dis-20191228

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 28, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

Commission File Number 001-38842


Delaware						83-0940635
State or Other Jurisdiction of						I.R.S. Employer Identification
Incorporation or Organization

500 South Buena Vista Street

Burbank, California 91521

Address of Principal Executive Offices and Zip Code

(818) 560-1000

Registrant’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

DIS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

There were 1,805,438,643 shares of common stock outstanding as of January 29, 2020.

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited; in millions, except per share data)


	Quarter Ended
	December 28, 2019		December 29, 2018
Revenues:
Services	$	18,075	$	12,866
Products	2,783		2,437
Total revenues	20,858		15,303
Costs and expenses:
Cost of services (exclusive of depreciation and amortization)	(11,377)		(7,564)
Cost of products (exclusive of depreciation and amortization)	(1,639)		(1,437)
Selling, general, administrative and other	(3,703)		(2,152)
Depreciation and amortization	(1,298)		(732)
Total costs and expenses	(18,017)		(11,885)
Restructuring and impairment charges	(150)		—

Interest expense, net	(283)		(63)
Equity in the income of investees	224		76
Income from continuing operations before income taxes	2,632		3,431
Income taxes on continuing operations	(459)		(645)
Net income from continuing operations	2,173		2,786
Loss from discontinued operations (net of income tax benefit of $8 and $0, respectively)	(26)		—
Net income	2,147		2,786
Net (income) loss from continuing operations attributable to noncontrolling interests	(40)		2

Net income attributable to The Walt Disney Company (Disney)	$	2,107	$	2,788

Earnings per share attributable to Disney⁽¹⁾:
Diluted
Continuing operations	$	1.17	$	1.86
Discontinued operations	(0.01)		—
	$	1.16	$	1.86
Basic
Continuing operations	$	1.18	$	1.87
Discontinued operations	(0.01)		—
	$	1.17	$	1.87

Weighted average number of common and common equivalent shares outstanding:
Diluted	1,817		1,498
Basic	1,805		1,490

⁽¹⁾Total may not equal the sum of the column due to rounding.

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited; in millions)


	Quarter Ended
	December 28, 2019		December 29, 2018
Net income	$	2,147	$	2,786
Other comprehensive income (loss), net of tax:

Market value adjustments for hedges	(107)		(9)
Pension and postretirement medical plan adjustments	107		53
Foreign currency translation and other	127		(21)
Other comprehensive income	127		23
Comprehensive income	2,274		2,809
Net (income) loss from continuing operations attributable to noncontrolling interests	(40)		2
Other comprehensive income attributable to noncontrolling interests	(43)		(2)
Comprehensive income attributable to Disney	$	2,191	$	2,809

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)


	December 28, 2019		September 28, 2019
ASSETS
Current assets
Cash and cash equivalents	$	6,833	$	5,418
Receivables	17,100		15,481
Inventories	1,571		1,649
Licensed content costs and advances	1,334		4,597

Other current assets	938		979

Total current assets	27,776		28,124
Produced and licensed content costs	26,539		22,810
Investments	3,312		3,224
Parks, resorts and other property
Attractions, buildings and equipment	59,910		58,589
Accumulated depreciation	(33,057)		(32,415)
	26,853		26,174
Projects in progress	4,023		4,264
Land	1,019		1,165
	31,895		31,603
Intangible assets, net	22,669		23,215
Goodwill	80,314		80,293

Other assets	8,443		4,715
Total assets	$	200,948	$	193,984

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other accrued liabilities	$	19,755	$	17,762
Current portion of borrowings	10,018		8,857
Deferred revenue and other	5,024		4,722

Total current liabilities	34,797		31,341
Borrowings	38,057		38,129
Deferred income taxes	8,364		7,902

Other long-term liabilities	15,928		13,760
Commitments and contingencies (Note 13)
Redeemable noncontrolling interests	9,029		8,963
Equity
Preferred stock	—		—
Common stock, $0.01 par value, Authorized – 4.6 billion shares, Issued – 1.8 billion shares	53,995		53,907
Retained earnings	43,202		42,494
Accumulated other comprehensive loss	(6,533)		(6,617)

Treasury stock, at cost, 19 million shares	(907)		(907)
Total Disney Shareholders’ equity	89,757		88,877
Noncontrolling interests	5,016		5,012
Total equity	94,773		93,889
Total liabilities and equity	$	200,948	$	193,984

