MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, the impact of COVID-19 on our businesses and operations, results of operations and competition. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report. These statements are subject to known and unknown risks, uncertainties and other factors, including those described in “Risk Factors” in our 2021 Annual Report on Form 10-K, that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. You should not place undue reliance on the forward-looking statements. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
•Consolidated Results
•Significant Developments
•Current Quarter Results Compared to Prior-Year Quarter
•Current Period Results Compared to Prior-Year Period
•Seasonality
•Business Segment Results
•Corporate and Unallocated Shared Expenses
•Financial Condition
•Supplemental Guarantor Financial Information
•Commitments and Contingencies
•Other Matters
•Market Risk
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
CONSOLIDATED RESULTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) | | Six Months Ended | | % Change
Better
(Worse) |
| (in millions, except per share data) | April 2,
2022 | | April 3,
2021 | | | April 2,
2022 | | April 3,
2021 | |
| Revenues: | | | | | | | | | | | |
| Services | $ | 17,212 | | | $ | 14,522 | | | 19 % | | $ | 36,754 | | | $ | 29,393 | | | 25 % |
| Products | 2,037 | | | 1,091 | | | 87 % | | 4,314 | | | 2,469 | | | 75 % |
| Total revenues | 19,249 | | | 15,613 | | | 23 % | | 41,068 | | | 31,862 | | | 29 % |
| Costs and expenses: | | | | | | | | | | | |
| Cost of services (exclusive of depreciation and amortization) | (11,330) | | | (8,932) | | | (27) % | | (24,491) | | | (19,670) | | | (25) % |
| Cost of products (exclusive of depreciation and amortization) | (1,264) | | | (850) | | | (49) % | | (2,670) | | | (1,887) | | | (41) % |
| Selling, general, administrative and other | (3,768) | | | (3,113) | | | (21) % | | (7,555) | | | (6,030) | | | (25) % |
| Depreciation and amortization | (1,287) | | | (1,272) | | | (1) % | | (2,556) | | | (2,570) | | | 1 % |
| Total costs and expenses | (17,649) | | | (14,167) | | | (25) % | | (37,272) | | | (30,157) | | | (24) % |
| Restructuring and impairment charges | (195) | | | (414) | | | 53 % | | (195) | | | (527) | | | 63 % |
| Other income (expense), net | (158) | | | 305 | | | nm | | (594) | | | 305 | | | nm |
| Interest expense, net | (355) | | | (320) | | | (11) % | | (666) | | | (644) | | | (3) % |
| Equity in the income of investees | 210 | | | 213 | | | (1) % | | 449 | | | 437 | | | 3 % |
| Income from continuing operations before income taxes | 1,102 | | | 1,230 | | | (10) % | | 2,790 | | | 1,276 | | | >100 % |
| Income taxes on continuing operations | (505) | | | (108) | | | >(100) % | | (993) | | | (124) | | | >(100) % |
| Net income from continuing operations | 597 | | | 1,122 | | | (47) % | | 1,797 | | | 1,152 | | | 56 % |
| Loss from discontinued operations, net of income tax benefit of $0, $3, $14 and $7, respectively | — | | | (11) | | | — % | | (48) | | | (23) | | | >(100) % |
| Net income | 597 | | | 1,111 | | | (46) % | | 1,749 | | | 1,129 | | | 55 % |
| Net income from continuing operations attributable to noncontrolling interests | (127) | | | (210) | | | 40 % | | (175) | | | (211) | | | 17 % |
| | | | | | | | | | | |
| Net income attributable to Disney | $ | 470 | | | $ | 901 | | | (48) % | | $ | 1,574 | | | $ | 918 | | | 71 % |
| Diluted earnings per share from continuing operations attributable to Disney | $ | 0.26 | | | $ | 0.50 | | | (48) % | | $ | 0.89 | | | $ | 0.52 | | | 71 % |
SIGNIFICANT DEVELOPMENTS
COVID-19 Pandemic
Since early 2020, the world has been, and continues to be, impacted by COVID-19 and its variants. COVID-19 and measures to prevent its spread have impacted our segments in a number of ways, most significantly at the DPEP segment where our theme parks and resorts were closed and cruise ship sailings and guided tours were suspended. These operations resumed at various points since May 2020, initially at reduced operating capacities as a result of COVID-19 restrictions. In fiscal 2020 and 2021, we delayed, or in some cases, shortened or canceled, theatrical releases. In addition, we experienced significant disruptions in the production and availability of content, including the delay of key live sports programming during fiscal 2020 and fiscal 2021.
The most significant impact on operating income since the onset of COVID-19 has been at the DPEP segment due to revenue lost. In fiscal 2022, our domestic parks and resorts are generally operating without significant COVID-19-related capacity restrictions, such as those that were in place during the prior year. Certain of our international parks and resorts and cruise ship operations continue to be impacted by COVID-19-related closures and capacity and travel restrictions. At the DMED segment, our film and television productions have generally resumed, although we have seen disruptions of production activities depending on local circumstances. We have generally been able to release our films theatrically in the first half of fiscal 2022, although certain markets continue to impose restrictions on theater openings and capacity.
We have incurred, and will continue to incur, costs to address government regulations and the safety of our employees, guests and talent, of which certain costs are capitalized and will be amortized over future periods.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The impact of the disruptions on our businesses and costs to address government regulations and the safety of our employees, guests and talent (and the extent of their adverse impact on our financial and operational results) will depend on the length of time that such disruptions continue. This will, in turn, depend on the duration and severity of the impacts of COVID-19 and its variants, and among other things, the impact and duration of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward.
CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER
Revenues for the quarter increased 23%, or $3.6 billion, to $19.2 billion; net income attributable to Disney decreased to $0.5 billion from $0.9 billion; and diluted earnings per share from continuing operations attributable to Disney (EPS) was $0.26 compared to $0.50 in the prior-year quarter. The EPS decrease for the quarter was due to the reduction in revenue for the Content License Early Termination, a higher effective income tax rate and investment losses in the current quarter compared to investment gains in the prior-year quarter. These decreases were partially offset by higher segment operating results due to growth at DPEP, partially offset by lower operating results at DMED.
Revenues
Service revenues for the quarter increased 19%, or $2.7 billion, to $17.2 billion due to increased revenues at our theme parks and resorts, higher DTC subscription revenue and advertising revenue growth. The increase at theme parks and resorts was due to higher volumes, which reflected the impact of operating with capacity restrictions in the prior-year quarter as a result of COVID-19, and higher average per capita ticket revenue. The increase in subscription revenue was due to subscriber growth at Disney+, Hulu and ESPN+ and higher average rates at Disney+ and Hulu. These increases were partially offset by the reduction in revenue for the Content License Early Termination, and, to a lesser extent, lower sales of episodic television and film content.
Product revenues for the quarter increased 87%, or $0.9 billion, to $2.0 billion due to higher merchandise, food and beverage sales at our theme parks and resorts.
Costs and expenses
Cost of services for the quarter increased 27%, or $2.4 billion, to $11.3 billion due to higher programming and production costs, increased volumes at our theme parks and resorts and, to a lesser extent, higher technical support costs at Direct-to-Consumer. The increase in programming and production costs was due to higher costs at Disney+ primarily due to more content provided on the service, increased sports programming costs and higher subscriber-based fees at Hulu, partially offset by a decrease in production cost amortization due to lower TV/SVOD sales.
Cost of products for the quarter increased 49%, or $0.4 billion, to $1.3 billion due to higher merchandise, food and beverage sales at our theme parks and resorts.
Selling, general, administrative and other costs increased 21%, or $0.7 billion, to $3.8 billion due to higher marketing costs at our direct-to-consumer and parks and experiences businesses.
Restructuring and impairment charges
In March 2022, in response to events in Russia and Ukraine, the Company announced a pause of its operations in Russia, which include theatrical distribution and other licensing businesses and the distribution of the Disney Channel in Russia. These business generate approximately two percent of the Company’s operating income. In the current quarter, the Company recorded charges of $195 million due to the impairment of an intangible asset related to the Disney Channel in Russia. We may incur additional charges to exit these businesses, which are not anticipated to be material.
In the prior-year quarter, the Company recorded charges of $414 million due to asset impairments and severance costs related to the planned closure of an animation studio and a substantial number of our Disney-branded retail stores as well as severance costs at our parks and resorts businesses.
Other income (expense), net
Other expense in the current quarter reflects the DraftKings loss of $158 million. Other income in the prior-year quarter reflects the DraftKings gain of $305 million.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Interest expense, net
Interest expense, net is as follows:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | |
| (in millions) | April 2,
2022 | | April 3,
2021 | | % Change
Better (Worse) |
| Interest expense | $ | (374) | | | $ | (415) | | | 10 % |
| Interest income, investment income and other | 19 | | | 95 | | | (80) % |
| | | | | |
| Interest expense, net | $ | (355) | | | $ | (320) | | | (11) % |
The decrease in interest expense was due to lower average debt balances and higher capitalized interest.
The decrease in interest income, investment income and other was due to investment losses in the current quarter compared to investment gains in the prior-year quarter. This decrease was partially offset by a favorable comparison of pension and postretirement benefit costs, other than service cost, which was a benefit in the current quarter and an expense in the prior-year quarter.
Effective Income Tax Rate
| | | | | | | | | | | | | | |
| Quarter Ended | | |
| April 2,
2022 | | April 3,
2021 | | | |
| Income from continuing operations before income taxes | $ | 1,102 | | $ | 1,230 | | |
| Income tax on continuing operations | 505 | | 108 | |
| Effective income tax rate - continuing operations | 45.8% | | 8.8% | | | |
The effective income tax rate in the current quarter was higher than the U.S. statutory rate primarily due to higher effective tax rates on foreign earnings, including the impact of tax regulations issued in the current quarter that limit our ability to utilize certain foreign tax credits. The effective income tax rate in the prior-year quarter was lower than the U.S. statutory rate due to the favorable resolution of various tax matters and excess tax benefits on employee share-based awards, partially offset by higher effective tax rates on foreign earnings. Higher effective tax rates on foreign earnings in both the current and prior-year quarters reflected the impact of foreign losses and foreign tax credits for which we are unable to recognize a tax benefit.
Noncontrolling Interests
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | |
| (in millions) | April 2,
2022 | | April 3,
2021 | | % Change
Better (Worse) |
| Net income from continuing operations attributable to noncontrolling interests | $ | (127) | | $ | (210) | | 40 % |
The decrease in net income from continuing operations attributable to noncontrolling interests was driven by higher losses at our DTC sports business.
Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable.
Certain Items Impacting Results in the Quarter
Results for the quarter ended April 2, 2022 were impacted by the following:
•A $1.0 billion reduction in revenue for the Content License Early Termination
•TFCF and Hulu acquisition amortization of $594 million
•Impairment charges of $195 million
•Other expense of $158 million due to the DraftKings loss
Results for the quarter ended April 3, 2021 were impacted by the following:
•TFCF and Hulu acquisition amortization of $605 million
•Restructuring and impairment charges of $414 million
•Other income of $305 million due to the DraftKings gain
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
A summary of the impact of these items on EPS is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | Pre-Tax Income (Loss) | | Tax Benefit (Expense)(1) | | After-Tax Income (Loss) | | EPS Favorable (Adverse)(2) |
| Quarter Ended April 2, 2022: | | | | | | | |
| Content License Early Termination | $ | (1,023) | | $ | 238 | | | $ | (785) | | | $ | (0.43) | |
| TFCF and Hulu acquisition amortization | (594) | | 138 | | | (456) | | | (0.24) | |
| Restructuring and impairment charges | (195) | | 45 | | | (150) | | | (0.08) | |
| DraftKings Loss | (158) | | 37 | | | (121) | | | (0.07) | |
| | | | | | | |
| Total | $ | (1,970) | | $ | 458 | | | $ | (1,512) | | | $ | (0.82) | |
| | | | | | | |
| Quarter Ended April 3, 2021: | | | | | | | |
| TFCF and Hulu acquisition amortization | $ | (605) | | $ | 141 | | | $ | (464) | | | $ | (0.24) | |
| Restructuring and impairment charges | (414) | | 97 | | | (317) | | | (0.17) | |
| DraftKings Gain | 305 | | (71) | | | 234 | | | 0.13 | |
| | | | | | | |
| | | | | | | |
| Total | $ | (714) | | $ | 167 | | | $ | (547) | | | $ | (0.28) | |
(1)Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item.
