-month period included the $4.9 billion Hulu gain, while current-period results also included higher acquisition-related amortization and interest expense. Six-month amortization of TFCF and Hulu intangible assets and film/television fair-value step-ups was $1.4 billion, versus $105 million in the prior-year period. Segment operating income declined as parks results weakened and DTC losses increased, partly offset by Media Networks and Studio Entertainment contributions.
At March 28, Disney reported 33.5 million Disney+ paid subscribers, 7.9 million ESPN+ subscribers and 32.1 million Hulu subscribers. Following additional launches and the conversion of Hotstar in India, Disney said Disney+ exceeded 50 million paid subscribers; that later figure is subsequent-period information, not the quarter-end count.
Outlook, management commentary, risks and unusual items
- COVID-19: Parks and retail stores were closed, cruise sailings and guided tours suspended, theatrical releases delayed or changed, and most film and television production suspended. Canceled or deferred sports also affected viewership, advertising and affiliate-fee discussions. Management estimated an adverse current-quarter impact of up to $1.4 billion on income from continuing operations before taxes across the company and expected more extensive impacts in the third quarter. It said the duration and future financial effects could not be estimated precisely.
- Mitigation and funding: Disney issued commercial paper and senior notes, entered an additional $5.0 billion credit facility in April, suspended certain capital projects, reduced discretionary spending and temporarily reduced management compensation. It furloughed more than 120,000 employees, who were to continue receiving company-provided medical benefits. The board elected not to declare the dividend payable in July 2020. Further financing, spending cuts, dividend changes and workforce actions remained possible.
- Guidance: The filing provides no earnings or revenue guidance. Management expected fiscal 2020 capital expenditures to be approximately $0.4 billion below fiscal 2019’s $4.9 billion, partly reflecting COVID-related mitigation.
- Credit and accounting risks: Fitch placed Disney’s debt ratings on Negative Outlook; S&P lowered its ratings in April and placed the long-term rating on CreditWatch with negative implications. Management warned of possible additional credit-loss provisions, asset impairments, and changes to content amortization and pension assumptions. The allowance for credit losses on trade receivables was $535 million, compared with $375 million at fiscal year-end.
- Other unusual items and contingencies: The effective tax rate on continuing operations was 49.5% for the quarter and 26.7% for six months; COVID-19 uncertainty led Disney to use a different interim tax calculation. The company recorded $145 million of quarterly restructuring and impairment charges, primarily severance. Management did not believe the disclosed legal actions involved a probable material loss. Disney’s remaining guaranteed Anaheim bond debt-service obligation was $237 million.
Important facts for investors to verify
- How long closures, capacity restrictions and production disruptions persist, and whether the estimated COVID-19 impacts worsen.
- Disney’s cash generation, debt maturities, borrowing costs and credit ratings as it uses financing to support operations.
- Whether parks attendance and spending recover, and whether DTC subscriber growth can reduce the segment’s operating losses without materially weakening legacy licensing revenue.
- Potential changes to receivable collectability, content recoverability, goodwill valuations and pension funding needs.
- The effect of the July 2020 dividend omission and any subsequent capital-spending, financing or workforce decisions.