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)


	Quarter Ended
	December 28, 2019		December 29, 2018
OPERATING ACTIVITIES
Net income from continuing operations	$	2,173	$	2,786
Depreciation and amortization	1,298		732

Deferred income taxes	534		46
Equity in the income of investees	(224)		(76)
Cash distributions received from equity investees	219		170
Net change in produced and licensed content costs and advances	(77)		468
Equity-based compensation	115		92
Other	65		61
Changes in operating assets and liabilities, net of business acquisitions:
Receivables	(1,424)		(1,078)
Inventories	81		32
Other assets	(33)		25
Accounts payable and other liabilities	(841)		(1,289)
Income taxes	(256)		130
Cash provided by operations - continuing operations	1,630		2,099

INVESTING ACTIVITIES
Investments in parks, resorts and other property	(1,338)		(1,195)


Other	(12)		(141)
Cash used in investing activities - continuing operations	(1,350)		(1,336)

FINANCING ACTIVITIES
Commercial paper borrowings/(payments), net	1,172		(302)
Borrowings	51		—
Reduction of borrowings	(46)		—


Proceeds from exercise of stock options	126		37


Other	(186)		(146)
Cash provided by (used in) financing activities - continuing operations	1,117		(411)

CASH FLOWS FROM DISCONTINUED OPERATIONS
Cash used in operations - discontinued operations	(19)		—




Impact of exchange rates on cash, cash equivalents and restricted cash	41		(44)

Change in cash, cash equivalents and restricted cash	1,419		308
Cash, cash equivalents and restricted cash, beginning of period	5,455		4,155
Cash, cash equivalents and restricted cash, end of period	$	6,874	$	4,463

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)


	Quarter Ended
	Equity Attributable to Disney
	Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)					Treasury Stock		Total Disney Equity		Non-controlling Interests ⁽¹⁾		Total Equity
Balance at September 28, 2019	1,802	$	53,907	$	42,494		$	(6,617)	$	(907)	$	88,877	$	5,012	$	93,889
Comprehensive income	—	—		2,107			84		—		2,191		17		2,208
Equity compensation activity	3	88		—			—		—		88		—		88

Dividends	—	—		(1,587)			—		—		(1,587)		—		(1,587)
Contributions	—	—		—			—		—		—		20		20


Adoption of new lease accounting guidance:	—	—		197			—		—		197		—		197


Distributions and other	—	—		(9)			—		—		(9)		(33)		(42)
Balance at December 28, 2019	1,805	$	53,995	$	43,202		$	(6,533)	$	(907)	$	89,757	$	5,016	$	94,773

Balance at September 29, 2018	1,488	$	36,779	$	82,679		$	(3,097)	$	(67,588)	$	48,773	$	4,059	$	52,832
Comprehensive income	—	—		2,788			21		—		2,809		(1)		2,808
Equity compensation activity	2	20		—			—		—		20		—		20

Dividends	—	—		(1,310)			—		—		(1,310)		—		(1,310)
Contributions	—	—		—			—		—		—		20		20
Adoption of new accounting guidance:
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	—	—		691			(691)		—		—		—		—
Intra-Entity Transfers of Assets Other Than Inventory	—	—		129			—		—		129		—		129
Revenues from Contracts with Customers	—	—		(116)			—		—		(116)		—		(116)
Other	—	—		22			(15)		—		7		—		7
Distributions and other	—	—		4			—		—		4		(1)		3
Balance at December 29, 2018	1,490	$	36,799	$	84,887		$	(3,782)	$	(67,588)	$	50,316	$	4,077	$	54,393

⁽¹⁾Excludes redeemable noncontrolling interests

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

1.Principles of Consolidation

These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the quarter ended December 28, 2019 are not necessarily indicative of the results that may be expected for the year ending October 3, 2020.

The terms “Company,” “we,” “us,” and “our” are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted. The term “TWDC” is used to refer to the parent company.

These financial statements should be read in conjunction with the Company’s 2019 Annual Report on Form 10-K.