(2)EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.
CURRENT SIX-MONTH PERIOD RESULTS COMPARED TO PRIOR-YEAR SIX-MONTH PERIOD
Revenues for the current period increased $9.2 billion, to $41.1 billion; net income attributable to Disney increased $0.7 billion, to $1.6 billion; and EPS was $0.89 compared to $0.52 in the prior-year period. The EPS increase was due to higher segment operating results reflecting growth at DPEP, partially offset by lower operating results at DMED. The increase in segment operating results was partially offset by the reduction in revenue for the Content License Early Termination, a higher effective income tax rate and investment losses in the current period compared to investment gains in the prior-year period.
Revenues
Service revenues for the current period increased 25%, or $7.4 billion, to $36.8 billion, due to increased revenues at our theme parks and resorts, higher DTC subscription revenue and, to a lesser extent, higher theatrical distribution and advertising revenue. The increase at theme parks and resorts was due to higher volumes, which reflected the impact of operating with capacity restrictions in the prior-year period as a result of COVID-19, and higher average per capita ticket revenue. The increase in subscription revenue was due to subscriber growth at Disney+, Hulu and ESPN+ and higher average rates at Disney+, Hulu and, to a lesser extent, ESPN+. These increases were partially offset by the reduction in revenue for the Content License Early Termination.
Product revenues for the current period increased 75%, or $1.8 billion, to $4.3 billion, due to higher merchandise, food and beverage sales at our theme parks and resorts.
Costs and expenses
Cost of services for the current period increased 25%, or $4.8 billion, to $24.5 billion, due to higher programming and production costs, increased volumes at our theme parks and resorts and, to a lesser extent, higher technical support expenses at Direct-to-Consumer. The increase in programming and production costs was due to higher costs at Disney+ primarily due to more content provided on the service, increased sports programming costs, higher subscriber-based fees at Hulu and, to a lesser extent, higher production cost amortization due to theatrical revenue growth.
Cost of products for the current period increased 41%, or $0.8 billion, to $2.7 billion, due to higher merchandise, food and beverage sales at our theme parks and resorts.
Selling, general, administrative and other costs for the current period increased 25%, or $1.5 billion, to $7.6 billion, due to higher marketing costs at our direct-to-consumer, theatrical distribution and, to a lesser extent, parks and experiences businesses.
Restructuring and impairment charges
In the current period, the Company recorded charges of $195 million due to the impairment of an intangible asset related to the Disney Channel in Russia.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
In the prior-year period, the Company recorded charges of $527 million due to asset impairments and severance costs primarily related to the planned closure of an animation studio and a substantial number of our Disney-branded retail stores as well as severance costs at our other businesses.
Other income (expense), net
Other expense in the current period reflects the DraftKings loss of $590 million. Other income in the prior-year period reflects the fuboTV gain of $186 million and DraftKings gain of $119 million.
Interest expense, net
Interest expense, net is as follows:
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | |
| (in millions) | April 2,
2022 | | April 3,
2021 | | % Change
Better (Worse) |
| Interest expense | $ | (735) | | | $ | (819) | | | 10 % |
| Interest income, investment income and other | 69 | | | 175 | | | (61) % |
| Interest expense, net | $ | (666) | | | $ | (644) | | | (3) % |
The decrease in interest expense was due to lower average debt balances and higher capitalized interest.
The decrease in interest income, investment income and other was due to investment losses in the current period compared to investment gains in the prior-year period. This decrease was partially offset by a favorable comparison of pension and postretirement benefits costs, other than service cost, which was a benefit in the current period and expense in the prior-year period.
Effective Income Tax Rate
| | | | | | | | | | | | | | |
| Six Months Ended | | |
| April 2,
2022 | | April 3,
2021 | | | |
| Income from continuing operations before income taxes | $ | 2,790 | | | $ | 1,276 | | | |
| Income tax on continuing operations | 993 | | | 124 | | |
| Effective income tax rate - continuing operations | 35.6 | % | | 9.7 | % | | | |
The effective income tax rate in the current period was higher than the U.S. statutory rate primarily due to higher effective tax rates on foreign earnings, including the impact of tax regulations issued in the current quarter that limit our ability to utilize certain foreign tax credits, and unfavorable adjustments related to prior years. The effective income tax rate in the prior-year period was lower than the U.S. statutory rate due to the favorable adjustments related to years prior to fiscal 2021 and excess tax benefits on employee share-based awards, partially offset by higher effective tax rates on foreign earnings. Higher effective tax rates on foreign earnings in both the current and prior-year periods reflected the impact of foreign losses and foreign tax credits for which we are unable to recognize a tax benefit.
Noncontrolling Interests
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | |
| (in millions) | April 2,
2022 | | April 3,
2021 | | % Change
Better (Worse) |
| Net income from continuing operations attributable to noncontrolling interests | $ | (175) | | $ | (211) | | 17 % |
The decrease in net income from continuing operations attributable to noncontrolling interests for the current period was due to higher losses at our DTC sports business.
Certain Items Impacting Results in the Year
Results for the six months ended April 2, 2022 were impacted by the following:
•A $1.0 billion reduction in revenue for the Content License Early Termination
•TFCF and Hulu acquisition amortization of $1,189 million
•Impairment charges of $195 million
•Other expense of $594 million due to the DraftKings loss
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Results for the six months ended April 3, 2021 were impacted by the following:
•TFCF and Hulu acquisition amortization of $1,222 million
•Restructuring and impairment charges of $527 million
•Other income of $305 million due to the fuboTV gain of $186 million and DraftKings gain of $119 million
A summary of the impact of these items on EPS is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | Pre-Tax Income (Loss) | | Tax Benefit (Expense)(1) | | After-Tax Income (Loss) | | EPS Favorable (Adverse)(2) |
| Six Months Ended April 2, 2022: | | | | | | | |
| Content License Early Termination | $ | (1,023) | | $ | 238 | | | $ | (785) | | | $ | (0.43) | |
| TFCF and Hulu acquisition amortization | (1,189) | | 277 | | | (912) | | | (0.49) | |
| Other income (expense), net | (594) | | 138 | | | (456) | | | (0.25) | |
| Restructuring and impairment charges | (195) | | 45 | | | (150) | | | (0.08) | |
| | | | | | | |
| | | | | | | |
| Total | $ | (3,001) | | $ | 698 | | | $ | (2,303) | | | $ | (1.25) | |
| | | | | | | |
| Six Months Ended April 3, 2021: | | | | | | | |
| | | | | | | |
| TFCF and Hulu acquisition amortization | $ | (1,222) | | $ | 285 | | | $ | (937) | | | $ | (0.50) | |
| Restructuring and impairment charges | (527) | | 124 | | | (403) | | | (0.22) | |
| Other income (expense), net | 305 | | (71) | | | 234 | | | 0.13 | |
| | | | | | | |
| | | | | | | |
| Total | $ | (1,444) | | $ | 338 | | | $ | (1,106) | | | $ | (0.59) | |
(1)Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item.
(2)EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.
SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the six months ended April 2, 2022 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
DMED revenues are subject to seasonal advertising patterns, changes in viewership and subscriber levels, timing and performance of film releases in the theatrical and home entertainment markets, timing of and demand for film and television programs, and the availability of and demand for sports programming. In general, domestic advertising revenues are typically somewhat higher during the fall and somewhat lower during the summer months. In addition, advertising revenues generated from sports programming are impacted by the timing of sports seasons and events, which varies throughout the year or may take place periodically (e.g. biannually, quadrennially). Affiliate revenues vary with the subscriber trends of multi-channel video programming distributors (i.e. cable, satellite telecommunications and digital over-the-top service providers). Theatrical release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
DPEP revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities, which generally results in higher revenues during the Company’s first and fourth fiscal quarters. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early winter and spring holiday periods. Consumer products revenue fluctuates with consumer purchasing behavior, which generally results in higher revenues during the Company’s first fiscal quarter due to the winter holiday season and in the fourth quarter due to back-to-school. In addition, licensing revenues fluctuate with the timing and performance of our film and television content.
BUSINESS SEGMENT RESULTS
Below is a discussion of the major revenue and expense categories for our business segments. Costs and expenses for each segment consist of operating expenses, selling, general, administrative and other costs, and depreciation and amortization. Selling, general, administrative and other costs include third-party and internal marketing expenses.
Our DMED segment primarily generates revenue across three significant lines of business/distribution platforms: Linear Networks, Direct-to-Consumer and Content Sales/Licensing. Programming and production costs are generally allocated across these businesses based on the estimated relative value of the distribution windows. Programming and production costs to support these businesses/distribution platforms are largely incurred across three content creation groups: Studios, General Entertainment and Sports. Programming and production costs include amortization of acquired licensed programming rights
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
(including sports rights), amortization of capitalized production costs (including participations and residuals) and production costs related to live programming such as news and sports. Costs for initial marketing campaigns are generally recognized in the distribution platform of initial exploitation.
The Linear Networks business generates revenue from affiliate fees and advertising sales and from fees from sub-licensing of sports programming to third parties. Operating expenses include programming and production costs, technical support costs, operating labor and distribution costs.
The Direct-to-Consumer business generates revenue from subscription fees, advertising sales and pay-per-view and Premier Access fees. Operating expenses include programming and production costs, technology support costs, operating labor and distribution costs. Operating expenses also includes fees paid to Linear Networks for the right to air the linear network feeds and other services.
The Content Sales/Licensing business generates revenue from the sale of film and episodic television content in the TV/SVOD and home entertainment markets, distribution of films in the theatrical market, licensing of our music rights, sales of tickets to stage play performances and licensing of our IP for use in stage plays. Operating expenses include programming and production costs, distribution expenses and costs of sales.
Our DPEP segment primarily generates revenue from the sale of admissions to theme parks, the sale of food, beverage and merchandise at our theme parks and resorts, charges for room nights at hotels, sales of cruise vacations, sales and rentals of vacation club properties, royalties from licensing our IP for use on consumer goods and the sale of branded merchandise. Revenues are also generated from sponsorships and co-branding opportunities, real estate rent and sales, and royalties from Tokyo Disney Resort. Significant expenses include operating labor, costs of goods sold, infrastructure costs, depreciation and other operating expenses. Infrastructure costs include information systems expense, repairs and maintenance, utilities and fuel, property taxes, retail occupancy costs, insurance and transportation. Other operating expenses include costs for such items as supplies, commissions and entertainment offerings.
The Company evaluates the performance of its operating segments based on segment operating income, and management uses total segment operating income as a measure of the overall performance of the operating businesses separate from non-operating factors. Total segment operating income is not a financial measure defined by GAAP, should be reviewed in conjunction with the relevant GAAP financial measure and may not be comparable to similarly titled measures reported by other companies. The Company believes that information about total segment operating income assists investors by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from factors other than business operations that affect net income, thus providing separate insight into both operations and other factors that affect reported results.
