Segment Information

6 Months Ended

Apr. 03, 2021

Segment Information

Description of Business and 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.

As of the first quarter of fiscal 2021, we changed the presentation of segment operating results as discussed below and have recast our fiscal 2020 segment operating results to align with the fiscal 2021 presentation.

Media and Entertainment Reorganization

In October 2020, the Company reorganized its media and entertainment operations, which have been previously reported in three segments: Media Networks, Studio Entertainment and Direct-to-Consumer & International. With this reorganization, a single group is responsible for distributing all of the Company’s media and entertainment content across all platforms globally. This distribution organization will have full accountability for the financial results of the media and entertainment businesses, and content will generally be created by three production groups: Studios, General Entertainment and Sports.

As a result of the reorganization, effective at the beginning of the first quarter of fiscal 2021, we are reporting the financial results of the media and entertainment businesses as one segment, Disney Media and Entertainment Distribution (DMED) across three significant lines of business/distribution platforms: Linear Networks, Direct-to-Consumer and Content Sales/Licensing (primarily comprising theatrical, home entertainment and third-party television and subscription video-on-demand “TV/SVOD” distribution globally).

Intersegment Transfer Pricing

Under our previous segment structure, in certain instances production and distribution activities were in different segments. In these situations, for segment financial accounting purposes, the producer segment would recognize revenue based on an intersegment transfer price that included a “mark-up”. These transactions were reported “gross” (i.e. the segment producing the content reported revenue and the mark-up from intersegment transactions, and the required eliminations were reported on a separate “Eliminations” line when presenting a summary of our segment results). Under our new segment structure, the operating results of the production and distribution activities are reported in the same segment, and the fully loaded production cost is allocated across the distribution platforms which are utilizing the content.

Elimination of Consumer Products Revenue Share

Under our legacy segment financial reporting, the Studio Entertainment segment received a revenue share related to the consumer products business, which is included in the Disney Parks, Experiences and Products (DPEP) segment. Under the new reporting structure, DMED does not receive a revenue share from DPEP related to the consumer products business.

DESCRIPTION OF BUSINESS

Disney Media and Entertainment Distribution

The DMED segment encompasses the Company’s global film and episodic television content production and distribution activities. Content is distributed by a single organization across three significant lines of business: Linear Networks, Direct-to-Consumer and Content Sales/Licensing and is generally created by three production/content licensing groups: Studios, General Entertainment and Sports. The distribution organization has full accountability for the financial results of the entire media and entertainment business.

The operations in our significant lines of business are as follows:

•Linear Networks

◦Domestic Channels: ABC Television Network (ABC) and eight owned ABC television stations (Broadcasting), and Disney, ESPN, Freeform, FX and National Geographic branded domestic television networks (Cable)

◦International Channels: Disney, ESPN, Fox, National Geographic and Star branded television networks outside the U.S.

◦A 50% equity investment in A+E Television Networks (A+E), which operates a variety of cable channels including A&E, HISTORY and Lifetime

•Direct-to-Consumer

◦Disney+, Disney+ Hotstar, ESPN+, Hulu and Star+ DTC streaming services

•Content Sales/Licensing

◦Sales/licensing of film and television content to third-party television and subscription video-on-demand (TV/SVOD) services

◦Theatrical distribution

◦Home entertainment distribution (DVD, Blu-ray and electronic home video licenses)

◦Music distribution

◦Staging and licensing of live entertainment events on Broadway and around the world (Stage Plays)

DMED also includes the following activities that are reported with Content Sales/Licensing:

•Post-production services through Industrial Light & Magic and Skywalker Sound

•A 30% ownership interest in Tata Sky Limited, which operates a direct-to-home satellite distribution platform in India

The significant revenues of DMED are as follows:

•Affiliate fees - Fees charged by our linear networks to multi-channel video programming distributors (i.e. cable, satellite, telecommunications and digital over-the-top (e.g. YouTube TV) service providers) (MVPDs) and television stations affiliated with the ABC Network for the right to deliver our programming to their customers

•Advertising - Sales of advertising time/space on our Linear Networks and Direct-to-Consumer