On March 20, 2019, the Company acquired Twenty-First Century Fox, Inc., which was subsequently renamed TFCF Corporation (TFCF). As a result of the acquisition, the Company’s ownership in Hulu LLC (Hulu) increased to 60% (67% as of December 28, 2019 and September 28, 2019). The acquired TFCF operations and Hulu have been consolidated since the acquisition. In order to obtain regulatory approval for the acquisition, the Company agreed to sell sports media operations in Brazil and Mexico, which, along with certain other businesses to be divested, are presented as discontinued operations in the Condensed Consolidated Statement of Income. At December 28, 2019 and September 28, 2019, the assets and liabilities of the businesses held for sale are not material and are included in other assets and other liabilities in the Condensed Consolidated Balance Sheet.

Variable Interest Entities

The Company enters into relationships or investments with other entities that may be variable interest entities (VIE). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant (as defined by ASC 810-10-25-38) to the VIE. Hong Kong Disneyland Resort and Shanghai Disney Resort (together the Asia Theme Parks) are VIEs in which the Company has less than 50% equity ownership. Company subsidiaries (the Management Companies) have management agreements with the Asia Theme Parks, which provide the Management Companies, subject to certain protective rights of joint venture partners, with the ability to direct the day-to-day operating activities and the development of business strategies that we believe most significantly impact the economic performance of the Asia Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the Asia Theme Parks. Therefore, the Company has consolidated the Asia Theme Parks in its financial statements.

Redeemable Noncontrolling Interests

On May 13, 2019, the Company entered into a put/call agreement with NBC Universal (NBCU) that provided the Company with full operational control of Hulu. Under the agreement, beginning in January 2024, NBCU has the option to require the Company to purchase NBCU’s approximately 33% interest in Hulu and the Company has the option to require NBCU to sell its interest in Hulu, based on NBCU’s equity ownership percentage of the greater of Hulu’s then fair value or $27.5 billion.

NBCU’s interest will generally not be allocated its portion of Hulu’s losses as the redeemable noncontrolling interest is required to be carried at a minimum value. The minimum value is equal to the fair value as of the May 13, 2019 agreement date accreted to the January 2024 redemption value. At December 28, 2019, NBCU’s interest in Hulu is recorded in the Company’s financial statements at $7.9 billion.

BAMTech’s noncontrolling interest holders, Major League Baseball (MLB) and the National Hockey League (NHL), have the right to sell their interest to the Company in the future. MLB can generally sell its interest to the Company starting five years from and ending ten years after the Company’s September 25, 2017 acquisition date of BAMTech at the greater of fair value or a guaranteed floor value ($563 million accreting at 8% annually for eight years from the date of acquisition). The NHL can sell its interest to the Company in fiscal 2020 for $300 million or in fiscal 2021 for $350 million. The Company has the right to purchase MLB’s interest in BAMTech starting five years from and ending ten years after the September 25, 2017

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

acquisition date at the greater of fair value or the guaranteed floor value. The Company has the right to acquire the NHL interest in fiscal 2020 or 2021 for $500 million.

The MLB and NHL interests will generally not be allocated their portion of BAMTech losses as these interests are required to be recorded at the greater of (i) their acquisition date fair value adjusted for their share (if any) of earnings, losses, or dividends or (ii) an accreted value from the date of the acquisition to the earliest redemption date. The accretion of the MLB interest to the earliest redemption value (i.e. in five years after the acquisition date) will be recorded using an interest method. The redeemable noncontrolling interest subject to accretion would have had a redemption amount of approximately $670 million as of December 28, 2019.

Adjustments to the carrying amount of redeemable noncontrolling interests increase or decrease income available to Company shareholders and are recorded in “Net (income) loss from continuing operations attributable to noncontrolling interests” on the Condensed Consolidated Statement of Income.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results may differ from those estimates.

Reclassifications

Certain reclassifications have been made in fiscal 2019 financial statements and notes to conform to the fiscal 2020 presentation.

2.Segment Information

Our operating segments report separate financial information, which is evaluated regularly by the Chief Executive Officer in order to decide how to allocate resources and to assess performance. The following are the Company’s operating segments:

•Media Networks;

•Parks, Experiences and Products;

•Studio Entertainment; and

•Direct-to-Consumer & International

Segment operating results reflect earnings before corporate and unallocated shared expenses, restructuring and impairment charges, net other income, net interest expense, income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees and excludes impairments of certain equity investments and purchase accounting amortization of TFCF and Hulu assets (i.e. intangible assets and the fair value step-up for film and television costs) recognized in connection with the TFCF acquisition. Corporate and unallocated shared expenses principally consist of corporate functions, executive management and certain unallocated administrative support functions.