The following table reconciles total revenues to segment revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | | | April 2,
2022 | | April 3,
2021 | |
| Total revenues | $ | 19,249 | | | $ | 15,613 | | | 23 % | | $ | 41,068 | | | $ | 31,862 | | | 29 % |
| Content License Early Termination | 1,023 | | | — | | | nm | | 1,023 | | | — | | | nm |
| Segment revenues | $ | 20,272 | | | $ | 15,613 | | | 30 % | | $ | 42,091 | | | $ | 31,862 | | | 32 % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The following table reconciles income from continuing operations before income taxes to total segment operating income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | | | April 2,
2022 | | April 3,
2021 | |
| Income from continuing operations before income taxes | $ | 1,102 | | | $ | 1,230 | | | (10) % | | $ | 2,790 | | | $ | 1,276 | | | >100 % |
| Add (subtract): | | | | | | | | | | | |
| Content License Early Termination | 1,023 | | | — | | | nm | | 1,023 | | | — | | | nm |
| Corporate and unallocated shared expenses | 272 | | | 201 | | | (35) % | | 500 | | | 433 | | | (15) % |
| Restructuring and impairment charges | 195 | | | 414 | | | 53 % | | 195 | | | 527 | | | 63 % |
| Other expense, net | 158 | | | (305) | | | nm | | 594 | | | (305) | | | nm |
| Interest expense, net | 355 | | | 320 | | | (11) % | | 666 | | | 644 | | | (3) % |
| TFCF and Hulu acquisition amortization | 594 | | | 605 | | | 2 % | | 1,189 | | | 1,222 | | | 3 % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total segment operating income | $ | 3,699 | | | $ | 2,465 | | | 50 % | | $ | 6,957 | | | $ | 3,797 | | | 83 % |
The following is a summary of segment revenue and operating income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | | | April 2,
2022 | | April 3,
2021 | |
| Segment Revenues: | | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 13,620 | | $ | 12,440 | | 9 % | | $ | 28,205 | | $ | 25,101 | | 12 % |
| Disney Parks, Experiences and Products | 6,652 | | 3,173 | | >100 % | | 13,886 | | 6,761 | | >100 % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| $ | 20,272 | | $ | 15,613 | | 30 % | | $ | 42,091 | | $ | 31,862 | | 32 % |
| Segment operating income (loss): | | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 1,944 | | $ | 2,871 | | | (32) % | | $ | 2,752 | | $ | 4,322 | | | (36) % |
| Disney Parks, Experiences and Products | 1,755 | | | (406) | | | nm | | 4,205 | | (525) | | | nm |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| $ | 3,699 | | $ | 2,465 | | | 50 % | | $ | 6,957 | | $ | 3,797 | | | 83 % |
Depreciation expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | | | April 2,
2022 | | April 3,
2021 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 169 | | | $ | 133 | | | (27) % | | $ | 322 | | | $ | 300 | | | (7) % |
| Disney Parks, Experiences and Products | | | | | | | | | | | |
| | | | | | | | | | | |
| Domestic | 404 | | | 391 | | | (3) % | | 802 | | | 779 | | | (3) % |
| International | 167 | | | 184 | | | 9 % | | 335 | | | 360 | | | 7 % |
| | | | | | | | | | | |
| Total Disney Parks, Experiences and Products | 571 | | | 575 | | | 1 % | | 1,137 | | | 1,139 | | | — % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate | 46 | | | 46 | | | — % | | 94 | | | 92 | | | (2) % |
| Total depreciation expense | $ | 786 | | | $ | 754 | | | (4) % | | $ | 1,553 | | | $ | 1,531 | | | (1) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Amortization of intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | | | April 2,
2022 | | April 3,
2021 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 39 | | $ | 44 | | 11 % | | $ | 79 | | $ | 91 | | 13 % |
| Disney Parks, Experiences and Products | 27 | | 27 | | — % | | 54 | | 54 | | — % |
| TFCF and Hulu | 435 | | 447 | | 3 % | | 870 | | 894 | | 3 % |
| | | | | | | | | | | |
| Total amortization of intangible assets | $ | 501 | | $ | 518 | | 3 % | | $ | 1,003 | | $ | 1,039 | | 3 % |
BUSINESS SEGMENT RESULTS - Current Quarter Results Compared to Prior-Year Quarter
Disney Media and Entertainment Distribution
Revenue and operating results for the DMED segment are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | | | |
| (in millions) | April 2,
2022 | | April 3,
2021 | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Linear Networks | $ | 7,116 | | | $ | 6,746 | | | 5 % | | | | | | |
| Direct-to-Consumer | 4,903 | | | 3,999 | | | 23 % | | | | | | |
| Content Sales/Licensing and Other | 1,866 | | | 1,916 | | | (3) % | | | | | | |
Elimination of Intrasegment Revenue(1) | (265) | | | (221) | | | (20) % | | | | | | |
| $ | 13,620 | | | $ | 12,440 | | | 9 % | | | | | | |
| Segment operating income (loss): | | | | | | | | | | | |
| Linear Networks | $ | 2,815 | | | $ | 2,849 | | | (1) % | | | | | | |
| Direct-to-Consumer | (887) | | | (290) | | | >(100) % | | | | | | |
| Content Sales/Licensing and Other | 16 | | | 312 | | | (95) % | | | | | | |
| | | | | | | | | | | |
| $ | 1,944 | | | $ | 2,871 | | | (32) % | | | | | | |
(1) Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services.
Linear Networks
Operating results for Linear Networks are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| Affiliate fees | $ | 4,867 | | | $ | 4,815 | | | 1 % |
| Advertising | 2,083 | | | 1,815 | | | 15 % |
| Other | 166 | | | 116 | | | 43 % |
| Total revenues | 7,116 | | | 6,746 | | | 5 % |
| Operating expenses | (3,584) | | | (3,191) | | | (12) % |
| Selling, general, administrative and other | (902) | | | (890) | | | (1) % |
| Depreciation and amortization | (36) | | | (36) | | | — % |
| Equity in the income of investees | 221 | | | 220 | | | — % |
| Operating Income | $ | 2,815 | | | $ | 2,849 | | | (1) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues
Affiliate revenue is as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| | | | | |
| Domestic Channels | $ | 4,123 | | $ | 3,927 | | 5 % |
| International Channels | 744 | | 888 | | (16) % |
| $ | 4,867 | | $ | 4,815 | | | 1 % |
The increase in affiliate revenue at the Domestic Channels was due to an increase of 7% from higher contractual rates, partially offset by a decrease of 3% from fewer subscribers.
The decrease in affiliate revenue at the International Channels was due to decreases of 13% from fewer subscribers driven by channel closures in Asia, Latin America and Europe and 5% from an unfavorable foreign exchange impact, partially offset by an increase of 1% from higher contractual rates.
Advertising revenue is as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| | | | | |
| Cable | $ | 833 | | $ | 711 | | 17 % |
| Broadcasting | 796 | | 722 | | 10 % |
| Domestic Channels | 1,629 | | 1,433 | | 14 % |
| International Channels | 454 | | 382 | | 19 % |
| $ | 2,083 | | $ | 1,815 | | 15 % |
The increase in Cable advertising revenue was due to increases of 9% from higher impressions and 5% from increased rates. The increase in impressions reflected higher average viewership.
The increase in Broadcasting advertising revenue was due to increases of 12% from a shift in the timing of The Academy Awards at ABC, 10% from higher rates at ABC and 6% from the owned television stations. The Academy Awards aired in the current quarter compared to the third quarter in the prior year. These increases were partially offset by a decrease of 14% from fewer impressions at ABC, reflecting lower average viewership and, to a lesser extent, fewer units delivered. The increase at the owned television stations was driven by the timing of The Academy Awards and higher rates.
The increase in International Channels advertising revenue was due to increases of 18% from higher impressions reflecting an increase in average viewership and 5% from higher rates, partially offset by a decrease of 7% from an unfavorable foreign exchange impact. The increase in viewership was due to the airing of ten Indian Premier League (IPL) cricket matches in the current quarter, compared to no matches in the prior-year quarter as a result of COVID-19. IPL cricket matches typically occur in our second and third fiscal quarters.
Other revenue increased $50 million, to $166 million from $116 million, driven by higher sub-licensing fees from cricket matches due to the shift in timing of IPL matches.
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| | | | | |
| Cable | $ | (1,774) | | $ | (1,515) | | (17) % |
| Broadcasting | (738) | | (658) | | (12) % |
| Domestic Channels | (2,512) | | (2,173) | | (16) % |
| International Channels | (694) | | (607) | | (14) % |
| $ | (3,206) | | $ | (2,780) | | (15) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The increase in programming and production costs at Cable was due to higher rights costs for the NFL, College Football Playoffs (CFP), NBA and college basketball and an increase in sports production costs due to the return of ESPN-hosted college events, which were canceled in the prior-year quarter due to COVID-19. These increases were partially offset by lower costs for MLB programming due to the MLB lockout, which delayed the start of the 2022 season to the third quarter of the current fiscal year. Higher NFL programming costs were due to airing three regular season games, a wild card playoff game and the Pro Bowl in the current quarter compared to a wild card playoff game in the prior-year quarter. The increases in CFP, NBA and college basketball rights costs were due to higher contractual rates.
The increase in programming and production costs at Broadcasting was due to the timing of The Academy Awards, partially offset by lower average cost of other programming aired on ABC in the current quarter compared to the prior-year quarter.
Programming and production costs at the International Channels increased due to higher sports programming costs, partially offset by the impact of channel closures and a favorable foreign exchange impact. The increase in sports programming costs was due to higher costs for cricket rights driven by airing ten IPL cricket matches in the current quarter compared to none in the prior-year quarter and contractual rate increases for Board of Control for Cricket in India (BCCI) events.
Operating Income from Linear Networks
Operating income from Linear Networks decreased $34 million, to $2,815 million from $2,849 million, due to decreases at the International Channels and Cable, partially offset by an increase at Broadcasting.
The following table provides supplemental revenue and operating income detail for Linear Networks:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Domestic Channels | $ | 5,826 | | $ | 5,418 | | 8 % |
| International Channels | 1,290 | | 1,328 | | (3) % |
| $ | 7,116 | | $ | 6,746 | | 5 % |
| Supplemental operating income detail | | | | | |
| Domestic Channels | $ | 2,349 | | $ | 2,281 | | 3 % |
| International Channels | 245 | | 348 | | (30) % |
| Equity in the income of investees | 221 | | 220 | | — % |
| $ | 2,815 | | $ | 2,849 | | (1) % |
Direct-to-Consumer
Operating results for Direct-to-Consumer are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| Subscription fees | $ | 3,887 | | | $ | 3,000 | | | 30 % |
| Advertising | 891 | | | 717 | | | 24 % |
| TV/SVOD distribution and other | 125 | | | 282 | | | (56) % |
| Total revenues | 4,903 | | | 3,999 | | | 23 % |
| Operating expenses | (4,402) | | | (3,214) | | | (37) % |
| Selling, general, administrative and other | (1,290) | | | (1,010) | | | (28) % |
| Depreciation and amortization | (98) | | | (65) | | | (51) % |
| Operating Loss | $ | (887) | | | $ | (290) | | | >(100) % |
Revenues
The increase in subscription fees was due to increases of 20% from higher subscribers, driven by growth at Disney+, Hulu and ESPN+, and 11% from higher rates due to increases in retail pricing at Disney+ and Hulu.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Higher advertising revenue reflected increases of 14% from higher impressions due to increases at Hulu and Disney+, and 8% from higher rates due to an increase at Hulu.
The decrease in TV/SVOD distribution and other revenue was due to a decrease in Ultimate Fighting Championship (UFC) pay-per-view fees and lower Disney+ Premier Access revenues, which reflected the absence of releases in the current quarter compared to the release of Raya and the Last Dragon in the prior-year quarter. The decrease in UFC pay-per-view fees was due to lower average buys per event and the impact of airing three events in the current quarter compared to four events in the prior-year quarter, partially offset by higher pricing.
The following tables present additional information about our Disney+, ESPN+ and Hulu product offerings(1).