•Subscription fees - Fees charged to customers/subscribers for our DTC services

•TV/SVOD distribution - Licensing fees and other revenue for the right to use our film and television productions and revenue from fees charged to customers to view our sports programming (“pay-per-view”) and Premier Access content. TV/SVOD distribution revenue is primarily reported in Content Sales/Licensing, except for pay-per-view and Premier Access revenue, which is reported in Direct-to-Consumer

•Theatrical distribution - Rentals from licensing our film productions to theaters

•Home entertainment - Sale of our film and television content to retailers and distributors in home video formats

•Other content sales/licensing revenue - Revenues from licensing our music, ticket sales from stage play performances and fees from licensing our intellectual properties for use in stage plays

•Other revenue - Fees from sub-licensing of sports programming rights (reported in Linear Networks) and post-production services (reported with Content Sales/Licensing)

The significant expenses of DMED are as follows:

•Operating expenses consist primarily of programming and production costs, technical support costs, operating labor, distribution costs and costs of sales. Operating expenses also includes fees paid to Linear Networks from other DMED business for the right to air the linear networks feed and other services. Programming and production costs include amortization of acquired licensed programming rights (including sports rights), amortization of capitalized production

costs (including participations and residuals) and production costs related to live programming such as news and sports. Programming and production costs are largely incurred across three content creation groups, as follows:

◦Studios - Primarily capitalized production costs related to feature films produced under the Walt Disney Pictures, Twentieth Century Studios, Marvel, Lucasfilm, Pixar and Searchlight Pictures banners

◦General Entertainment - Primarily acquisition of rights to and internal production of episodic television programs and news content. Internal content is generally produced by the following television studios: ABC Signature; 20th Television; Disney Television Animation, FX Productions and various studios for which we commission productions for our branded channels and DTC services

◦Sports - Primarily acquisition of professional and college sports programming rights and related production costs

•Selling, general and administrative costs

•Depreciation and amortization

Disney Parks, Experiences and Products

Significant operations:

•Parks & Experiences:

◦Theme parks and resorts, which include: Walt Disney World Resort in Florida; Disneyland Resort in California; Disneyland Paris; Hong Kong Disneyland Resort; Shanghai Disney Resort. Additionally, the Company licenses our intellectual property to a third party to operate Tokyo Disney Resort

◦Disney Cruise Line, Disney Vacation Club and Aulani, a Disney Resort & Spa in Hawaii

•Consumer Products:

◦Licensing of our trade names, characters, visual, literary and other intellectual properties to various manufacturers, game developers, publishers and retailers throughout the world, for use on merchandise, published materials and games

◦Sale of branded merchandise through retail, online and wholesale businesses, and development and publishing of books, comic books and magazines

Significant revenues:

•Theme park admissions - Sales of tickets for admission to our theme parks

•Parks & Experiences merchandise, food and beverage - Sales of merchandise, food and beverages at our theme parks and resorts and cruise ships

•Resorts and vacations - Sales of room nights at hotels, sales of cruise and other vacations and sales and rentals of vacation club properties

•Merchandise licensing and retail:

◦Merchandise licensing - Royalties from licensing our intellectual properties for use on consumer goods

◦Retail - Sales of merchandise at The Disney Stores and through branded internet shopping sites, as well as to wholesalers (including books, comic books and magazines)

•Parks licensing and other - Revenues from sponsorships and co-branding opportunities and real estate rent and sales. In addition, we earn royalties on Tokyo Disney Resort revenues

Significant expenses:

•Operating expenses consist primarily of operating labor, costs of goods sold, infrastructure costs, supplies, commissions and entertainment offerings. Infrastructure costs include information systems expense, repairs and maintenance, property taxes, utilities and fuel, retail occupancy costs, insurance and transportation

•Selling, general and administrative costs

•Depreciation and amortization

SEGMENT INFORMATION

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 acquisition accounting amortization of TFCF Corporation (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 in fiscal 2019 (TFCF and Hulu acquisition amortization).

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.