Segment operating results include allocations of certain costs, including information technology, pension, legal and other shared services costs, which are allocated based on metrics designed to correlate with consumption. These allocations are agreed-upon amounts between the businesses and may differ from amounts that would be negotiated in arm’s length transactions.

Intersegment content transactions are presented “gross” (i.e. the segment producing the content reports revenue and profit from intersegment transactions, and the required eliminations are reported on a separate “Eliminations” line when presenting a summary of our segment results). Other intersegment transactions are reported “Net” (i.e. revenue from another segment is recorded as a reduction of costs). Studio Entertainment revenues and operating income include an allocation of Parks, Experiences and Products revenues, which is meant to reflect royalties on revenue generated by Parks, Experiences and Products on merchandise based on intellectual property from Studio Entertainment films.

As it relates to film and television content that is produced by our Media Networks and Studio Entertainment segments that will be used on our direct-to-consumer (DTC) services, there are four broad categories of content:

•Content produced for exclusive DTC use, “Originals”;

•New Studio Entertainment theatrical releases following the theatrical and home entertainment windows, “Studio Pay 1”;

•New Media Networks episodic television series following their initial airing on our linear networks, “Media Pay 1”; and

•Content in all other windows, “Library”.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

The intersegment transfer price, for purposes of segment financial reporting pursuant to ASC 280 Segment Reporting, is generally cost plus a margin for Originals and Media Pay 1 content and generally based on comparable transactions for Studio Pay 1 and Library content. Imputed title by title intersegment license fees that may be necessary for other purposes are established as required by those purposes.

Intersegment revenue is recognized upon availability of the content to the DTC service except with respect to Library content for which revenue is recognized ratably over the license period.

Our DTC services generally amortize intersegment content costs for Originals and Studio Pay 1 content on an accelerated basis and for Media Pay 1 and Library content on a straight line basis.

When the DTC amortization timing is different than the timing of revenue recognition at Studio Entertainment or Media Networks, the difference results in an operating income impact in the elimination segment, which nets to zero over the DTC amortization period.

Segment revenues and segment operating income are as follows:


	Quarter Ended
	December 28, 2019		December 29, 2018
Revenues:
Media Networks	$	7,361	$	5,921
Parks, Experiences and Products⁽¹⁾	7,396		6,824
Studio Entertainment⁽¹⁾	3,764		1,824
Direct-to-Consumer & International	3,987		918

Eliminations⁽²⁾	(1,650)		(184)
	$	20,858	$	15,303
Segment operating income (loss):
Media Networks	$	1,630	$	1,330
Parks, Experiences and Products⁽¹⁾	2,338		2,152
Studio Entertainment⁽¹⁾	948		309
Direct-to-Consumer & International	(693)		(136)

Eliminations⁽²⁾	(221)		—
	$	4,002	$	3,655

⁽¹⁾The allocation of Parks, Experiences and Products revenues to Studio Entertainment was $184 million and $154 million for the quarters ended December 28, 2019 and December 29, 2018, respectively.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

⁽²⁾Intersegment eliminations are as follows:


	Quarter Ended
(in millions)	December 28, 2019		December 29, 2018
Revenues:

Studio Entertainment:
Content transactions with Media Networks	$	(53)	$	(21)
Content transactions with Direct-to-Consumer & International	(685)		(18)
Media Networks:
Content transactions with Direct-to-Consumer & International	(912)		(145)


	$	(1,650)	$	(184)

Operating income:

Studio Entertainment:
Content transactions with Media Networks	$	—	$	—
Content transactions with Direct-to-Consumer & International	(116)		2
Media Networks:
Content transactions with Direct-to-Consumer & International	(105)		(2)


	$	(221)	$	—

Equity in the income/(loss) of investees is included in segment operating income as follows:


	Quarter Ended
	December 28, 2019		December 29, 2018
Media Networks	$	193	$	179
Parks, Experiences and Products	(3)		(12)

Direct-to-Consumer & International	42		(91)
Equity in the income of investees included in segment operating income	232		76

Amortization of TFCF intangible assets related to equity investees	(8)		—
Equity in the income (loss) of investees, net	$	224	$	76

A reconciliation of segment operating income to income from continuing operations before income taxes is as follows:


	Quarter Ended
	December 28, 2019		December 29, 2018
Segment operating income	$	4,002	$	3,655
Corporate and unallocated shared expenses	(237)		(161)