Paid subscribers(2) as of:
| | | | | | | | | | | | | | | | | | |
| (in millions) | April 2,
2022 | | April 3,
2021 | | % Change
Better
(Worse) | |
| Disney+ | | | | | | |
| Domestic (U.S. and Canada) | 44.4 | | | 37.3 | | | 19 % | |
International (excluding Disney+ Hotstar)(3) | 43.2 | | | 31.1 | | | 39 % | |
Disney+ (excluding Disney+ Hotstar)(4) | 87.6 | | | 68.4 | | | 28 % | |
| Disney+ Hotstar | 50.1 | | | 35.2 | | | 42 % | |
Total Disney+(4) | 137.7 | | | 103.6 | | | 33 % | |
| | | | | | |
| ESPN+ | 22.3 | | | 13.8 | | | 62 % | |
| | | | | | |
| Hulu | | | | | | |
| SVOD Only | 41.4 | | | 37.8 | | | 10 % | |
| Live TV + SVOD | 4.1 | | | 3.8 | | | 8 % | |
Total Hulu(4) | 45.6 | | | 41.6 | | | 10 % | |
Average Monthly Revenue Per Paid Subscriber(5) for the quarter ended:
| | | | | | | | | | | | | | | | | | |
| | | | % Change
Better
(Worse) | |
| April 2,
2022 | | April 3,
2021 | | |
| Disney+ | | | | | | |
| Domestic (U.S. and Canada) | $ | 6.32 | | $ | 6.01 | | 5 % | |
International (excluding Disney+ Hotstar)(3) | 6.35 | | 5.14 | | 24 % | |
| Disney+ (excluding Disney+ Hotstar) | 6.33 | | 5.61 | | 13 % | |
| Disney+ Hotstar | 0.76 | | 0.49 | | 55 % | |
| Global Disney+ | 4.35 | | 3.99 | | 9 % | |
| | | | | | |
| ESPN+ | 4.73 | | 4.55 | | 4 % | |
| | | | | | |
| Hulu | | | | | | |
| SVOD Only | 12.77 | | 12.08 | | 6 % | |
| Live TV + SVOD | 88.77 | | 81.83 | | 8 % | |
(1)In the U.S., Disney+, ESPN+ and Hulu SVOD Only are each offered as a standalone service or as a package that includes all three services (the SVOD Bundle). Effective December 21, 2021, Hulu Live TV + SVOD includes Disney+ and ESPN+ (the new Hulu Live TV + SVOD offering), whereas previously, Hulu Live TV + SVOD was offered as a standalone service or with Disney+ and ESPN+ as optional additions (the old Hulu Live TV + SVOD offering). Effective March 15, 2022, Hulu SVOD Only is also offered with Disney+ as an optional add-on. Disney+ is available in more than 80 countries and territories outside the U.S. and Canada. In India and certain other Southeast Asian countries, the service is branded Disney+ Hotstar. In certain Latin American countries, we offer Disney+ as well as Star+, a general entertainment SVOD service, which is available on a standalone basis or together with Disney+ (Combo+). Depending on the market, our services can be purchased on our websites, through third-party platforms/apps or via wholesale arrangements.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
(2)Reflects subscribers for which we recognized subscription revenue. Subscribers cease to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method. Subscribers to the SVOD Bundle are counted as a paid subscriber for each service included in the SVOD Bundle and subscribers to the Hulu Live TV + SVOD offerings are counted as one paid subscriber for each of the Hulu Live TV + SVOD, Disney+ and ESPN+ offerings. If a Hulu SVOD Only subscriber chooses to add on Disney+, they are counted as one paid subscriber for each of the Hulu SVOD Only and Disney+ offerings. In Latin America, if a subscriber has either the standalone Disney+ or Star+ service or Combo+, they are counted as one Disney+ paid subscriber. Subscribers include those who receive a service through wholesale arrangements including those for which we receive a fee for the distribution of the service to each subscriber of an existing content distribution tier. When we aggregate the total number of paid subscribers across our DTC streaming services, we refer to them as paid subscriptions.
(3)Includes the Disney+ service outside the U.S. and Canada and the Star+ service in Latin America.
(4)Total may not equal the sum of the column due to rounding.
(5)Revenue per paid subscriber is calculated based on the average of the monthly average paid subscribers for each month in the period. The monthly average paid subscribers is calculated as the sum of the beginning of the month and end of the month paid subscriber count, divided by two. Disney+ average monthly revenue per paid subscriber is calculated using a daily average of paid subscribers for the period. Revenue includes subscription fees, advertising (excluding revenue earned from selling advertising spots to other Company businesses) and premium and feature add-on revenue but excludes Premier Access and Pay-Per-View revenue. The average revenue per paid subscriber is net of discounts on the SVOD Bundle or other offerings that carry more than one service. Revenue is allocated to each service based on the relative retail price of each service on a standalone basis. Starting in December 2021, revenue for the new Hulu Live TV + SVOD offering is allocated to the SVOD services based on the wholesale price of the SVOD Bundle. In general, wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third-party platforms.
The average monthly revenue per paid subscriber for domestic Disney+ increased from $6.01 to $6.32 due to an increase in retail pricing and a lower mix of wholesale subscribers, partially offset by a higher mix of subscribers to multi-product offerings.
The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) increased from $5.14 to $6.35 due to increases in retail pricing.
The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.49 to $0.76 due to launches in new territories with higher average prices and higher per-subscriber advertising revenue, partially offset by a higher mix of wholesale subscribers.
The average monthly revenue per paid subscriber for ESPN+ increased from $4.55 to $4.73 primarily due to an increase in retail pricing and, to a lesser extent, higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.
The average monthly revenue per paid subscriber for the Hulu SVOD Only service increased from $12.08 to $12.77 due to an increase in retail pricing and, to a lesser extent, higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.
The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $81.83 to $88.77 due to an increase in retail pricing and higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Programming and production costs | | | | | |
| Disney+ | $ | (1,196) | | $ | (654) | | (83) % |
| Hulu | (1,913) | | (1,626) | | (18) % |
| ESPN+ and other | (454) | | (306) | | (48) % |
| Total programming and production costs | (3,563) | | (2,586) | | (38) % |
| Other operating expense | (839) | | (628) | | (34) % |
| $ | (4,402) | | $ | (3,214) | | (37) % |
The increase in programming and production costs at Disney+ was primarily due to more content provided on the service.
Higher programming and production costs at Hulu were primarily due to higher subscriber-based fees for programming the Live TV service due to the carriage of more networks, an increase in the number of subscribers and rate increases.
The increase in programming and production costs at ESPN+ and other was primarily due to new National Hockey League programming.
Other operating expenses increased primarily due to higher technology and distribution costs at Disney+ driven by growth in existing markets and, to a lesser extent, expansion to new markets.
Selling, general, administrative and other costs increased $280 million, to $1,290 million from $1,010 million, due to higher marketing costs at Disney+ and Hulu.
Depreciation and amortization increased $33 million, to $98 million from $65 million, driven by increased investment in technology assets at Hulu and Disney+.
Operating Loss from Direct-to-Consumer
Direct-to-Consumer operating loss increased $597 million, to $887 million from $290 million, due to higher losses at Disney+ and ESPN+ and lower operating income at Hulu.
Content Sales/Licensing and Other
Operating results for Content Sales/Licensing and Other are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| TV/SVOD distribution | $ | 977 | | | $ | 1,344 | | | (27) % |
| Theatrical distribution | 224 | | | 109 | | | >100 % |
| Home entertainment | 230 | | | 219 | | | 5 % |
| Other | 435 | | | 244 | | | 78 % |
| Total revenues | 1,866 | | | 1,916 | | | (3) % |
| Operating expenses | (1,232) | | | (1,136) | | | (8) % |
| Selling, general, administrative and other | (541) | | | (398) | | | (36) % |
| Depreciation and amortization | (74) | | | (76) | | | 3 % |
| Equity in the income of investees | (3) | | | 6 | | | nm |
| Operating Income | $ | 16 | | | $ | 312 | | | (95) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues
The decrease in TV/SVOD distribution revenue was due to lower sales of both episodic television and theatrical film content. The decrease in episodic television content sales was driven by lower sales of Modern Family and How I Met Your Mother in the current quarter compared to the prior-year quarter. Lower revenue from theatrical film content sales was due to the sale of Fear Street in the prior-year quarter with no comparable title in the current quarter.
The increase in theatrical distribution revenue was due to more titles in release in the current quarter compared to the prior-year quarter and revenue from the co-production of Marvel’s Spider-Man: No Way Home. Titles in release in the current quarter included Death on the Nile, The King’s Man and Encanto whereas the prior-year quarter included Raya and The Last Dragon and the international distribution of Soul.
The increase in home entertainment revenue was due to an increase in average net effective pricing, partially offset by lower unit sales. The increase in average net effective pricing was due to a higher mix of new release titles, which have a higher sales price than catalog titles.
The increase in other revenue was primarily due to higher revenue from stage plays as a result of more performances in the current quarter.
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Programming and production costs | $ | (909) | | $ | (915) | | 1 % |
| Cost of goods sold and distribution costs | (323) | | (221) | | (46) % |
| $ | (1,232) | | $ | (1,136) | | (8) % |
Programming and production costs were comparable to the prior-year quarter as a decrease in production cost amortization due to lower TV/SVOD sales was largely offset by an increase in production cost amortization due to theatrical revenue growth and the impact of higher home entertainment per unit amortization costs.
The increase in cost of goods sold and distribution costs was due to higher costs for stage plays as a result of more performances in the current quarter.
Selling, general administrative and other costs increased $143 million, to $541 million from $398 million, driven by higher theatrical marketing costs due to more titles in release.
Operating Income from Content Sales/Licensing and Other
Operating income from Content Sales/Licensing and Other decreased $296 million, to $16 million from $312 million, due to lower TV/SVOD distribution results and, to a lesser extent, a decrease at home entertainment.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Items Excluded from Segment Operating Income Related to Disney Media and Entertainment Distribution
The following table presents supplemental information for items related to the DMED segment that are excluded from segment operating income:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Content License Early Termination | $ | (1,023) | | | $ | — | | | nm |
TFCF and Hulu acquisition amortization(1) | (592) | | (603) | | 2 % |
Restructuring and impairment charges(2) | (195) | | (223) | | 13 % |
(1)In the current quarter, amortization of step-up on film and television costs was $156 million and amortization of intangible assets was $433 million. In the prior-year quarter, amortization of step-up on film and television costs was $154 million and amortization of intangible assets was $445 million.
(2)Charges for the current quarter were due to the impairment of an intangible asset related to the Disney Channel in Russia. Charges for the prior-year quarter included asset impairments and severance costs related to the planned closure of an animation studio and severance costs related to workforce reductions.
Disney Parks, Experiences and Products
Operating results for the DPEP segment are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| Theme park admissions | $ | 1,973 | | | $ | 597 | | | >100 % |
| Parks & Experiences merchandise, food and beverage | 1,515 | | | 558 | | | >100 % |
| Resorts and vacations | 1,451 | | | 513 | | | >100 % |
| Merchandise licensing and retail | 1,164 | | | 1,145 | | | 2 % |
| Parks licensing and other | 549 | | | 360 | | | 53 % |
| Total revenues | 6,652 | | | 3,173 | | | >100 % |
| Operating expenses | (3,485) | | | (2,308) | | | (51) % |
| Selling, general, administrative and other | (809) | | | (660) | | | (23) % |
| Depreciation and amortization | (598) | | | (602) | | | 1 % |
| Equity in the loss of investees | (5) | | | (9) | | | 44 % |
| Operating Income (Loss) | $ | 1,755 | | | $ | (406) | | | nm |
COVID-19
Revenues at DPEP benefited from the comparison to the closures/reduced operating capacity at our theme parks and experiences in the prior-year quarter as a result of COVID-19. In fiscal 2022, our domestic parks and resorts are generally operating without significant COVID-19-related capacity restrictions, such as those that were in place during the prior year. Certain of our international parks and resorts and cruise ship operations continue to be impacted by COVID-19-related closures and capacity and travel restrictions.
Walt Disney World Resort and Tokyo Disney Resort were open for the entire quarter in both the current and prior years. Disneyland Resort and Disneyland Paris were open for the entire current quarter, whereas both were closed for all of the prior-year quarter. Shanghai Disney Resort was open for 78 days in the current quarter and for all of the prior-year quarter. Hong Kong Disneyland Resort was open for 3 days in the current quarter and 33 days in the prior-year quarter. Cruise ships operated at reduced capacities in the current quarter and sailings were suspended in the prior-year quarter.