Impact of COVID-19

Since early 2020, the world has been, and continues to be, impacted by the novel coronavirus (COVID-19) pandemic. COVID-19 and measures to prevent its spread are impacting our segments in a number of ways, most significantly at DPEP where our theme parks have been closed or operating at significantly reduced capacity and cruise ship sailings and guided tours have been suspended. We have delayed, or in some cases, shortened or canceled, theatrical releases, and stage play performances have been suspended since March 2020 with a limited number of performances returning in the first quarter of fiscal 2021. We have experienced significant disruptions in the production and availability of content, including the shift of key live sports programming from the third quarter of fiscal 2020 to the fourth quarter of fiscal 2020 and into the first quarter of fiscal 2021 as well as the suspension of most film and television content late in the second quarter of fiscal 2020. Although most film and television production activities resumed beginning in the fourth quarter of fiscal 2020, we continue to see disruption in production activities depending on local circumstances.

The impact of these disruptions and the extent of their adverse impact on our financial and operating results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19, and among other things, the impact of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward. As some of our businesses have reopened, we have incurred additional costs to address government regulations and the safety of our employees, talent and guests.

Segment revenues and segment operating income are as follows:

	Quarter Ended				Six Months Ended
	April 3, 2021		March 28, 2020		April 3, 2021		March 28, 2020
Revenues:
Disney Media and Entertainment Distribution	$	12,440	$	12,365	$	25,101	$	25,662
Disney Parks, Experiences and Products	3,173		5,660		6,761		13,240
	$	15,613	$	18,025	$	31,862	$	38,902
Segment operating income (loss):
Disney Media and Entertainment Distribution	$	2,871	$	1,651	$	4,322	$	3,125
Disney Parks, Experiences and Products	(406)		756		(525)		3,278
	$	2,465	$	2,407	$	3,797	$	6,403

Equity in the income of investees is included in segment operating income as follows: 

	Quarter Ended				Six Months Ended
	April 3, 2021		March 28, 2020		April 3, 2021		March 28, 2020
Disney Media and Entertainment Distribution	$	226	$	149	$	461	$	384
Disney Parks, Experiences and Products	(9)		(6)		(17)		(9)
Equity in the income of investees included in segment operating income	217		143		444		375
Amortization of TFCF intangible assets related to equity investees	(4)		(8)		(7)		(16)
Equity in the income of investees, net	$	213	$	135	$	437	$	359

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

	Quarter Ended				Six Months Ended
	April 3, 2021		March 28, 2020		April 3, 2021		March 28, 2020
Segment operating income	$	2,465	$	2,407	$	3,797	$	6,403
Corporate and unallocated shared expenses	(201)		(188)		(433)		(425)
Restructuring and impairment charges    (see Note 15)	(414)		(145)		(527)		(295)
Other income, net(1)	305		—		305		—
Interest expense, net	(320)		(300)		(644)		(583)
TFCF and Hulu acquisition amortization(2)	(605)		(723)		(1,222)		(1,423)
Income from continuing operations before income taxes	$	1,230	$	1,051	$	1,276	$	3,677

(1)For the quarter ended April 3, 2021, other income reflected a $305 million gain from an adjustment of our investment in DraftKings, Inc. to fair value (DraftKings Gain). For the six months ended April 3, 2021, other income reflected a $186 million gain from an adjustment of our investment in fuboTV Inc. to fair value, which was sold in January 2021 (fuboTV Gain), and a $119 million DraftKings Gain.

(2)For the quarter ended April 3, 2021 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $447 million, $154 million and $4 million, respectively. For the six months ended April 3, 2021 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $894 million, $321 million and $7 million, respectively. For the quarter ended March 28, 2020 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $498 million, $217 million, and $8 million, respectively. For the six months ended March 28, 2020 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $984 million, $423 million and $16 million, respectively.

Goodwill

The changes in the carrying amount of goodwill for the six months ended April 3, 2021 are as follows:

	Media Networks		Disney Parks, Experiences and Products		Studio Entertainment			Direct-to-Consumer & International		Disney Media and Entertainment Distribution		Total
Balance at October 3, 2020	$	33,991	$	5,550		$	17,795	$	20,353	$	—	$	77,689
Segment recast (1)	(33,991)		—			(17,795)		(20,353)		72,139		—
Currency translation adjustments and other, net	—		—			—		—		172		172
Balance at April 3, 2021	$	—	$	5,550		$	—	$	—	$	72,311	$	77,861

(1)Represents the reallocation of goodwill as a result of the Company recasting its segments.