Revenues
The increase in theme park admissions revenue was due to attendance growth and higher average per capita ticket revenue, which reflected a favorable attendance mix and the introduction of Genie+ and Lightning Lane in the first quarter of fiscal 2022.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Parks & Experiences merchandise, food and beverage revenue growth was due to increases in volumes and average guest spending.
Higher resorts and vacations revenue was primarily due to increases in occupied hotel room nights, average daily hotel room rates and passenger cruise days.
Merchandise licensing and retail revenue was higher due to an increase of 8% from merchandise licensing, partially offset by a decrease of 6% from retail. The revenue growth at merchandise licensing was primarily due to higher sales of merchandise based on Mickey and Minnie, Spider-Man, Disney Princesses and Star Wars Classic, partially offset by lower minimum guarantee shortfall recognition. The decrease in retail revenues was due to the closure of a substantial number of Disney-branded retail stores in North America and Europe in the second half of fiscal year 2021.
The increase in parks licensing and other revenue was due to increases in real estate sales and sponsorship revenue.
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic | | International(1) | | Total |
| | Quarter Ended | | Quarter Ended | | Quarter Ended |
| | Apr 2,
2022 | | Apr 3,
2021 | | Apr 2,
2022 | | Apr 3,
2021 | | Apr 2,
2022 | | Apr 3,
2021 |
| Parks | | | | | | | | | | | |
| Increase (decrease) | | | | | | | | | | | |
Attendance(2) | >100 % | | (66) % | | 78 % | | (41) % | | >100 % | | (61) % |
Per Capita Guest Spending(3) | 20 % | | 8 % | | 28 % | | (9) % | | 26 % | | — % |
| Hotels | | | | | | | | | | | |
Occupancy(4) | 84 % | | 35 % | | 46 % | | 9 % | | 75 % | | 29 % |
Available Room Nights (in thousands)(5) | 2,521 | | 2,649 | | 787 | | 787 | | 3,308 | | 3,436 |
Per Room Guest Spending(6) | $434 | | $336 | | $298 | | $374 | | $414 | | $339 |
(1)Per capita guest spending growth rate is stated on a constant currency basis. Per room guest spending is stated at the average foreign exchange rate for the same period in the prior year.
(2)Attendance is used to analyze volume trends at our theme parks and is based on the number of unique daily entries, i.e. a person visiting multiple theme parks in a single day is counted only once. Our attendance count includes complimentary entries but excludes entries by children under the age of three.
(3)Per capita guest spending is used to analyze guest spending trends and is defined as total revenue from ticket sales and sales of food, beverage and merchandise in our theme parks, divided by total theme park attendance.
(4)Occupancy is used to analyze the usage of available capacity at hotels and is defined as the number of room nights occupied by guests as a percentage of available hotel room nights.
(5)Available hotel room nights is defined as the total number of room nights that are available at our hotels and at Disney Vacation Club (DVC) properties located at our theme parks and resorts that are not utilized by DVC members. Available hotel room nights include rooms temporarily taken out of service.
(6)Per room guest spending is used to analyze guest spending at our hotels and is defined as total revenue from room rentals and sales of food, beverage and merchandise at our hotels, divided by total occupied hotel room nights.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Operating labor | $ | (1,610) | | $ | (1,012) | | (59) % |
| Cost of goods sold and distribution costs | (642) | | (421) | | (52) % |
| Infrastructure costs | (651) | | (543) | | (20) % |
| Other operating expense | (582) | | (332) | | (75) % |
| $ | (3,485) | | $ | (2,308) | | (51) % |
The increases in operating labor, cost of goods sold and distribution costs and other operating expenses were due to higher volumes, while the increase in infrastructure costs was primarily due to higher volumes and increased technology spending.
Selling, general, administrative and other costs increased $149 million, to $809 million from $660 million, primarily due to higher marketing spend.
Segment Operating Income (Loss)
Segment operating results increased from a loss of $0.4 billion to income of $1.8 billion due to growth at our domestic parks and experiences and, to a lesser extent, our international parks and resorts and consumer products business.
The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 4,898 | | | $ | 1,735 | | | >100 % |
| International | 574 | | | 262 | | | >100 % |
| Consumer Products | 1,180 | | | 1,176 | | | — % |
| $ | 6,652 | | | $ | 3,173 | | | >100 % |
| Supplemental operating income (loss) detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 1,385 | | | $ | (587) | | | nm |
| International | (268) | | | (380) | | | 29 % |
| Consumer Products | 638 | | | 561 | | | 14 % |
| $ | 1,755 | | | $ | (406) | | | nm |
Items Excluded from Segment Operating Income Related to Disney Parks, Experiences and Products
The following table presents supplemental information for items related to the DPEP segment that are excluded from segment operating income:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
Restructuring and impairment charges(1) | $ | — | | | $ | (189) | | | 100 % |
| TFCF and Hulu acquisition amortization | (2) | | | (2) | | | — % |
(1)The prior-year quarter includes asset impairments and severance costs related to the planned closure of a substantial number of our Disney-branded retail stores and severance costs related to other workforce reductions.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
BUSINESS SEGMENT RESULTS - Current Period Six-Month Results Compared to the Prior-Year Six-Month Period
Disney Media and Entertainment Distribution
Revenue and operating results for the DMED segment are as follows: | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues: | | | | | |
| Linear Networks | $ | 14,822 | | | $ | 14,439 | | | 3 % |
| Direct-to-Consumer | 9,593 | | | 7,503 | | | 28 % |
| Content Sales/Licensing and Other | 4,299 | | | 3,618 | | | 19 % |
Elimination of Intrasegment Revenue(1) | (509) | | | (459) | | | (11) % |
| $ | 28,205 | | | $ | 25,101 | | | 12 % |
| Segment operating income (loss): | | | | | |
| Linear Networks | $ | 4,314 | | | $ | 4,578 | | | (6) % |
| Direct-to-Consumer | (1,480) | | | (756) | | | (96) % |
| Content Sales/Licensing and Other | (82) | | | 500 | | | nm |
| $ | 2,752 | | | $ | 4,322 | | | (36) % |
(1) Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services.
Linear Networks
Operating results for Linear Networks are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| Affiliate fees | $ | 9,482 | | | $ | 9,455 | | | — % |
| Advertising | 4,922 | | | 4,650 | | | 6 % |
| Other | 418 | | | 334 | | | 25 % |
| Total revenues | 14,822 | | | 14,439 | | | 3 % |
| Operating expenses | (9,240) | | | (8,612) | | | (7) % |
| Selling, general, administrative and other | (1,657) | | | (1,614) | | | (3) % |
| Depreciation and amortization | (74) | | | (89) | | | 17 % |
| Equity in the income of investees | 463 | | | 454 | | | 2 % |
| Operating Income | $ | 4,314 | | | $ | 4,578 | | | (6) % |
Revenues
Affiliate revenue is as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| | | | | |
| Domestic Channels | $ | 7,985 | | | $ | 7,700 | | | 4 % |
| International Channels | 1,497 | | | 1,755 | | | (15) % |
| $ | 9,482 | | $ | 9,455 | | | — % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The increase in affiliate revenue at the Domestic Channels was due to an increase of 6% from higher contractual rates, partially offset by a decrease of 3% from fewer subscribers.
The decrease in affiliate revenue at the International Channels was due to decreases of 12% from fewer subscribers, due to channel closures, and 4% from an unfavorable foreign exchange impact. These decreases were partially offset by an increase of 2% from higher contractual rates.
Advertising revenue is as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| | | | | |
| Cable | $ | 2,126 | | | $ | 1,928 | | | 10 % |
| Broadcasting | 1,696 | | | 1,706 | | | (1) % |
| Domestic Channels | 3,822 | | 3,634 | | 5 % |
| International Channels | 1,100 | | | 1,016 | | | 8 % |
| $ | 4,922 | | $ | 4,650 | | 6 % |
The increase in Cable advertising revenue was primarily due to increases of 7% from higher impressions and 1% from increased rates. The increase in impressions reflected higher average viewership and, to a lesser extent, an increase in units delivered.
Broadcasting advertising revenue was comparable to the prior-year period, as decreases of 13% from fewer ABC impressions and 2% from the owned television stations were largely offset by increases of 12% from higher rates at ABC and 5% from the benefit of the shift in the timing of The Academy Awards at ABC. The decrease in ABC impressions reflected lower average viewership. The decrease at the owned television stations was due to lower rates resulting from a decrease in political advertising, partially offset by the benefit of the shift in timing of The Academy Awards.
The increase in International Channels advertising revenue was due to increases of 7% from higher rates and 6% from higher impressions, reflecting an increase in average viewership. These increases were partially offset by a decrease of 4% from an unfavorable foreign exchange impact. The increase in viewership reflected more cricket matches aired in the current period, primarily due to the airing of International Cricket Council (ICC) T20 World Cup matches in the current period and an increase in Board of Control for Cricket in India (BCCI) matches in the current period compared to the prior-year period. These increases were partially offset by fewer IPL cricket matches in the current period compared to the prior-year period. The ICC T20 World Cup generally occurs every two years and was not held in the prior-year period due to COVID-19. As a result of COVID-19-related timing shifts, we aired 23 IPL matches in the current period and 44 matches in the prior-year period. The increase in the number of BCCI matches aired in the current period was driven by COVID-19-related cancellations of certain BCCI matches in the prior-year period.
Other revenue increased $84 million, to $418 million from $334 million, due to sub-licensing fees from ICC T20 World Cup matches in the current period.
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| | | | | |
| Cable | $ | (5,357) | | | $ | (4,919) | | | (9) % |
| Broadcasting | (1,538) | | | (1,405) | | | (9) % |
| Domestic Channels | (6,895) | | | (6,324) | | | (9) % |
| International Channels | (1,588) | | | (1,521) | | | (4) % |
| $ | (8,483) | | | $ | (7,845) | | | (8) % |
The increase in programming and production costs at Cable was due to higher rights costs for the NFL, College Football Playoffs (CFP), college football and college basketball, and an increase in sports production costs due to the return of ESPN-hosted events, which were canceled in the prior-year period due to COVID-19. These increases were partially offset by lower NBA and golf programming costs. Higher NFL programming costs were primarily due to airing 3 additional regular season games in the current period compared to the prior-year period and contractual rate increases. The current period included 16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
regular season games, a wild card playoff game and the Pro Bowl while the prior-year period included 13 regular season games and a wild card playoff game. The increases in CFP, college football and college basketball were due to higher contractual rates. Lower NBA programming costs were due to airing four 2020 NBA season final games in fiscal 2021, reflecting a delay of the 2020 season as a result of COVID-19, partially offset by a contractual rate increase. The decrease in golf programming costs was due to the shift of the 2020 Masters out of fiscal 2020 and into the first quarter of fiscal 2021 due to COVID-19. The Masters typically occurs in our fiscal third quarter.
The increase in programming and production costs at Broadcasting was primarily due to the timing of The Academy Awards.
The increase in programming and production costs at the International Channels was due to higher sports programming costs driven by increased costs for cricket rights, partially offset by the impact of channel closures and a favorable foreign exchange impact. The increased costs for cricket rights were due to the ICC T20 World Cup matches in the current period and contractual rate increases for BCCI matches, partially offset by fewer IPL matches in the current period compared to the prior-year period.
Selling, general, administrative and other costs increased $43 million, to $1,657 million from $1,614 million, driven by collections in the prior-year period of previously reserved receivables.
Equity in the Income of Investees
Income from equity investees increased $9 million, to $463 million from $454 million, due to higher income from A+E Television Networks driven by lower programming costs, partially offset by lower affiliate revenue.
Operating Income from Linear Networks
Operating income from Linear Networks decreased $264 million, to $4,314 million from $4,578 million, due to decreases at Cable and the International Channels, partially offset by an increase at Broadcasting.
The following table provides supplemental revenue and operating income detail for Linear Networks:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Domestic Channels | $ | 11,978 | | $ | 11,488 | | 4 % |
| International Channels | 2,844 | | 2,951 | | (4) % |
| $ | 14,822 | | $ | 14,439 | | 3 % |
| Supplemental operating income detail | | | | | |
| Domestic Channels | $ | 3,237 | | $ | 3,401 | | (5) % |
| International Channels | 614 | | 723 | | (15) % |
| Equity in the income of investees | 463 | | 454 | | 2 % |
| $ | 4,314 | | $ | 4,578 | | (6) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Direct-to-Consumer
Operating results for Direct-to-Consumer are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| Subscription fees | $ | 7,485 | | $ | 5,546 | | 35 % |
| Advertising | 1,871 | | 1,599 | | 17 % |
| TV/SVOD distribution and other | 237 | | 358 | | (34) % |
| Total revenues | 9,593 | | 7,503 | | 28 % |
| Operating expenses | (8,324) | | (6,135) | | (36) % |
| Selling, general, administrative and other | (2,565) | | (1,980) | | (30) % |
| Depreciation and amortization | (184) | | (144) | | (28) % |
| | | | | |
| Operating Loss | $ | (1,480) | | $ | (756) | | (96) % |
Revenues
The increase in subscription fees was due to increases of 21% from higher subscribers driven by growth at Disney+, Hulu and ESPN+, and 14% from higher rates due to increases in retail pricing at Disney+, Hulu and, to a lesser extent, ESPN+.
Advertising revenue growth was due to increases of 9% from higher impressions reflecting increases at Disney+, Hulu and ESPN+, and 7% from higher rates due to an increase at Hulu.
The decrease in TV/SVOD distribution and other revenue was due to the absence of Disney+ Premier Access revenues in the current period compared to revenues for Raya and the Last Dragon in the prior-year period, and a decrease in UFC pay-per-view fees. The decrease in UFC pay-per-view fees reflected the impact of airing five events in the current period compared to seven in the prior-year period, partially offset by higher pricing.
The following tables present Average Monthly Revenue Per Paid Subscriber for the six months ended (see additional discussion of metrics under quarterly results analysis of Business Segment Results):
| | | | | | | | | | | | | | | | | |
| | | | % Change
Better
(Worse) |
| April 2,
2022 | | April 3,
2021 | |
| Disney+ | | | | | |
| Domestic (U.S. and Canada) | $ | 6.49 | | | $ | 5.91 | | | 10 % |
| International (excluding Disney+ Hotstar) | 6.17 | | | 4.97 | | | 24 % |
| Disney+ (excluding Disney+ Hotstar) | 6.33 | | | 5.51 | | | 15 % |
| Disney+ Hotstar | 0.89 | | | 0.70 | | | 27 % |
| Global Disney+ | 4.38 | | | 4.01 | | | 9 % |
| | | | | |
| ESPN+ | 4.92 | | | 4.52 | | | 9 % |
| | | | | |
| Hulu | | | | | |
| SVOD Only | 12.87 | | | 12.77 | | | 1 % |
| Live TV + SVOD | 87.89 | | | 78.31 | | | 12 % |
The average monthly revenue per paid subscriber for domestic Disney+ increased from $5.91 to $6.49 due to an increase in retail pricing and a lower mix of wholesale subscribers, partially offset by a higher number of subscribers to multi-product offerings.
The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) increased from $4.97 to $6.17 due to increases in retail pricing, partially offset by an unfavorable foreign exchange impact.
The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.70 to $0.89 due to launches in new territories with higher average prices and higher per-subscriber advertising revenue, partially offset by a higher mix of wholesale subscribers.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The average monthly revenue per paid subscriber for ESPN+ increased from $4.52 to $4.92 driven by an increase in retail pricing and higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.
The average monthly revenue per paid subscriber for the Hulu SVOD Only service increased from $12.77 to $12.87 due to an increase in retail pricing, partially offset by a higher mix of subscribers to multi-product offerings and lower per-subscriber advertising revenue.
The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $78.31 to $87.89 due to increases in retail pricing, higher per-subscriber advertising revenue and an increase in per-subscriber premium and feature add-on revenue, partially offset by a higher mix of subscribers to multi-product offerings.
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Programming and production costs | | | | | |
| Disney+ | $ | (2,116) | | | $ | (1,169) | | | (81) % |
| Hulu | (3,745) | | | (3,250) | | | (15) % |
| ESPN+ and other | (881) | | | (546) | | | (61) % |
| Total programming and production costs | (6,742) | | | (4,965) | | | (36) % |
| Other operating expense | (1,582) | | | (1,170) | | | (35) % |
| $ | (8,324) | | | $ | (6,135) | | | (36) % |
The increase in programming and production costs at Disney+ was due to more content provided on the service.
Higher programming and production costs at Hulu were primarily due to higher subscriber-based fees for programming the Live television service due to the carriage of more networks, an increase in the number of subscribers and rate increases.
The increase in programming and production costs at ESPN+ and other was primarily due to new National Hockey League programming.
Other operating expenses increased primarily due to higher technology and distribution costs at Disney+ due to growth in existing markets and, to a lesser extent, expansion to new markets.
Selling, general, administrative and other costs increased $585 million, to $2,565 million from $1,980 million, due to higher marketing costs at Disney+ and Hulu.
Depreciation and amortization increased $40 million, to $184 million from $144 million, due to increased investment in technology assets at Disney+ and Hulu.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer increased $724 million, to $1,480 million from $756 million, due to higher losses at Disney+ and ESPN+, partially offset by improved results at Hulu.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Content Sales/Licensing and Other
Operating results for Content Sales/Licensing and Other are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| TV/SVOD distribution | $ | 2,172 | | | $ | 2,366 | | | (8) % |
| Theatrical distribution | 753 | | | 140 | | | >100 % |
| Home entertainment | 524 | | | 519 | | | 1 % |
| Other | 850 | | | 593 | | | 43 % |
| Total revenues | 4,299 | | | 3,618 | | | 19 % |
| Operating expenses | (2,857) | | | (2,210) | | | (29) % |
| Selling, general, administrative and other | (1,381) | | | (757) | | | (82) % |
| Depreciation and amortization | (143) | | | (158) | | | 9 % |
| Equity in the income (loss) of investees | — | | | 7 | | | — % |
| Operating Income (Loss) | $ | (82) | | | $ | 500 | | | nm |
Revenues
The decrease in TV/SVOD distribution revenue reflected lower episodic television content sales due to higher sales of Modern Family and How I Met Your Mother in the prior-year period.
The increase in theatrical distribution revenue was due to the release of 11 titles in the current period compared to four titles in the prior-year period and revenue from the co-production of Marvel’s Spider-Man: No Way Home. Titles released in the current period included Eternals, Encanto, Death on The Nile, The King’s Man and West Side Story. Titles released in the prior-year period included Soul, which was distributed internationally, and Raya And The Last Dragon.
The increase in other revenue was due to higher revenue from stage plays as a result of more performances in the current period.
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Programming and production costs | $ | (2,169) | | $ | (1,792) | | (21) % |
| Cost of goods sold and distribution costs | (688) | | (418) | | (65) % |
| $ | (2,857) | | $ | (2,210) | | (29) % |
The increase in programming and production costs was due to higher production cost amortization driven by an increase in theatrical revenue and higher film cost impairments, partially offset by lower production cost amortization for TV/SVOD distribution due to lower revenue.
Higher cost of goods sold and distribution costs were due to the increases in stage play performances and theatrical releases.
Selling, general, administrative and other costs increased $624 million, to $1,381 million from $757 million, due to higher theatrical marketing costs.
Operating Income from Content Sales/Licensing and Other
Operating income from Content Sales/Licensing and Other decreased $582 million, to a loss of $82 million from income of $500 million, due to lower theatrical distribution results, higher film cost impairments and lower TV/SVOD distribution results.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Items Excluded from Segment Operating Income Related to Disney Media and Entertainment Distribution
The following table presents supplemental information for items related to the DMED segment that are excluded from segment operating income:
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
TFCF and Hulu acquisition amortization(1) | $ | (1,185) | | $ | (1,218) | | 3 % |
| Content License Early Termination | (1,023) | | | — | | | nm |
Restructuring and impairment charges(2) | (195) | | (304) | | 36 % |
(1)In the current period, amortization of step-up on film and television costs was $313 million and amortization of intangible assets was $866 million. In the prior-year period, amortization of step-up on film and television costs was $321 million and amortization of intangible assets was $890 million.
(2)Charges for the current period were due to the impairment of an intangible asset related to the Disney Channel in Russia. Charges for the prior-year period included asset impairments and severance costs related to the planned closure of an animation studio.
Disney Parks, Experiences and Products
Operating results for the DPEP segment are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Revenues | | | | | |
| Theme park admissions | $ | 4,125 | | $ | 1,146 | | >100 % |
| Parks & Experiences merchandise, food and beverage | 3,141 | | 1,111 | | >100 % |
| Resorts and vacations | 2,896 | | 946 | | >100 % |
| Merchandise licensing and retail | 2,727 | | 2,843 | | (4) % |
| Parks licensing and other | 997 | | 715 | | 39 % |
| Total revenues | 13,886 | | 6,761 | | >100 % |
| Operating expenses | (6,936) | | (4,738) | | (46) % |
| Selling, general, administrative and other | (1,546) | | (1,338) | | (16) % |
| Depreciation and amortization | (1,191) | | (1,193) | | — % |
| Equity in the loss of investees | (8) | | (17) | | 53 % |
| Operating Income (Loss) | $ | 4,205 | | | $ | (525) | | | nm |
COVID-19
Revenues at DPEP benefited from the comparison to the closures/reduced operating capacity at our theme parks and experiences in the prior-year period as a result of the impact of COVID-19. Walt Disney World Resort and Tokyo Disney Resort were open for the entire period in both the current and prior year. Disneyland Resort and Disneyland Paris were open for the entire current period, whereas Disneyland Resort was closed for all of the prior-year period, and Disneyland Paris was open for 26 days in the period-year period. Shanghai Disney Resort was open for 167 days in the current period and open for all of the prior-year period. Hong Kong Disneyland Resort was open for 71 days in the current period and 75 days in the prior-year period. Cruise ships operated at reduced capacities in the current period while sailings were suspended in the prior-year period.
Revenues
The increase in theme park admissions revenue was due to attendance growth and higher average per capita ticket revenue, which reflected a favorable attendance mix and the introduction of Genie+ and Lightning Lane in the first quarter of fiscal 2022.
Parks & Experiences merchandise, food and beverage revenue growth was due to increases in volumes and average guest spending.
Higher resorts and vacations revenue was primarily due to increases in occupied hotel room nights, average daily hotel room rates and passenger cruise days.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The decrease in merchandise licensing and retail revenue was due to a decrease of 8% from retail, partially offset by an increase of 4% from merchandise licensing. The decrease in retail revenues was due to the closure of a substantial number of Disney-branded retail stores in North America and Europe in the second half of fiscal year 2021. The revenue growth at merchandise licensing was due to higher sales of merchandise based on Mickey and Minnie, Disney Princesses, Star Wars Classic, Spider-Man and The Mandalorian, partially offset by a decrease in sales of merchandise based on Frozen.
The increase in parks licensing and other revenue was due to increases in sponsorship revenue, real estate sales and royalties from Tokyo Disney Resort.
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business (see additional discussion of metrics under the quarterly analysis of Business Segment Results):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic | | International | | Total |
| | Six Months Ended | | Six Months Ended | | Six Months Ended |
| | April 2,
2022 | | April 3,
2021 | | April 2,
2022 | | April 3,
2021 | | April 2,
2022 | | April 3,
2021 |
| Parks | | | | | | | | | | | |
| Increase (decrease) | | | | | | | | | | | |
| Attendance | >100 % | | (70) % | | >100 % | | (54) % | | >100 % | | (67) % |
| Per Capita Guest Spending | 25 % | | 4 % | | 19 % | | (10) % | | 29 % | | (2) % |
| Hotels | | | | | | | | | | | |
| Occupancy | 78 % | | 31 % | | 49 % | | 11 % | | 71 % | | 27 % |
| Available Room Nights (in thousands) | 5,062 | | 5,293 | | 1,587 | | 1,587 | | 6,649 | | 6,880 |
| Per Room Guest Spending | $452 | | $349 | | $336 | | $371 | | $433 | | $351 |
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Operating labor | $ | (3,125) | | | $ | (2,042) | | | (53) % |
| Infrastructure costs | (1,227) | | | (1,065) | | | (15) % |
| Cost of goods sold and distribution costs | (1,440) | | | (1,008) | | | (43) % |
| Other operating expense | (1,144) | | | (623) | | | (84) % |
| $ | (6,936) | | | $ | (4,738) | | | (46) % |
The increases in operating labor, cost of goods sold and distribution costs and other operating expenses were due to higher volumes, while the increase in infrastructure costs was due to higher volumes and increased technology spending.
Selling, general, administrative and other costs increased $208 million, to $1,546 million from $1,338 million, due to higher marketing spend.
Segment Operating Income (Loss)
Segment operating results increased from a loss of $525 million to income of $4.2 billion due to growth at our domestic parks and experiences and, to a less extent, our international parks and resorts.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment:
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 9,698 | | | $ | 3,224 | | | >100 % |
| International | 1,435 | | | 640 | | | >100 % |
| Consumer Products | 2,753 | | | 2,897 | | | (5) % |
| $ | 13,886 | | | $ | 6,761 | | | >100 % |
| Supplemental operating income (loss) detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 2,940 | | | $ | (1,385) | | | nm |
| International | (247) | | | (642) | | | 62 % |
| Consumer Products | 1,512 | | | 1,502 | | | 1 % |
| $ | 4,205 | | | $ | (525) | | | nm |
Items Excluded from Segment Operating Income Related to Disney Parks, Experiences and Products
The following table presents supplemental information for items related to the DPEP segment that are excluded from segment operating income:
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
Restructuring and impairment charges(1) | $ | — | | | $ | (217) | | | 100 % |
| TFCF and Hulu acquisition amortization | (4) | | | (4) | | | — % |
(1)The prior-year period includes asset impairments and severance costs related to the planned closure of a substantial number of our Disney-branded retail stores and severance costs related to other workforce reductions.
CORPORATE AND UNALLOCATED SHARED EXPENSES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | | | April 2,
2022 | | April 3,
2021 | |
| Corporate and unallocated shared expenses | $ | (272) | | $ | (201) | | (35) % | | $ | (500) | | $ | (433) | | (15) % |
Corporate and unallocated shared expenses for the quarter increased $71 million, from $201 million to $272 million, driven by the timing of allocations to operating segments. Corporate and unallocated shared expenses for the current period increased $67 million, from $433 million to $500 million, driven by higher compensation and human resource-related costs.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
FINANCIAL CONDITION
The change in cash and cash equivalents is as follows:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | % Change
Better
(Worse) |
| (in millions) | April 2,
2022 | | April 3,
2021 | |
| Cash provided by operations - continuing operations | $ | 1,556 | | | $ | 1,468 | | | 6 % |
| Cash used in investing activities - continuing operations | (2,024) | | | (1,327) | | | (53) % |
| Cash used in financing activities - continuing operations | (2,097) | | | (2,241) | | | 6 % |
| Cash (used in) provided by discontinued operations | (4) | | | 8 | | | nm |
| | | | | |
| | | | | |
| | | | | |
| Impact of exchange rates on cash, cash equivalents and restricted cash | (116) | | | 70 | | | nm |
| Change in cash, cash equivalents and restricted cash | $ | (2,685) | | | $ | (2,022) | | | (33) % |
Operating Activities
Cash provided by continuing operating activities increased 6% due to higher operating cash flow at DPEP and lower severance payments, partially offset by lower operating cash flow at DMED and a partial payment for the Content License Early Termination. The increase in operating cash flow at DPEP was due to higher operating cash receipts driven by higher revenue, partially offset by an increase in operating cash disbursements due to higher operating expenses. The decrease in operating cash flow at DMED was due to higher operating cash disbursements and higher spending on film and television productions, partially offset by higher operating cash receipts. Higher operating cash disbursements were driven by increased operating expenses while higher operating cash receipts were due to revenue growth.
Produced and licensed programming costs
The DMED segment incurs costs to produce and license feature film and television content. Film and television production costs include all internally produced content such as live-action and animated feature films, television series, television specials and theatrical stage plays. Programming costs include film or television content rights licensed from third parties for use on the Company’s Linear Networks and DTC services. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The Company’s film and television production and programming activity for the six months ended April 2, 2022 and April 3, 2021 are as follows:
| | | | | | | | | | | |
| | Six Months Ended |
| (in millions) | April 2,
2022 | | April 3,
2021 |
| Beginning balances: | | | |
| Produced and licensed programming assets | $ | 31,732 | | | $ | 27,193 | |
| Programming liabilities | (4,113) | | | (4,099) | |
| 27,619 | | | 23,094 | |
| Spending: | | | |
| Programming licenses and rights | 7,335 | | | 6,649 | |
| Produced film and television content | 7,586 | | | 5,607 | |
| 14,921 | | | 12,256 | |
| Amortization: | | | |
| Programming licenses and rights | (7,650) | | | (6,762) | |
| Produced film and television content | (4,992) | | | (3,809) | |
| (12,642) | | | (10,571) | |
| Change in internally produced and licensed content costs | 2,279 | | | 1,685 | |
| | | |
| Other non-cash activity | 215 | | | 139 | |
| Ending balances: | | | |
| Produced and licensed programming assets | 34,145 | | | 29,062 | |
| Programming liabilities | (4,032) | | | (4,144) | |
| $ | 30,113 | | | $ | 24,918 | |
The Company currently expects its fiscal 2022 spend on produced and licensed content, including sports rights, to be as much as approximately $32 billion, or approximately $7 billion more than fiscal 2021 spend of $25 billion. The increase is driven by higher spend to support our DTC expansion and generally assumes no significant disruptions to production due to COVID-19.
Investing Activities
Investing activities consist principally of investments in parks, resorts and other property and acquisition and divestiture activity. The Company’s investments in parks, resorts and other property for the six months ended April 2, 2022 and April 3, 2021 are as follows:
| | | | | | | | | | | |
| (in millions) | April 2,
2022 | | April 3,
2021 |
| | | |
| | | |
| | | |
| | | |
| Disney Media and Entertainment Distribution | $ | 334 | | | $ | 369 | |
| Disney Parks, Experiences and Products | | | |
| Domestic | 1,047 | | | 656 | |
| International | 391 | | | 355 | |
| | | |
| Total Disney Parks, Experiences and Products | 1,438 | | | 1,011 | |
| | | |
| | | |
| Corporate | 288 | | | 150 | |
| $ | 2,060 | | | $ | 1,530 | |
Capital expenditures at the DMED segment primarily reflect investments in technology and in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities.
Capital expenditures for the DPEP segment are principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and technology. The increase in the current period compared to the prior-year period was primarily due to the temporary suspension of certain capital projects in the prior-year period as a result of COVID-19 and higher spend in the current period on cruise ships and other guest offerings.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Capital expenditures at Corporate primarily reflect investments in corporate facilities, technology and equipment. The increase in the current period compared to the prior-year period was driven by higher spend on corporate facilities.
The Company currently expects its fiscal 2022 capital expenditures will be approximately $5.5 billion compared to fiscal 2021 capital expenditures of $3.6 billion. The expected increase in capital expenditures is due to higher spending on cruise ship fleet expansion, corporate facilities, and production facilities and technology at the DMED segment.
Financing Activities
Cash used in financing activities was $2.1 billion in the current six months compared to $2.2 billion in the prior-year six months. In the current six months, the Company had a decrease in net borrowings of $1.5 billion compared to a decrease in net borrowings of $1.9 billion in the prior-year six months. The lower decrease in net borrowings was partially offset by lower proceeds from exercise of stock options ($0.1 billion in the current six months compared to $0.4 billion in the prior-year six months).
See Note 5 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the six months ended April 2, 2022 and information regarding the Company’s bank facilities. The Company may use operating cash flows, commercial paper borrowings up to the amount of its unused $12.25 billion bank facilities maturing in March 2023, March 2025 and March 2027, and incremental term debt issuances to retire or refinance other borrowings before or as they come due.
The Company’s operating cash flow and access to the capital markets can be impacted by factors outside of its control, including COVID-19, which had an adverse impact on the Company’s operating cash flows in fiscal 2020 and 2021. We believe that the Company’s financial condition remains strong and that its cash balances, other liquid assets, operating cash flows, access to debt and equity capital markets and borrowing capacity under current bank facilities, taken together, provide adequate resources to fund ongoing operating requirements and upcoming debt maturities as well as future capital expenditures related to the expansion of existing businesses and development of new projects. Depending on the unknowable duration and severity of the future impacts of COVID-19 and its variants, the Company may take mitigating actions in the future such as continuing to not declare dividends (the Company did not pay a dividend with respect to fiscal 2020 and 2021 operations and has not declared or paid a dividend with respect to fiscal 2022 operations); reducing or not making certain payments, such as some contributions to our pension and postretirement medical plans; raising financing; suspending capital spending; reducing film and television content investments; or implementing furloughs or reductions in force. The impacts on our operating cash flows are subject to uncertainty and may require us to rely more heavily on external funding sources, such as debt and other types of financing.
The Company’s borrowing costs can also be impacted by short- and long-term debt ratings assigned by nationally recognized rating agencies, which are based, in significant part, on the Company’s performance as measured by certain credit metrics such as leverage and interest coverage ratios. As of April 2, 2022, Moody’s Investors Service’s long- and short-term debt ratings for the Company were A2 and P-1 (Stable), respectively, Standard and Poor’s long- and short-term debt ratings for the Company were BBB+ and A-2 (Stable), respectively, and Fitch’s long- and short-term debt ratings for the Company were A- and F2 (Stable), respectively. On April 4, 2022, Standard and Poor’s revised its outlook on the Company to Positive from Stable and affirmed its BBB+ long-term issuer credit rating. The Company’s bank facilities contain only one financial covenant, relating to interest coverage of three times earnings before interest, taxes, depreciation and amortization, including both intangible amortization and amortization of our film and television production and programming costs, which the Company met on April 2, 2022, by a significant margin. The Company’s bank facilities also specifically exclude certain entities, including the Asia Theme Parks, from any representations, covenants or events of default.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
On March 20, 2019 as part of the acquisition of TFCF, The Walt Disney Company (“TWDC”) became the ultimate parent of TWDC Enterprises 18 Corp. (formerly known as The Walt Disney Company) (“Legacy Disney”). Legacy Disney and TWDC are collectively referred to as “Obligor Group”, and individually, as a “Guarantor”. Concurrent with the close of the TFCF acquisition, $16.8 billion of TFCF’s assumed public debt (which then constituted 96% of such debt) was exchanged for senior notes of TWDC (the “exchange notes”) issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an Indenture, dated as of March 20, 2019, between TWDC, Legacy Disney, as guarantor, and Citibank, N.A., as trustee (the “TWDC Indenture”) and guaranteed by Legacy Disney. On November 26, 2019, $14.0 billion of the outstanding exchange notes were exchanged for new senior notes of TWDC registered under the Securities Act, issued pursuant to the TWDC Indenture and guaranteed by Legacy Disney. In addition, contemporaneously with the closing of the March 20, 2019 exchange offer, TWDC entered into a guarantee of the registered debt securities issued by Legacy Disney under the Indenture dated as of September 24, 2001 between Legacy Disney and Wells Fargo Bank, National Association, as trustee (the “2001 Trustee”) (as amended by the first supplemental indenture among Legacy Disney, as issuer, TWDC, as guarantor, and the 2001 Trustee, as trustee).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Other subsidiaries of the Company do not guarantee the registered debt securities of either TWDC or Legacy Disney (such subsidiaries are referred to as the “non-Guarantors”). The par value and carrying value of total outstanding and guaranteed registered debt securities of the Obligor Group at April 2, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| TWDC | | Legacy Disney |
| (in millions) | Par Value | | Carrying Value | | Par Value | | Carrying Value |
| Registered debt with unconditional guarantee | $ | 37,350 | | $ | 38,403 | | $ | 9,199 | | $ | 9,070 |
The guarantees by TWDC and Legacy Disney are full and unconditional and cover all payment obligations arising under the guaranteed registered debt securities. The guarantees may be released and discharged upon (i) as a general matter, the indebtedness for borrowed money of the consolidated subsidiaries of TWDC in aggregate constituting no more than 10% of all consolidated indebtedness for borrowed money of TWDC and its subsidiaries (subject to certain exclusions), (ii) upon the sale, transfer or disposition of all or substantially all of the equity interests or all or substantially all, or substantially as an entirety, the assets of Legacy Disney to a third party, and (iii) other customary events constituting a discharge of a guarantor’s obligations. In addition, in the case of Legacy Disney’s guarantee of registered debt securities issued by TWDC, Legacy Disney may be released and discharged from its guarantee at any time Legacy Disney is not a borrower, issuer or guarantor under certain material bank facilities or any debt securities.
Operations are conducted almost entirely through the Company’s subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service its debt, including the public debt, are dependent upon the earnings of the Company’s subsidiaries and the distribution of those earnings to the Obligor Group, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities have a direct claim only against the Obligor Group.
Set forth below is summarized financial information for the Obligor Group on a combined basis after elimination of (i) intercompany transactions and balances between TWDC and Legacy Disney and (ii) equity in the earnings from and investments in any subsidiary that is a non-Guarantor. This summarized financial information has been prepared and presented pursuant to the Securities and Exchange Commission Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with GAAP.
| | | | | |
| Results of operations (in millions) | Six months Ended April 2, 2022 |
| Revenues | $ | — |
| Costs and expenses | — |
| Net income (loss) from continuing operations | (535) |
| Net income (loss) | (535) |
| Net income (loss) attributable to TWDC shareholders | (535) |
| | | | | | | | | | | |
| Balance Sheet (in millions) | April 2, 2022 | | October 2, 2021 |
| Current assets | $ | 6,024 | | $ | 9,506 |
| Noncurrent assets | 1,729 | | 1,689 |
| Current liabilities | 6,054 | | 6,878 |
| Noncurrent liabilities (excluding intercompany to non-Guarantors) | 49,259 | | 51,439 |
| Intercompany payables to non-Guarantors | 147,027 | | 147,629 |
| | | |
| | | |
COMMITMENTS AND CONTINGENCIES
Legal Matters
As disclosed in Note 13 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters.
Guarantees
See Note 15 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.
Tax Matters
As disclosed in Note 10 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K, the Company has exposure for certain tax matters.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Contractual Commitments
See Note 15 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.
OTHER MATTERS
Accounting Policies and Estimates
We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.
Produced and Acquired/Licensed Content Costs
We amortize and test for impairment of capitalized film and television production costs based on whether the content is predominantly monetized individually or as a group. See Note 7 to the Condensed Consolidated Financial Statements for further discussion.
Production costs that are classified as individual are amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues).
With respect to produced films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues is theatrical performance. Revenues derived from other markets subsequent to the theatrical release are generally highly correlated with theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort. Upon a film’s release and determination of the theatrical performance, the Company’s estimates of revenues from succeeding windows and markets, which may include imputed license fees for content that is used on our DTC streaming services, are revised based on historical relationships and an analysis of current market trends.
With respect to capitalized television production costs that are classified as individual, the most sensitive factors affecting estimates of Ultimate Revenues are program ratings of the content on our licensees’ platforms. Program ratings, which are an indication of market acceptance, directly affect the program’s ability to generate advertising and subscriber revenues and are correlated with the license fees we can charge for the content in subsequent windows and for subsequent seasons.
Ultimate Revenues are reassessed each reporting period and the impact of any changes on amortization of production cost is accounted for as if the change occurred at the beginning of the current fiscal year. If our estimate of Ultimate Revenues decreases, amortization of costs may be accelerated or result in an impairment. Conversely, if our estimate of Ultimate Revenues increases, cost amortization may be slowed.
Produced content costs that are part of a group and acquired/licensed content costs are amortized based on projected usage typically resulting in an accelerated or straight-line amortization pattern. The determination of projected usage requires judgment and is reviewed periodically for changes. If projected usage changes we may need to accelerate or slow the recognition of amortization expense.
The amortization of multi-year sports rights is based on our projections of revenues over the contract period, which include advertising revenue and an allocation of affiliate revenue (relative value). If the annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season. If estimated relative values by year were to change significantly, amortization of our sports rights costs may be accelerated or slowed.
Revenue Recognition
The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. Refer to Note 2 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K for our revenue recognition policies.
Pension and Postretirement Medical Plan Actuarial Assumptions
The Company’s pension and postretirement medical benefit obligations and related costs are calculated using a number of actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement, which we evaluate annually. See Note 11 to the Consolidated Financial Statements in the 2021 Annual Report on Form 10-K for estimated impacts of changes in these assumptions. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension and postretirement medical expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. The Company’s discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans’ liability cash flows to the yield curves.
To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension and postretirement medical expense.
Goodwill, Other Intangible Assets, Long-Lived Assets and Investments
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis. The Company performs its annual test of goodwill and indefinite-lived intangible assets for impairment in its fiscal fourth quarter.
Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. To test goodwill for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of a reporting unit exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows of the reporting unit.
The quantitative assessment compares the fair value of each goodwill reporting unit to its carrying amount, and to the extent the carrying amount exceeds the fair value, an impairment of goodwill is recognized for the excess up to the amount of goodwill allocated to the reporting unit.
The impairment test for goodwill requires judgment related to the identification of reporting units, the assignment of assets and liabilities to reporting units including goodwill, and the determination of fair value of the reporting units. To determine the fair value of our reporting units, we apply what we believe to be the most appropriate valuation methodology for each of our reporting units. We generally use a present value technique (discounted cash flows) corroborated by market multiples when available and as appropriate. The discounted cash flow analyses are sensitive to our estimates of future revenue growth and margins for these businesses as well as the discount rates used to calculate the present value of future cash flows. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. We believe our estimates are consistent with how a marketplace participant would value our reporting units. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.
To test its other indefinite-lived intangible assets for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of each of its indefinite-lived intangible assets exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows.
The quantitative assessment compares the fair value of an indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized for the excess. Fair values of indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company tests long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of the estimated undiscounted future cash flows expected to be generated over the useful life of the significant assets of an asset group to the carrying amount of the asset group. An asset group is generally established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the asset group and the carrying amount of the asset group. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
triggering event has occurred, the identification of asset groups, estimates of future cash flows and the discount rate used to determine fair values.
The Company has investments in equity securities. For equity securities that do not have a readily determinable fair value, we consider forecasted financial performance of the investee companies, as well as volatility inherent in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded.
Allowance for Credit Losses
We evaluate our allowance for credit losses and estimate collectability of accounts receivable based on historical bad debt experience, our assessment of the financial condition of individual companies with which we do business, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, including COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, costs and expenses may increase in future periods, and if it is too high, costs and expenses may decrease in future periods. See Note 3 to the Condensed Consolidated Financial Statements for additional discussion.
Contingencies and Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for the resolution of these proceedings. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and have been developed in consultation with outside counsel as appropriate. From time to time, we are also involved in other contingent matters for which we accrue estimates for a probable and estimable loss. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to legal proceedings or our assumptions regarding other contingent matters. See Note 13 to the Condensed Consolidated Financial Statements for more detailed information on litigation exposure.
Income Tax
As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in proposed assessments. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized by the Company may differ from those recognized in our future financial statements based on a number of factors, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and the Company’s success in supporting its filing positions with taxing authorities.
Impacts of COVID-19 on Accounting Policies and Estimates
In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies and may make changes to these estimates and judgments over time. This could result in meaningful impacts to our financial statements in future periods as discussed below.
Produced and Acquired/Licensed Content Costs
Certain of our completed or in progress film and television productions have had their initial release dates delayed. The duration of the delay, market conditions when we release the content, or a change in our release strategy (e.g. bypassing certain distribution windows) could have an impact on Ultimate Revenues, which may accelerate amortization or result in an impairment of capitalized film and television production costs.
Given the ongoing uncertainty around live sporting events continuing uninterrupted, the amount and timing of revenues derived from the broadcast of these events may differ from the projections of revenues that support our amortization pattern of the rights costs we pay for these events. Such changes in revenues could result in an acceleration or slowing of the amortization of our sports rights costs.
Revenue Recognition
Certain of our affiliate contracts contain commitments with respect to the content to be aired on our television networks (e.g. live sports or original content). If there are delays or cancellations of live sporting events or disruptions to film and television content production activities, we may need to assess the impact on our contractual obligations and adjust the revenue that we recognize related to these contracts.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Goodwill, Other Intangible Assets, Long-Lived Assets and Investments
Given the ongoing impacts of COVID-19 across our businesses, the projected cash flows that we use to assess the fair value of our businesses and assets for purposes of impairment testing are subject to greater uncertainty than normal. If in the future we reduce our estimate of cash flow projections, we may need to impair some of these assets.
Income Tax (See Note 8 to the Condensed Consolidated Financial Statements)
The determination of interim period tax provisions generally requires the use of a forecasted full-year effective tax rate, which in turn requires a full year forecast of earnings before tax and tax expense. Given the uncertainties created by COVID-19, these forecasts are subject to greater than normal variability, which could lead to volatility in our reported quarterly effective tax rates.
Risk Management Contracts
The Company employs a variety of financial instruments (derivatives) including interest rate and cross-currency swap agreements and forward and option contracts to manage its exposure to fluctuations in interest rates, foreign currency exchange rates and commodity prices.
As a result of the impact of COVID-19 on our businesses, our projected cash flows or projected usage of commodities are subject to a greater degree of uncertainty, which may cause us to recognize gains or losses on our hedging instruments in different periods than the hedged transaction.
New Accounting Pronouncements
See Note 17 to the Condensed Consolidated Financial Statements for information regarding new accounting pronouncements.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, commodity fluctuations and changes in the market values of its investments.
Policies and Procedures
In the normal course of business, we employ established policies and procedures to manage the Company’s exposure to changes in interest rates, foreign currencies and commodities using a variety of financial instruments.
Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to the Company’s portfolio of borrowings. By policy, the Company targets fixed-rate debt as a percentage of its net debt between minimum and maximum percentages.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow in order to allow management to focus on core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the U.S. dollar equivalent value of its existing foreign currency assets, liabilities, commitments and forecasted foreign currency revenues and expenses. The Company utilizes option strategies and forward contracts that provide for the purchase or sale of foreign currencies to hedge probable, but not firmly committed, transactions. The Company also uses forward and option contracts to hedge foreign currency assets and liabilities. The principal foreign currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings to U.S. dollar denominated borrowings. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its forecasted foreign exchange exposures generally for periods not to exceed four years. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related exposures. The economic or political conditions in a country have reduced and in the future could reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country.
Our objectives in managing exposure to commodity fluctuations are to use commodity derivatives to reduce volatility of earnings and cash flows arising from commodity price changes. The amounts hedged using commodity swap contracts are based on forecasted levels of consumption of certain commodities, such as fuel oil and gasoline.
Our objectives in managing exposures to market-based fluctuations in certain retirement liabilities are to use total return swap contracts to reduce the volatility of earnings arising from changes in these retirement liabilities. The amounts hedged using total return swap contracts are based on estimated liability balances.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
It is the Company’s policy to enter into foreign currency and interest rate derivative transactions and other financial instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes.