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,” “would,” “should,” “expects,” “plans,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “anticipates,” “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 our 2021 Annual Report on Form 10-K, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission, 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) | | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions, except per share data) | July 2,
2022 | | July 3,
2021 | | | July 2,
2022 | | July 3,
2021 | |
| Revenues: | | | | | | | | | | | |
| Services | $ | 19,461 | | | $ | 15,585 | | | 25 % | | $ | 56,215 | | | $ | 44,978 | | | 25 % |
| Products | 2,043 | | | 1,437 | | | 42 % | | 6,357 | | | 3,906 | | | 63 % |
| Total revenues | 21,504 | | | 17,022 | | | 26 % | | 62,572 | | | 48,884 | | | 28 % |
| Costs and expenses: | | | | | | | | | | | |
| Cost of services (exclusive of depreciation and amortization) | (12,404) | | | (10,251) | | | (21) % | | (36,895) | | | (29,921) | | | (23) % |
| Cost of products (exclusive of depreciation and amortization) | (1,278) | | | (982) | | | (30) % | | (3,948) | | | (2,869) | | | (38) % |
| Selling, general, administrative and other | (4,100) | | | (3,168) | | | (29) % | | (11,655) | | | (9,198) | | | (27) % |
| Depreciation and amortization | (1,290) | | | (1,266) | | | (2) % | | (3,846) | | | (3,836) | | | — % |
| Total costs and expenses | (19,072) | | | (15,667) | | | (22) % | | (56,344) | | | (45,824) | | | (23) % |
| Restructuring and impairment charges | (42) | | | (35) | | | (20) % | | (237) | | | (562) | | | 58 % |
| Other income (expense), net | (136) | | | (91) | | | (49) % | | (730) | | | 214 | | | nm |
| Interest expense, net | (360) | | | (445) | | | 19 % | | (1,026) | | | (1,089) | | | 6 % |
| Equity in the income of investees | 225 | | | 211 | | | 7 % | | 674 | | | 648 | | | 4 % |
| Income from continuing operations before income taxes | 2,119 | | | 995 | | | >100 % | | 4,909 | | | 2,271 | | | >100 % |
| Income taxes on continuing operations | (617) | | | 133 | | | nm | | (1,610) | | | 9 | | | nm |
| Net income from continuing operations | 1,502 | | | 1,128 | | | 33 % | | 3,299 | | | 2,280 | | | 45 % |
| Loss from discontinued operations, net of income tax benefit of $0, $2, $14 and $9, respectively | — | | | (5) | | | 100 % | | (48) | | | (28) | | | (71) % |
| Net income | 1,502 | | | 1,123 | | | 34 % | | 3,251 | | | 2,252 | | | 44 % |
| Net income from continuing operations attributable to noncontrolling interests | (93) | | | (205) | | | 55 % | | (268) | | | (416) | | | 36 % |
| | | | | | | | | | | |
| Net income attributable to Disney | $ | 1,409 | | | $ | 918 | | | 53 % | | $ | 2,983 | | | $ | 1,836 | | | 62 % |
| Diluted earnings per share from continuing operations attributable to Disney | $ | 0.77 | | | $ | 0.50 | | | 54 % | | $ | 1.66 | | | $ | 1.02 | | | 63 % |
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 generally in place during the prior year. In addition, our cruise ships have generally been operating without COVID-19-related capacity restrictions since April 2022. Certain of our international parks and resorts 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. Thus far, we have generally been able to release our films theatrically in fiscal 2022, although certain markets continue to impose restrictions on theater openings and capacity.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
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.
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 26%, or $4.5 billion, to $21.5 billion; net income attributable to Disney increased to $1.4 billion from $0.9 billion; and diluted earnings per share from continuing operations attributable to Disney (EPS) increased to $0.77 from $0.50 in the prior-year quarter. The EPS increase for the quarter was due to higher segment operating income, partially offset by the comparison to an income tax benefit in the prior-year quarter. Higher segment operating results were due to growth at DPEP, partially offset by lower operating results at DMED.
Revenues
Service revenues for the quarter increased 25%, or $3.9 billion, to $19.5 billion due to increased revenues at our theme parks and resorts and in DTC subscription, theatrical distribution and advertising revenue. The increase at theme parks and resorts was due to higher volumes, which generally 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 DTC subscription revenue was due to subscriber growth and higher average rates.
Product revenues for the quarter increased 42%, or $0.6 billion, to $2.0 billion due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts.
Costs and expenses
Cost of services for the quarter increased 21%, or $2.2 billion, to $12.4 billion due to increased volumes at our theme parks and resorts, higher programming and production costs 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 Direct-to-Consumer primarily due to more content provided on the Disney+ service and higher subscriber-based fees at Hulu and, to a lesser extent, an increase due to higher theatrical distribution revenue.
Cost of products for the quarter increased 30%, or $0.3 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 29%, or $0.9 billion, to $4.1 billion driven by higher marketing costs at our direct-to-consumer, theatrical distribution and, to a lesser extent, parks and experiences businesses, partially offset by lower marketing costs at our linear channels.
Restructuring and impairment charges
In the current quarter, the Company recorded charges of $42 million primarily due to asset impairments related to our businesses in Russia.
In the prior-year quarter, the Company recorded charges of $35 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 experience businesses.
Other income (expense), net
In the current quarter, the Company recorded the DraftKings loss of $136 million. In the prior-year quarter, the Company recorded the DraftKings loss of $217 million and the German FTA gain of $126 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) | July 2,
2022 | | July 3,
2021 | | % Change
Better (Worse) |
| Interest expense | $ | (380) | | | $ | (404) | | | 6 % |
| Interest income, investment income and other | 20 | | | (41) | | | nm |
| | | | | |
| Interest expense, net | $ | (360) | | | $ | (445) | | | 19 % |
The decrease in interest expense was due to lower average debt balances and higher capitalized interest, partially offset by higher average rates.
The increase in interest income, investment income and other was due to 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, and lower investment losses in the current quarter.
Effective Income Tax Rate
| | | | | | | | | | | | | | |
| Quarter Ended | | |
| July 2,
2022 | | July 3,
2021 | | | |
| Income from continuing operations before income taxes | $ | 2,119 | | $ | 995 | | | |
| Income tax on continuing operations | 617 | | (133) | | |
| Effective income tax rate - continuing operations | 29.1% | | (13.4)% | | | |
The effective income tax rate in the current quarter was higher than the U.S. statutory rate due to higher effective tax rates on foreign earnings, including the impact of foreign losses and foreign tax credits for which we are unable to recognize a tax benefit. The effective income tax rate was a benefit in the prior-year quarter due to favorable adjustments related to prior years.
Noncontrolling Interests
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | |
| (in millions) | July 2,
2022 | | July 3,
2021 | | % Change
Better (Worse) |
| Net income from continuing operations attributable to noncontrolling interests | $ | (93) | | $ | (205) | | 55 % |
The decrease in net income from continuing operations attributable to noncontrolling interests was due to higher losses at Shanghai Disney Resort, partially offset by higher results at ESPN.
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 July 2, 2022 were impacted by the following:
•TFCF and Hulu acquisition amortization of $585 million
•Other expense of $136 million reflecting the DraftKings loss
•Impairment charges of $42 million
Results for the quarter ended July 3, 2021 were impacted by the following:
•TFCF and Hulu acquisition amortization of $604 million
•Other expense of $91 million reflecting the DraftKings loss of $217 million, partially offset by the German FTA gain of $126 million
•Restructuring and impairment charges of $35 million
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 July 2, 2022: | | | | | | | |
| TFCF and Hulu acquisition amortization | $ | (585) | | $ | 136 | | | $ | (449) | | | $ | (0.24) | |
| Other expense | (136) | | 32 | | | (104) | | | (0.06) | |
| Restructuring and impairment charges | (42) | | 10 | | | (32) | | | (0.02) | |
| | | | | | | |
| | | | | | | |
| Total | $ | (763) | | $ | 178 | | | $ | (585) | | | $ | (0.32) | |
| | | | | | | |
| Quarter Ended July 3, 2021: | | | | | | | |
| TFCF and Hulu acquisition amortization | $ | (604) | | $ | 141 | | | $ | (463) | | | $ | (0.25) | |
| Other expense, net | (91) | | 22 | | | (69) | | | (0.04) | |
| Restructuring and impairment charges | (35) | | 8 | | | (27) | | | (0.01) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | $ | (730) | | $ | 171 | | | $ | (559) | | | $ | (0.30) | |
(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 NINE-MONTH PERIOD RESULTS COMPARED TO PRIOR-YEAR NINE-MONTH PERIOD
Revenues for the current period increased $13.7 billion, to $62.6 billion; net income attributable to Disney increased $1.1 billion, to $3.0 billion; and EPS was $1.66 compared to $1.02 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 recognition of an income tax benefit in the prior-year period, a reduction in revenue for the Content License Early Termination and a higher DraftKings loss in the current period compared to the prior-year period.
Revenues
Service revenues for the current period increased 25%, or $11.2 billion, to $56.2 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. These increases were partially offset by a reduction in revenue for the Content License Early Termination. The increase at theme parks and resorts was due to higher volumes, which generally 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 DTC subscription revenue was due to subscriber growth and higher average rates.
Product revenues for the current period increased 63%, or $2.5 billion, to $6.4 billion, due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts.
Costs and expenses
Cost of services for the current period increased 23%, or $7.0 billion, to $36.9 billion, due to higher programming and production costs, increased volumes at our theme parks and resorts and 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 an increase in production cost amortization due to theatrical revenue growth. These increases were partially offset by lower programming and production costs as a result of international channel closures.
Cost of products for the current period increased 38%, or $1.1 billion, to $3.9 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 27%, or $2.5 billion, to $11.7 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 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. These businesses generate approximately two percent of the Company’s operating income. In the current period, the Company
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
recorded charges of $237 million primarily due to the impairment of an intangible and other assets related to our businesses in Russia. We may incur additional charges to exit these businesses, which are not anticipated to be material.
In the prior-year period, the Company recorded charges of $562 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 parks and experiences and other businesses.
Other income (expense), net
In the current period, the Company recorded the DraftKings loss of $726 million. In the prior-year period, the Company recorded the fuboTV gain of $186 million, the German FTA gain of $126 million and the DraftKings loss of $98 million.
Interest expense, net
Interest expense, net is as follows:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended | | |
| (in millions) | July 2,
2022 | | July 3,
2021 | | % Change
Better (Worse) |
| Interest expense | $ | (1,115) | | | $ | (1,223) | | | 9 % |
| Interest income, investment income and other | 89 | | | 134 | | | (34) % |
| Interest expense, net | $ | (1,026) | | | $ | (1,089) | | | 6 % |
The decrease in interest expense was due to lower average debt balances and higher capitalized interest, partially offset by higher average rates.
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
| | | | | | | | | | | | | | |
| Nine Months Ended | | |
| July 2,
2022 | | July 3,
2021 | | | |
| Income from continuing operations before income taxes | $ | 4,909 | | | $ | 2,271 | | | |
| Income tax on continuing operations | 1,610 | | | (9) | | |
| Effective income tax rate - continuing operations | 32.8% | | (0.4)% | | | |
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 new tax regulations that limit our ability to utilize certain foreign tax credits. We recognized an income tax benefit in the prior-year period due to favorable adjustments related to prior years, 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
| | | | | | | | | | | | | | | | | |
| Nine Months Ended | | |
| (in millions) | July 2,
2022 | | July 3,
2021 | | % Change
Better (Worse) |
| Net income from continuing operations attributable to noncontrolling interests | $ | (268) | | $ | (416) | | 36 % |
The decrease in net income from continuing operations attributable to noncontrolling interests for the current period was due to higher losses at Shanghai Disney Resort and our DTC sports business, partially offset by higher results at ESPN.
Certain Items Impacting Results in the Year
Results for the nine months ended July 2, 2022 were impacted by the following:
•TFCF and Hulu acquisition amortization of $1,774 million
•A $1.0 billion reduction in revenue for the Content License Early Termination
•Other expense of $730 million reflecting the DraftKings loss
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
•Impairment charges of $237 million
Results for the nine months ended July 3, 2021 were impacted by the following:
•TFCF and Hulu acquisition amortization of $1,826 million
•Restructuring and impairment charges of $562 million
•Other income of $214 million reflecting the fuboTV gain of $186 million, German FTA gain of $126 million and DraftKings loss of $98 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) |
| Nine Months Ended July 2, 2022: | | | | | | | |
| TFCF and Hulu acquisition amortization | $ | (1,774) | | $ | 413 | | | $ | (1,361) | | | $ | (0.73) | |
| Contract License Early Termination | (1,023) | | 238 | | | (785) | | | (0.43) | |
| Other income (expense), net | (730) | | 170 | | | (560) | | | (0.31) | |
| Restructuring and impairment charges | (237) | | 55 | | | (182) | | | (0.10) | |
| | | | | | | |
| | | | | | | |
| Total | $ | (3,764) | | $ | 876 | | | $ | (2,888) | | | $ | (1.57) | |
| | | | | | | |
| Nine Months Ended July 3, 2021: | | | | | | | |
| | | | | | | |
| TFCF and Hulu acquisition amortization | $ | (1,826) | | $ | 425 | | | $ | (1,401) | | | $ | (0.74) | |
| Restructuring and impairment charges | (562) | | 132 | | | (430) | | | (0.24) | |
| Other income (expense), net | 214 | | (49) | | | 165 | | | 0.09 | |
| | | | | | | |
| | | | | | | |
| Total | $ | (2,174) | | $ | 508 | | | $ | (1,666) | | | $ | (0.89) | |
(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 nine months ended July 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
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 (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) | | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | | | July 2,
2022 | | July 3,
2021 | |
| Total revenues | $ | 21,504 | | | $ | 17,022 | | | 26 % | | $ | 62,572 | | | $ | 48,884 | | | 28 % |
| Content License Early Termination | — | | | — | | | nm | | 1,023 | | | — | | | nm |
| Segment revenues | $ | 21,504 | | | $ | 17,022 | | | 26 % | | $ | 63,595 | | | $ | 48,884 | | | 30 % |
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) | | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | | | July 2,
2022 | | July 3,
2021 | |
| Income from continuing operations before income taxes | $ | 2,119 | | | $ | 995 | | | >100 % | | $ | 4,909 | | | $ | 2,271 | | | >100 % |
| Add (subtract): | | | | | | | | | | | |
| Content License Early Termination | — | | | — | | | nm | | 1,023 | | | — | | | nm |
| Corporate and unallocated shared expenses | 325 | | | 212 | | | (53) % | | 825 | | | 645 | | | (28) % |
| Restructuring and impairment charges | 42 | | | 35 | | | (20) % | | 237 | | | 562 | | | 58 % |
| Other (income) expense, net | 136 | | | 91 | | | (49) % | | 730 | | | (214) | | | nm |
| Interest expense, net | 360 | | | 445 | | | 19 % | | 1,026 | | | 1,089 | | | 6 % |
| TFCF and Hulu acquisition amortization | 585 | | | 604 | | | 3 % | | 1,774 | | | 1,826 | | | 3 % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total segment operating income | $ | 3,567 | | | $ | 2,382 | | | 50 % | | $ | 10,524 | | | $ | 6,179 | | | 70 % |
The following is a summary of segment revenue and operating income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | | | July 2,
2022 | | July 3,
2021 | |
| Segment Revenues: | | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 14,110 | | $ | 12,681 | | 11 % | | $ | 42,315 | | $ | 37,782 | | 12 % |
| Disney Parks, Experiences and Products | 7,394 | | 4,341 | | 70 % | | 21,280 | | 11,102 | | 92 % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| $ | 21,504 | | $ | 17,022 | | 26 % | | $ | 63,595 | | $ | 48,884 | | 30 % |
| Segment operating income (loss): | | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 1,381 | | $ | 2,026 | | | (32) % | | $ | 4,133 | | $ | 6,348 | | | (35) % |
| Disney Parks, Experiences and Products | 2,186 | | | 356 | | | >100 % | | 6,391 | | (169) | | | nm |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| $ | 3,567 | | $ | 2,382 | | | 50 % | | $ | 10,524 | | $ | 6,179 | | | 70 % |
Depreciation expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | | | July 2,
2022 | | July 3,
2021 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 163 | | | $ | 153 | | | (7) % | | $ | 485 | | | $ | 453 | | | (7) % |
| Disney Parks, Experiences and Products | | | | | | | | | | | |
| | | | | | | | | | | |
| Domestic | 434 | | | 383 | | | (13) % | | 1,236 | | | 1,162 | | | (6) % |
| International | 161 | | | 178 | | | 10 % | | 496 | | | 538 | | | 8 % |
| | | | | | | | | | | |
| Total Disney Parks, Experiences and Products | 595 | | | 561 | | | (6) % | | 1,732 | | | 1,700 | | | (2) % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Corporate | 47 | | | 47 | | | — % | | 141 | | | 139 | | | (1) % |
| Total depreciation expense | $ | 805 | | | $ | 761 | | | (6) % | | $ | 2,358 | | | $ | 2,292 | | | (3) % |
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) | | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | | | July 2,
2022 | | July 3,
2021 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Disney Media and Entertainment Distribution | $ | 36 | | $ | 44 | | 18 % | | $ | 115 | | $ | 135 | | 15 % |
| Disney Parks, Experiences and Products | 27 | | 27 | | — % | | 81 | | 81 | | — % |
| TFCF and Hulu | 422 | | 434 | | 3 % | | 1,292 | | 1,328 | | 3 % |
| | | | | | | | | | | |
| Total amortization of intangible assets | $ | 485 | | $ | 505 | | 4 % | | $ | 1,488 | | $ | 1,544 | | 4 % |
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) | July 2,
2022 | | July 3,
2021 | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Linear Networks | $ | 7,189 | | | $ | 6,956 | | | 3 % | | | | | | |
| Direct-to-Consumer | 5,058 | | | 4,256 | | | 19 % | | | | | | |
| Content Sales/Licensing and Other | 2,111 | | | 1,681 | | | 26 % | | | | | | |
Elimination of Intrasegment Revenue(1) | (248) | | | (212) | | | (17) % | | | | | | |
| $ | 14,110 | | | $ | 12,681 | | | 11 % | | | | | | |
| Segment operating income (loss): | | | | | | | | | | | |
| Linear Networks | $ | 2,469 | | | $ | 2,187 | | | 13 % | | | | | | |
| Direct-to-Consumer | (1,061) | | | (293) | | | >(100) % | | | | | | |
| Content Sales/Licensing and Other | (27) | | | 132 | | | nm | | | | | | |
| | | | | | | | | | | |
| $ | 1,381 | | | $ | 2,026 | | | (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) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| Affiliate fees | $ | 4,585 | | | $ | 4,643 | | | (1) % |
| Advertising | 2,470 | | | 2,200 | | | 12 % |
| Other | 134 | | | 113 | | | 19 % |
| Total revenues | 7,189 | | | 6,956 | | | 3 % |
| Operating expenses | (4,091) | | | (4,091) | | | — % |
| Selling, general, administrative and other | (823) | | | (851) | | | 3 % |
| Depreciation and amortization | (34) | | | (42) | | | 19 % |
| Equity in the income of investees | 228 | | | 215 | | | 6 % |
| Operating Income | $ | 2,469 | | | $ | 2,187 | | | 13 % |
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) | July 2,
2022 | | July 3,
2021 | |
| | | | | |
| Domestic Channels | $ | 3,884 | | $ | 3,791 | | 2 % |
| International Channels | 701 | | 852 | | (18) % |
| $ | 4,585 | | $ | 4,643 | | | (1) % |
The increase in affiliate revenue at the Domestic Channels reflected 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 reflected decreases of 12% from fewer subscribers due to channel closures in Asia, Latin America and Europe and 5% from an unfavorable foreign exchange impact.
Advertising revenue is as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| | | | | |
| Cable | $ | 1,027 | | $ | 831 | | 24 % |
| Broadcasting | 755 | | 877 | | (14) % |
| Domestic Channels | 1,782 | | 1,708 | | 4 % |
| International Channels | 688 | | 492 | | 40 % |
| $ | 2,470 | | $ | 2,200 | | 12 % |
The increase in Cable advertising revenue was due to increases of 22% from rates and 5% from impressions, which reflected higher average viewership.
The decrease in Broadcasting advertising revenue was due to decreases of 12% from a shift in the timing of The Academy Awards at ABC and 12% from fewer impressions at ABC, reflecting lower average viewership and, to a lesser extent, fewer units delivered. Fewer units delivered reflected the impact of more hours programmed by ESPN due to the timing of the NBA Finals. The timing of the Academy Awards and the NBA Finals were both impacted by COVID-19 in the prior year. The Academy Awards aired in the second quarter in the current fiscal year compared to the third quarter in the prior fiscal year while the 2021 NBA Finals were aired in the third quarter of the current year compared to fourth quarter of the prior year. These decreases were partially offset by increases of 7% from higher rates at ABC and 1% from the owned television stations. The increase at the owned television stations was due to the benefit of higher rates resulting from an increase in political advertising, partially offset by the impact of the timing of The Academy Awards.
The increase in International Channels advertising revenue was due to increases of 43% from higher impressions reflecting an increase in average viewership and 7% from higher rates, partially offset by a decrease of 8% from an unfavorable foreign exchange impact. The increase in average viewership was due to airing 64 Indian Premier League (IPL) cricket matches in the current quarter, compared to 29 matches in the prior-year quarter. IPL cricket matches typically occur in our second and third fiscal quarters. The increase in the number of matches in the current quarter was due to a shift in the timing of matches from the third quarter to the fourth quarter in the prior fiscal year as a result of COVID-19 and the IPL adding matches to the current season.
Other revenue increased $21 million, to $134 million from $113 million, driven by higher sub-licensing fees from IPL cricket matches in the current quarter compared to the prior-year quarter.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| | | | | |
| Cable | $ | (2,066) | | $ | (2,055) | | (1) % |
| Broadcasting | (614) | | (798) | | 23 % |
| Domestic Channels | (2,680) | | (2,853) | | 6 % |
| International Channels | (1,000) | | (845) | | (18) % |
| $ | (3,680) | | $ | (3,698) | | — % |
Programming and production costs at Cable were comparable to the prior-year quarter as higher rights costs for NBA programming and an increase in sports production costs were largely offset by lower MLB and soccer rights costs. Higher NBA programming costs reflected the timing of the NBA Finals, which are programmed by ESPN and aired on ABC, and contractual rate increases, partially offset by fewer regular season games in the current quarter as a result of a delayed start of the 2021 NBA season due to COVID-19. Lower costs for MLB programming were due to airing 13 games in the current quarter compared to 44 games in the prior-year quarter. The decrease in soccer programming costs reflected the comparison to the airing of UEFA Euro 2020 in the prior-year quarter. UEFA Euro typically occurs every four years. UEFA Euro 2020 was originally scheduled to occur in fiscal 2020, but was held in fiscal 2021 due to COVID-19.
The decrease in programming and production costs at Broadcasting was due to a lower cost mix of programming and, to a lesser extent, the timing of the NBA Finals, which are programmed by ESPN. The lower cost mix of programming reflected the timing of The Academy Awards and fewer hours of scripted and acquired reality programming, partially offset by the cost of new National Hockey League (NHL) programming. We acquired the rights to NHL programming starting with the 2021/2022 season.
Programming and production costs at the International Channels increased due to higher sports programming costs reflecting more IPL cricket matches in the current quarter, partially offset by the impact of channel closures and a favorable foreign exchange impact.
Selling, general administrative and other costs decreased $28 million, to $823 million from $851 million, driven by lower marketing costs, partially offset by higher compensation costs.
Operating Income from Linear Networks
Operating income from Linear Networks increased $282 million, to $2,469 million from $2,187 million, due to increases at Cable and Broadcasting, partially offset by a decrease at the International Channels.
The following table provides supplemental revenue and operating income detail for Linear Networks:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Domestic Channels | $ | 5,700 | | $ | 5,561 | | 2 % |
| International Channels | 1,489 | | 1,395 | | 7 % |
| $ | 7,189 | | $ | 6,956 | | 3 % |
| Supplemental operating income detail | | | | | |
| Domestic Channels | $ | 2,075 | | $ | 1,803 | | 15 % |
| International Channels | 166 | | 169 | | (2) % |
| Equity in the income of investees | 228 | | 215 | | 6 % |
| $ | 2,469 | | $ | 2,187 | | 13 % |
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:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| Subscription fees | $ | 3,889 | | | $ | 3,156 | | | 23 % |
| Advertising | 1,018 | | | 909 | | | 12 % |
| TV/SVOD distribution and other | 151 | | | 191 | | | (21) % |
| Total revenues | 5,058 | | | 4,256 | | | 19 % |
| Operating expenses | (4,536) | | | (3,414) | | | (33) % |
| Selling, general, administrative and other | (1,494) | | | (1,048) | | | (43) % |
| Depreciation and amortization | (89) | | | (87) | | | (2) % |
| Operating Loss | $ | (1,061) | | | $ | (293) | | | >(100) % |
Revenues
The increase in subscription fees reflected increases of 21% from higher subscribers, due to growth at Disney+, Hulu and ESPN+, and 5% from higher rates due to increases in retail pricing at Hulu and Disney+, partially offset by a decrease of 2% from an unfavorable foreign exchange impact.
Higher advertising revenue reflected increases of 10% from higher impressions due to growth at Disney+ and, to a lesser extent, at ESPN+, and 3% from higher rates due to an increase at Hulu. The increase in impressions at Disney+ was due to airing 64 IPL matches in the current quarter compared to 29 matches in the prior-year quarter.
The decrease in TV/SVOD distribution and other revenue was due to lower Disney+ Premier Access revenues, partially offset by an increase in Ultimate Fighting Championship (UFC) pay-per-view fees. Lower Disney+ Premier Access revenues reflected no releases in the current quarter compared to Cruella in the prior-year quarter. The increase in UFC pay-per-view fees was due to airing four events in the current quarter compared to three events in the prior-year quarter and higher pricing, partially offset by lower average buys per event.
The following tables present additional information about our Disney+, ESPN+ and Hulu product offerings(1).
Paid subscribers(2) as of:
| | | | | | | | | | | | | | | | | | |
| (in millions) | July 2,
2022 | | July 3,
2021 | | % Change
Better
(Worse) | |
| Disney+ | | | | | | |
| Domestic (U.S. and Canada) | 44.5 | | | 37.9 | | | 17 % | |
International (excluding Disney+ Hotstar)(3) | 49.2 | | | 33.2 | | | 48 % | |
Disney+ (excluding Disney+ Hotstar)(4) | 93.6 | | | 71.1 | | | 32 % | |
| Disney+ Hotstar | 58.4 | | | 44.9 | | | 30 % | |
Total Disney+(4) | 152.1 | | | 116.0 | | | 31 % | |
| | | | | | |
| ESPN+ | 22.8 | | | 14.9 | | | 53 % | |
| | | | | | |
| Hulu | | | | | | |
| SVOD Only | 42.2 | | | 39.1 | | | 8 % | |
| Live TV + SVOD | 4.0 | | | 3.7 | | | 8 % | |
Total Hulu(4) | 46.2 | | | 42.8 | | | 8 % | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Average Monthly Revenue Per Paid Subscriber(5) for the quarter ended:
| | | | | | | | | | | | | | | | | | |
| | | | % Change
Better
(Worse) | |
| July 2,
2022 | | July 3,
2021 | | |
| Disney+ | | | | | | |
| Domestic (U.S. and Canada) | $ | 6.27 | | $ | 6.62 | | (5) % | |
International (excluding Disney+ Hotstar)(3) | 6.31 | | 5.52 | | 14 % | |
| Disney+ (excluding Disney+ Hotstar) | 6.29 | | 6.12 | | 3 % | |
| Disney+ Hotstar | 1.20 | | 0.78 | | 54 % | |
| Global Disney+ | 4.35 | | 4.16 | | 5 % | |
| | | | | | |
| ESPN+ | 4.55 | | 4.47 | | 2 % | |
| | | | | | |
| Hulu | | | | | | |
| SVOD Only | 12.92 | | 13.15 | | (2) % | |
| Live TV + SVOD | 87.92 | | 84.09 | | 5 % | |
(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 150 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.
(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. A Hulu SVOD Only subscriber that adds Disney+ is 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 subscribes to Combo+, the subscriber is 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)Average monthly 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 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. 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+ decreased from $6.62 to $6.27 due to a higher mix of subscribers to multi-product offerings, partially offset by an increase in retail pricing.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) increased from $5.52 to $6.31 due to increases in retail pricing, partially offset by an unfavorable foreign exchange impact and a higher mix of wholesale subscribers.
The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.78 to $1.20 due to higher per-subscriber advertising revenue.
The average monthly revenue per paid subscriber for ESPN+ increased from $4.47 to $4.55 due to an increase in retail pricing and, to a lesser extent, a lower mix of annual subscribers 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 decreased from $13.15 to $12.92 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product and promotional offerings, partially offset by an increase in retail pricing.
The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $84.09 to $87.92 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.
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Programming and production costs | | | | | |
| Disney+ | $ | (1,435) | | $ | (772) | | (86) % |
| Hulu | (1,894) | | (1,700) | | (11) % |
| ESPN+ and other | (385) | | (297) | | (30) % |
| Total programming and production costs | (3,714) | | (2,769) | | (34) % |
| Other operating expense | (822) | | (645) | | (27) % |
| $ | (4,536) | | $ | (3,414) | | (33) % |
The increase in programming and production costs at Disney+ was primarily due to more content provided on the service, including the impact of airing more IPL matches in the current quarter.
Higher programming and production costs at Hulu were primarily due to higher subscriber-based fees for programming the Live TV service due to an increase in the number of subscribers, rate increases and the carriage of more networks.
The increase in programming and production costs at ESPN+ and other was primarily due to higher rights costs for UFC programming due to airing four events in the current quarter compared to three events in the prior-year quarter and new NHL, golf and soccer programming.
Other operating expenses increased due to higher technology and distribution costs at Disney+ reflecting growth in existing markets and, to a lesser extent, expansion to new markets.
Selling, general, administrative and other costs increased $446 million, to $1,494 million from $1,048 million, primarily due to higher marketing costs at Hulu and Disney+.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer increased $768 million, to $1,061 million from $293 million, due to a higher loss at Disney+, lower operating income at Hulu and, to a lesser extent, a higher loss at ESPN+.
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:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| TV/SVOD distribution | $ | 937 | | | $ | 1,012 | | | (7) % |
| Theatrical distribution | 620 | | | 140 | | | >100 % |
| Home entertainment | 149 | | | 236 | | | (37) % |
| Other | 405 | | | 293 | | | 38 % |
| Total revenues | 2,111 | | | 1,681 | | | 26 % |
| Operating expenses | (1,414) | | | (1,056) | | | (34) % |
| Selling, general, administrative and other | (650) | | | (430) | | | (51) % |
| Depreciation and amortization | (76) | | | (68) | | | (12) % |
| Equity in the income of investees | 2 | | | 5 | | | (60) % |
| Operating Income | $ | (27) | | | $ | 132 | | | nm |
Revenues
The decrease in TV/SVOD distribution revenue was due to lower sales of theatrical film content primarily due to the shift from licensing content to third parties to distributing on our DTC services.
The increase in theatrical distribution revenue was due to the release of Doctor Strange In The Multiverse of Madness, Lightyear, and The Bob’s Burgers Movie in the current quarter compared to Cruella in the prior-year quarter.
The decrease in home entertainment revenue was primarily due to lower unit sales of catalog titles.
The increase in other revenue was due to higher revenue from stage plays reflecting more performances in the current quarter as productions were generally shut down in the prior-year quarter due to COVID-19, partially offset by an unfavorable foreign exchange impact.
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Programming and production costs | $ | (1,123) | | $ | (861) | | (30) % |
| Cost of goods sold and distribution costs | (291) | | (195) | | (49) % |
| $ | (1,414) | | $ | (1,056) | | (34) % |
The increase in programming and production costs was due to higher production cost amortization driven by an increase in theatrical revenue.
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 $220 million, to $650 million from $430 million, driven by higher theatrical marketing costs, due to more titles released in the current quarter compared to the prior-year quarter, and, to a lesser extent, an unfavorable foreign exchange impact.
Operating Income from Content Sales/Licensing and Other
Operating income from Content Sales/Licensing and Other decreased $159 million, to a loss of $27 million from income of $132 million, driven by an unfavorable foreign exchange impact and lower TV/SVOD distribution and home entertainment results, partially offset by higher stage play and theatrical 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:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
TFCF and Hulu acquisition amortization(1) | $ | (583) | | | $ | (602) | | | 3 % |
Restructuring and impairment charges(2) | (34) | | (1) | | >(100) % |
| German FTA gain | — | | 126 | | — % |
(1)In the current quarter, amortization of step-up on film and television costs was $160 million and amortization of intangible assets was $420 million. In the prior-year quarter, amortization of step-up on film and television costs was $166 million and amortization of intangible assets was $432 million.
(2)Charges for the current quarter were primarily due to asset impairments related to our businesses in Russia.
Disney Parks, Experiences and Products
Operating results for the DPEP segment are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| Theme park admissions | $ | 2,312 | | | $ | 1,152 | | | >100 % |
| Parks & Experiences merchandise, food and beverage | 1,688 | | | 914 | | | 85 % |
| Resorts and vacations | 1,805 | | | 776 | | | >100 % |
| Merchandise licensing and retail | 1,175 | | | 1,137 | | | 3 % |
| Parks licensing and other | 414 | | | 362 | | | 14 % |
| Total revenues | 7,394 | | | 4,341 | | | 70 % |
| Operating expenses | (3,729) | | | (2,718) | | | (37) % |
| Selling, general, administrative and other | (855) | | | (674) | | | (27) % |
| Depreciation and amortization | (622) | | | (588) | | | (6) % |
| Equity in the loss of investees | (2) | | | (5) | | | 60 % |
| Operating Income | $ | 2,186 | | | $ | 356 | | | >100 % |
COVID-19
Revenues at DPEP benefited from the comparison to the closures/reduced operating capacity at certain of 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 generally in place during the prior year. In addition, our cruise ships have generally been operating without COVID-19-related capacity restrictions since April 2022. Certain of our international parks and resorts 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. In the prior-year quarter, Disneyland Resort was open for 65 days and Disneyland Paris was open for 19 days. Shanghai Disney Resort was open for 3 days in the current quarter and for all of the prior-year quarter. Hong Kong Disneyland Resort was open for 54 days in the current quarter and 72 days in the prior-year quarter. Cruise ships were operating for the entire current quarter, whereas 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. Higher attendance was due to increases at Disneyland Resort, Walt Disney World Resort and Disneyland Paris, partially offset by a decrease at Shanghai Disney Resort. Growth in average per capita ticket revenue was due to the introduction of Genie+ and Lightning Lane at our domestic parks in the first quarter of the current fiscal year and a reduced
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
impact from promotions in the current quarter at Walt Disney World Resort, partially offset by an unfavorable attendance mix at Disneyland Resort.
Parks & Experiences merchandise, food and beverage revenue growth was due to higher volumes.
Higher resorts and vacations revenue was primarily due to increases in occupied hotel room nights, passenger cruise days and average daily hotel room rates.
Merchandise licensing and retail revenue growth was due to an increase of 12% from merchandise licensing, partially offset by a decrease of 7% from retail. The revenue growth at merchandise licensing was due to an increase in sales of merchandise based on Star Wars, including the current quarter release of the licensed game, LEGO: The Skywalker Saga, higher minimum guarantee shortfall recognition and increases in sales of Mickey and Minnie and Toy Story merchandise. 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 sponsorship revenue 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic | | International(1) | | Total |
| | Quarter Ended | | Quarter Ended | | Quarter Ended |
| | Jul 2,
2022 | | Jul 3,
2021 | | Jul 2,
2022 | | Jul 3,
2021 | | Jul 2,
2022 | | Jul 3,
2021 |
| Parks | | | | | | | | | | | |
| Increase (decrease) | | | | | | | | | | | |
Attendance(2) | 93 % | | nm | | 17 % | | nm | | 69 % | | nm |
Per Capita Guest Spending(3) | 10 % | | nm | | 28 % | | 13 % | | 18 % | | 92 % |
| Hotels | | | | | | | | | | | |
Occupancy(4) | 90 % | | 50 % | | 61 % | | 20 % | | 83 % | | 43 % |
Available Hotel Room Nights (in thousands)(5) | 2,501 | | 2,589 | | 793 | | 793 | | 3,294 | | 3,382 |
Per Room Guest Spending(6) | $446 | | $375 | | $439 | | $414 | | $445 | | $379 |
(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) | July 2,
2022 | | July 3,
2021 | |
| Operating labor | $ | (1,693) | | $ | (1,220) | | (39) % |
| Cost of goods sold and distribution costs | (679) | | (486) | | (40) % |
| Infrastructure costs | (731) | | (584) | | (25) % |
| Other operating expense | (626) | | (428) | | (46) % |
| $ | (3,729) | | $ | (2,718) | | (37) % |
The increase in operating labor was due to higher volumes and inflation, while the increases in cost of goods sold and distribution costs and other operating expenses were due to higher volumes. Higher infrastructure costs were primarily due to increases in volumes and technology spending.
Selling, general, administrative and other costs increased $181 million, to $855 million from $674 million, primarily due to increases in marketing and compensation costs.
Depreciation and amortization increased $34 million, to $622 million from $588 million, due to higher depreciation at our domestic theme parks and resorts.
Segment Operating Income
Segment operating income increased from $0.4 billion to $2.2 billion due to growth at domestic parks and experiences and, to a lesser extent, at international parks and resorts.
The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 5,423 | | | $ | 2,656 | | | >100 % |
| International | 788 | | | 526 | | | 50 % |
| Consumer Products | 1,183 | | | 1,159 | | | 2 % |
| $ | 7,394 | | | $ | 4,341 | | | 70 % |
| Supplemental operating income (loss) detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 1,651 | | | $ | 2 | | | >100 % |
| International | (64) | | | (210) | | | 70 % |
| Consumer Products | 599 | | | 564 | | | 6 % |
| $ | 2,186 | | | $ | 356 | | | >100 % |
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) | July 2,
2022 | | July 3,
2021 | |
Restructuring and impairment charges(1) | $ | — | | | $ | (35) | | | 100 % |
| TFCF and Hulu acquisition amortization | (2) | | | (2) | | | — % |
(1)Charges in the prior-year quarter were due to severance at our parks and resorts businesses.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
BUSINESS SEGMENT RESULTS - Current Period Nine-Month Results Compared to the Prior-Year Nine-Month Period
Disney Media and Entertainment Distribution
Revenue and operating results for the DMED segment are as follows: | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues: | | | | | |
| Linear Networks | $ | 22,011 | | | $ | 21,395 | | | 3 % |
| Direct-to-Consumer | 14,651 | | | 11,759 | | | 25 % |
| Content Sales/Licensing and Other | 6,410 | | | 5,299 | | | 21 % |
Elimination of Intrasegment Revenue(1) | (757) | | | (671) | | | (13) % |
| $ | 42,315 | | | $ | 37,782 | | | 12 % |
| Segment operating income (loss): | | | | | |
| Linear Networks | $ | 6,783 | | | $ | 6,765 | | | — % |
| Direct-to-Consumer | (2,541) | | | (1,049) | | | >(100) % |
| Content Sales/Licensing and Other | (109) | | | 632 | | | nm |
| $ | 4,133 | | | $ | 6,348 | | | (35) % |
(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:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| Affiliate fees | $ | 14,067 | | | $ | 14,098 | | | — % |
| Advertising | 7,392 | | | 6,850 | | | 8 % |
| Other | 552 | | | 447 | | | 23 % |
| Total revenues | 22,011 | | | 21,395 | | | 3 % |
| Operating expenses | (13,331) | | | (12,703) | | | (5) % |
| Selling, general, administrative and other | (2,480) | | | (2,465) | | | (1) % |
| Depreciation and amortization | (108) | | | (131) | | | 18 % |
| Equity in the income of investees | 691 | | | 669 | | | 3 % |
| Operating Income | $ | 6,783 | | | $ | 6,765 | | | — % |
Revenues
Affiliate revenue is as follows:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| | | | | |
| Domestic Channels | $ | 11,869 | | | $ | 11,491 | | | 3 % |
| International Channels | 2,198 | | | 2,607 | | | (16) % |
| $ | 14,067 | | $ | 14,098 | | | — % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Growth in affiliate revenue at the Domestic Channels reflected 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 reflected decreases of 13% from fewer subscribers, due to channel closures, and 5% 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:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| | | | | |
| Cable | $ | 3,153 | | | $ | 2,759 | | | 14 % |
| Broadcasting | 2,451 | | | 2,583 | | | (5) % |
| Domestic Channels | 5,604 | | 5,342 | | 5 % |
| International Channels | 1,788 | | | 1,508 | | | 19 % |
| $ | 7,392 | | $ | 6,850 | | 8 % |
Cable advertising revenue growth was due to increases of 7% from higher rates and 6% from increased impressions, reflecting higher average viewership.
The decrease in Broadcasting advertising revenue reflected a decrease of 14% from fewer impressions at ABC and a decrease of 1% from the owned television stations, partially offset by an increase of 10% from higher rates 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.
The increase in International Channels advertising revenue was due to increases of 16% from higher impressions, reflecting an increase in average viewership, and 8% from higher rates, partially offset by a decrease of 6% from an unfavorable foreign exchange impact. The increase in average 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 IPL and Board of Control for Cricket in India (BCCI) 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. We aired 87 IPL matches in the current period and 73 matches in the prior-year period. The increase in the number of IPL matches was due to COVID-19-related timing shifts and the IPL adding matches to the current season. 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 $105 million, to $552 million from $447 million, due to sub-licensing fees from ICC T20 World Cup matches and higher sub-licensing fees from BCCI cricket matches in the current period compared to the prior-year period.
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| | | | | |
| Cable | $ | (7,423) | | | $ | (6,974) | | | (6) % |
| Broadcasting | (2,152) | | | (2,203) | | | 2 % |
| Domestic Channels | (9,575) | | | (9,177) | | | (4) % |
| International Channels | (2,588) | | | (2,366) | | | (9) % |
| $ | (12,163) | | | $ | (11,543) | | | (5) % |
The increase in programming and production costs at Cable was due to higher rights costs for NFL, NBA and college sports and an increase in sports production costs. These increases were partially offset by lower MLB, soccer and golf rights costs. Higher NFL rights costs were primarily due to airing three additional regular season games in the current period compared to the prior-year period and contractual rate increases. The current period included 16 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 increase in NBA programming costs reflected the impact of COVID-19 on the timing of the 2020 and 2021 seasons and contractual rate increases. Due to COVID-19, four of the 2020 NBA Finals games were aired in the first quarter of fiscal
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
2021. All of the 2021 NBA Finals games were aired in the fourth quarter of fiscal 2021, and all of the 2022 NBA Finals games were aired in the third quarter of fiscal 2022. The increase in rights costs for college sports was driven by higher contractual rates for the College Football Playoffs. The increase in sports production costs was due to the return of ESPN-hosted college events, which were canceled in the prior-year period due to COVID-19, and NFL and NHL programming additions. Lower MLB programming costs were due to airing 13 regular season games and 1 playoff game in the current period compared to 44 regular season games in the prior-year period. The decrease in soccer programming costs was due to the airing of UEFA Euro 2020 in the prior-year period. Lower golf programming costs were due to airing one Masters tournament in fiscal 2022 compared to airing two Masters tournaments in fiscal 2021. Due to COVID-19, the 2020 Masters that was originally scheduled to occur in the third quarter of fiscal 2020 shifted to the first quarter of fiscal 2021.
The decrease in programming and production costs at Broadcasting was primarily due to a lower average cost programming aired in the current period, partially offset by a higher cost mix of programming in the current period and production cost increases for news. The higher cost mix reflected more hours of specials and scripted programming, partially offset by fewer hours of acquired reality programming.
The increase in programming and production costs at the International Channels was due to higher sports programming costs driven by airing ICC T20 World Cup cricket matches in the current period and higher costs for IPL and BCCI cricket rights, partially offset by the impact of channel closures and a favorable foreign exchange impact. The increase in costs for IPL and BCCI cricket rights was due to more matches and higher average costs per match.
Equity in the Income of Investees
Income from equity investees increased $22 million, to $691 million from $669 million, due to higher income from A+E Television Networks driven by lower programming costs and higher program sales, partially offset by lower affiliate revenue and an increase in marketing costs.
Operating Income from Linear Networks
Operating income from Linear Networks increased $18 million, to $6,783 million from $6,765 million, due to an increase at Broadcasting, which was largely offset by a decrease at the International Channels.
The following table provides supplemental revenue and operating income detail for Linear Networks:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Domestic Channels | $ | 17,678 | | $ | 17,049 | | 4 % |
| International Channels | 4,333 | | 4,346 | | — % |
| $ | 22,011 | | $ | 21,395 | | 3 % |
| Supplemental operating income detail | | | | | |
| Domestic Channels | $ | 5,312 | | $ | 5,204 | | 2 % |
| International Channels | 780 | | 892 | | (13) % |
| Equity in the income of investees | 691 | | 669 | | 3 % |
| $ | 6,783 | | $ | 6,765 | | — % |
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:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| Subscription fees | $ | 11,374 | | $ | 8,702 | | 31 % |
| Advertising | 2,889 | | 2,508 | | 15 % |
| TV/SVOD distribution and other | 388 | | 549 | | (29) % |
| Total revenues | 14,651 | | 11,759 | | 25 % |
| Operating expenses | (12,860) | | (9,549) | | (35) % |
| Selling, general, administrative and other | (4,059) | | (3,028) | | (34) % |
| Depreciation and amortization | (273) | | (231) | | (18) % |
| | | | | |
| Operating Loss | $ | (2,541) | | $ | (1,049) | | >(100) % |
Revenues
The increase in subscription fees reflected increases of 21% from higher subscribers due to growth at Disney+, Hulu and ESPN+, and 11% from higher rates due to increases in retail pricing at Disney+ and Hulu, partially offset by a decrease of 1% from an unfavorable foreign exchange impact.
Higher advertising revenue reflected an increase of 11% from higher impressions due to increases at Disney+, Hulu and ESPN+, and an increase of 6% from higher rates due to an increase at Hulu. The increase in impressions at Disney+ was due to airing 87 IPL matches and 45 ICC T20 World Cup matches in the current period compared to 73 IPL matches and no ICC T20 World Cup matches in the prior-year period.
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 and Cruella in the prior-year period and, to a lesser extent, a decrease in UFC pay-per-view fees. The decrease in UFC pay-per-view fees reflected the impact of airing nine events in the current period compared to ten events in the prior-year period and lower average buys per event, partially offset by higher pricing.
The following table presents Average Monthly Revenue Per Paid Subscriber for the nine months ended (see additional discussion of metrics under the quarterly results analysis of Business Segment Results):
| | | | | | | | | | | | | | | | | |
| | | | % Change
Better
(Worse) |
| July 2,
2022 | | July 3,
2021 | |
| Disney+ | | | | | |
| Domestic (U.S. and Canada) | $ | 6.42 | | | $ | 6.18 | | | 4 % |
| International (excluding Disney+ Hotstar) | 6.22 | | | 5.19 | | | 20 % |
| Disney+ (excluding Disney+ Hotstar) | 6.32 | | | 5.74 | | | 10 % |
| Disney+ Hotstar | 1.01 | | | 0.70 | | | 44 % |
| Global Disney+ | 4.37 | | | 4.08 | | | 7 % |
| | | | | |
| ESPN+ | 4.79 | | | 4.50 | | | 6 % |
| | | | | |
| Hulu | | | | | |
| SVOD Only | 12.88 | | | 12.90 | | | — % |
| Live TV + SVOD | 87.90 | | | 80.14 | | | 10 % |
The average monthly revenue per paid subscriber for domestic Disney+ increased from $6.18 to $6.42 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) increased from $5.19 to $6.22 due to increases in retail pricing, partially offset by an unfavorable foreign exchange impact and a higher mix of wholesale subscribers.
The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.70 to $1.01 primarily due to higher per-subscriber advertising revenue.
The average monthly revenue per paid subscriber for ESPN+ increased from $4.50 to $4.79 driven by 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 decreased from $12.90 to $12.88 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product and promotional offerings, largely offset by an increase in retail pricing.
The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $80.14 to $87.90 primarily due to increases in retail pricing, higher per-subscriber advertising revenue and, to a lesser extent, 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:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Programming and production costs | | | | | |
| Disney+ | $ | (3,551) | | | $ | (1,941) | | | (83) % |
| Hulu | (5,639) | | | (4,950) | | | (14) % |
| ESPN+ and other | (1,266) | | | (843) | | | (50) % |
| Total programming and production costs | (10,456) | | | (7,734) | | | (35) % |
| Other operating expense | (2,404) | | | (1,815) | | | (32) % |
| $ | (12,860) | | | $ | (9,549) | | | (35) % |
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, rate increases and an increase in the number of subscribers.
The increase in programming and production costs at ESPN+ and other was primarily due to new NHL and soccer programming.
Other operating expenses increased 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 $1,031 million, to $4,059 million from $3,028 million, due to higher marketing costs at Disney+ and Hulu.
Depreciation and amortization increased $42 million, to $273 million from $231 million, primarily due to increased investment in technology assets.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer increased $1,492 million, to $2,541 million from $1,049 million, due to higher losses at Disney+ and, to a lesser extent, at ESPN+ and lower operating income 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:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| TV/SVOD distribution | $ | 3,109 | | | $ | 3,378 | | | (8) % |
| Theatrical distribution | 1,373 | | | 280 | | | >100 % |
| Home entertainment | 673 | | | 755 | | | (11) % |
| Other | 1,255 | | | 886 | | | 42 % |
| Total revenues | 6,410 | | | 5,299 | | | 21 % |
| Operating expenses | (4,271) | | | (3,266) | | | (31) % |
| Selling, general, administrative and other | (2,031) | | | (1,187) | | | (71) % |
| Depreciation and amortization | (219) | | | (226) | | | 3 % |
| Equity in the income (loss) of investees | 2 | | | 12 | | | (83) % |
| Operating Income (Loss) | $ | (109) | | | $ | 632 | | | nm |
Revenues
The decrease in TV/SVOD distribution revenue was due to lower sales of episodic television and, to a lesser extent, theatrical film content. The decrease in episodic television sales was due to lower sales of Modern Family and How I Met Your Mother in the current period compared to the prior-year period, whereas lower sales of theatrical film content was primarily due to the shift from licensing content to third parties to distributing on our DTC services.
The increase in theatrical distribution revenue was due to the release of 14 titles in the current period compared to five 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 Doctor Strange In The Multiverse of Madness, Eternals, Encanto and Lightyear. Titles released in the prior-year period included Cruella, Raya And The Last Dragon, and Soul, which was only distributed theatrically in international markets.
The decrease in home entertainment revenue was due to lower unit sales of catalog titles, partially offset by higher sales of new release titles.
The increase in other revenue was due to higher revenue from stage plays as a result of more performances in the current period as productions were generally shut down in the prior-year period due to COVID-19.
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Programming and production costs | $ | (3,292) | | $ | (2,653) | | (24) % |
| Cost of goods sold and distribution costs | (979) | | (613) | | (60) % |
| $ | (4,271) | | $ | (3,266) | | (31) % |
The increase in programming and production costs was due to higher production cost amortization and, to a lesser extent, higher film cost impairments. The increase in production cost amortization was due to higher theatrical revenue in the current period, partially offset by a decrease due to lower TV/SVOD distribution revenue.
Higher cost of goods sold and distribution costs were due to more stage play performances and theatrical releases in the current period compared to the prior-year period.
Selling, general, administrative and other costs increased $844 million, to $2,031 million from $1,187 million, due to higher theatrical marketing costs.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Operating Income from Content Sales/Licensing and Other
Operating income from Content Sales/Licensing and Other decreased $741 million, to a loss of $109 million from income of $632 million, due to lower theatrical distribution results, higher film cost impairments and lower TV/SVOD distribution results.
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:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
TFCF and Hulu acquisition amortization(1) | $ | (1,768) | | $ | (1,820) | | 3 % |
| Content License Early Termination | (1,023) | | | — | | | nm |
Restructuring and impairment charges(2) | (229) | | (305) | | 25 % |
| German FTA gain | — | | 126 | | — % |
(1)In the current period, amortization of step-up on film and television costs was $473 million and amortization of intangible assets was $1,286 million. In the prior-year period, amortization of step-up on film and television costs was $487 million and amortization of intangible assets was $1,322 million.
(2)Charges for the current period were due to the impairment of an intangible and other assets related to our businesses in Russia. Charges for the prior-year period were primarily due to asset impairments and severance costs related to the closure of an animation studio.
Disney Parks, Experiences and Products
Operating results for the DPEP segment are as follows:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Revenues | | | | | |
| Theme park admissions | $ | 6,437 | | $ | 2,298 | | >100 % |
| Parks & Experiences merchandise, food and beverage | 4,829 | | 2,025 | | >100 % |
| Resorts and vacations | 4,701 | | 1,722 | | >100 % |
| Merchandise licensing and retail | 3,902 | | 3,980 | | (2) % |
| Parks licensing and other | 1,411 | | 1,077 | | 31 % |
| Total revenues | 21,280 | | 11,102 | | 92 % |
| Operating expenses | (10,665) | | (7,456) | | (43) % |
| Selling, general, administrative and other | (2,401) | | (2,012) | | (19) % |
| Depreciation and amortization | (1,813) | | (1,781) | | (2) % |
| Equity in the loss of investees | (10) | | (22) | | 55 % |
| Operating Income (Loss) | $ | 6,391 | | | $ | (169) | | | nm |
COVID-19
Revenues at DPEP benefited from the comparison to the closures/reduced operating capacity at certain of 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. In the prior-year period, Disneyland Resort was open for 65 days and Disneyland Paris was open for 45 days. Shanghai Disney Resort was open for 170 days in the current period and open for all of the prior-year period. Hong Kong Disneyland Resort was open for 125 days in the current period and 147 days in the prior-year period. Cruise ships were operating for the entire current period, whereas sailings were suspended in the prior-year period.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues
The increase in theme park admissions revenue was due to attendance growth and higher average per capita ticket revenue. Higher attendance was due to increases at Disneyland Resort, Walt Disney World Resort and Disneyland Paris, partially offset by a decrease at Shanghai Disney Resort. Growth in average per capita ticket revenue was due to the introduction of Genie+ and Lightning Lane at our domestic parks in the first quarter of the current fiscal year, a reduced impact from promotions in the current period and a favorable attendance mix at Walt Disney World Resort, partially offset by an unfavorable attendance mix at Disneyland Resort.
Parks & Experiences merchandise, food and beverage revenue growth was due to higher volumes.
Higher resorts and vacations revenue was primarily due to increases in occupied hotel room nights, passenger cruise days and average daily hotel room rates.
The decrease in merchandise licensing and retail revenue was primarily due to a decrease of 8% from retail, partially offset by an increase of 6% 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 driven by higher sales of merchandise based on Mickey and Minnie, Star Wars, Disney Princesses and Toy Story merchandise, partially offset by a decrease in sales of merchandise based on Frozen. Higher sales of Star Wars merchandise included the current period release of the licensed game, LEGO: The Skywalker Saga, and merchandise based on The Mandalorian.
The increase in parks licensing and other revenue was due to increases in sponsorship revenue, royalties from Tokyo Disney Resort and real estate sales.
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 |
| | Nine Months Ended | | Nine Months Ended | | Nine Months Ended |
| | July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 | | July 2,
2022 | | July 3,
2021 |
| Parks | | | | | | | | | | | |
| Increase (decrease) | | | | | | | | | | | |
| Attendance | nm | | (46) % | | 64 % | | (21) % | | nm | | (40) % |
| Per Capita Guest Spending | 17 % | | 13 % | | 21 % | | (3) % | | 23 % | | 6 % |
| Hotels | | | | | | | | | | | |
| Occupancy | 82 % | | 37 % | | 53 % | | 14 % | | 75 % | | 32 % |
| Available Hotel Room Nights (in thousands) | 7,564 | | 7,882 | | 2,380 | | 2,378 | | 9,944 | | 10,260 |
| Per Room Guest Spending | $450 | | $361 | | $379 | | $392 | | $438 | | $364 |
Costs and Expenses
Operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Operating labor | $ | (4,818) | | | $ | (3,262) | | | (48) % |
| Cost of goods sold and distribution costs | (2,119) | | | (1,494) | | | (42) % |
| Infrastructure costs | (1,958) | | | (1,649) | | | (19) % |
| Other operating expense | (1,770) | | | (1,051) | | | (68) % |
| $ | (10,665) | | | $ | (7,456) | | | (43) % |
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Selling, general, administrative and other costs increased $389 million, to $2,401 million from $2,012 million, due to higher marketing spend and, to a lesser extent, inflation.
Depreciation and amortization increased $32 million, to $1,813 million from $1,781 million, due to higher depreciation at our domestic theme parks and resorts.
Segment Operating Income (Loss)
Segment operating results increased from a loss of $169 million to income of $6.4 billion due to growth at domestic parks and experiences and, to a lesser extent, at international parks and resorts.
The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Supplemental revenue detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 15,121 | | | $ | 5,880 | | | >100 % |
| International | 2,223 | | | 1,166 | | | 91 % |
| Consumer Products | 3,936 | | | 4,056 | | | (3) % |
| $ | 21,280 | | | $ | 11,102 | | | 92 % |
| Supplemental operating income (loss) detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 4,591 | | | $ | (1,383) | | | nm |
| International | (311) | | | (852) | | | 63 % |
| Consumer Products | 2,111 | | | 2,066 | | | 2 % |
| $ | 6,391 | | | $ | (169) | | | 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:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
Restructuring and impairment charges(1) | $ | — | | | $ | (252) | | | 100 % |
| TFCF and Hulu acquisition amortization | (6) | | | (6) | | | — % |
(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) | | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | | | July 2,
2022 | | July 3,
2021 | |
| Corporate and unallocated shared expenses | $ | (325) | | $ | (212) | | (53) % | | $ | (825) | | $ | (645) | | (28) % |
Corporate and unallocated shared expenses increased $113 million, from $212 million to $325 million in the current quarter and increased $180 million, from $645 million to $825 million for the current nine-month period driven by higher compensation and human resource-related cost.
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:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | % Change
Better
(Worse) |
| (in millions) | July 2,
2022 | | July 3,
2021 | |
| Cash provided by operations - continuing operations | $ | 3,478 | | | $ | 2,934 | | | 19 % |
| Cash used in investing activities - continuing operations | (3,872) | | | (2,085) | | | (86) % |
| Cash used in financing activities - continuing operations | (2,247) | | | (2,771) | | | 19 % |
| Cash (used in) provided by discontinued operations | (4) | | | 6 | | | nm |
| | | | | |
| | | | | |
| | | | | |
| Impact of exchange rates on cash, cash equivalents and restricted cash | (354) | | | 77 | | | nm |
| Change in cash, cash equivalents and restricted cash | $ | (2,999) | | | $ | (1,839) | | | (63) % |
Operating Activities
Cash provided by continuing operating activities increased 19% due to higher operating cash flow at DPEP and lower pension plan contributions, 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 nine months ended July 2, 2022 and July 3, 2021 are as follows:
| | | | | | | | | | | |
| | Nine Months Ended |
| (in millions) | July 2,
2022 | | July 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 | 10,850 | | | 9,692 | |
| Produced film and television content | 11,908 | | | 9,238 | |
| 22,758 | | | 18,930 | |
| Amortization: | | | |
| Programming licenses and rights | (10,908) | | | (9,781) | |
| Produced film and television content | (7,544) | | | (5,957) | |
| (18,452) | | | (15,738) | |
| Change in internally produced and licensed content costs | 4,306 | | | 3,192 | |
| | | |
| Other non-cash activity | 209 | | | 179 | |
| Ending balances: | | | |
| Produced and licensed programming assets | 35,979 | | | 30,256 | |
| Programming liabilities | (3,845) | | | (3,791) | |
| $ | 32,134 | | | $ | 26,465 | |
The Company currently expects its fiscal 2022 spend on produced and licensed content, including sports rights, to be approximately $30 billion, or approximately $5 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 nine months ended July 2, 2022 and July 3, 2021 are as follows:
| | | | | | | | | | | |
| (in millions) | July 2,
2022 | | July 3,
2021 |
| | | |
| | | |
| | | |
| | | |
| Disney Media and Entertainment Distribution | $ | 543 | | | $ | 582 | |
| Disney Parks, Experiences and Products | | | |
| Domestic | 2,226 | | | 1,121 | |
| International | 584 | | | 502 | |
| | | |
| Total Disney Parks, Experiences and Products | 2,810 | | | 1,623 | |
| | | |
| | | |
| Corporate | 442 | | | 263 | |
| $ | 3,795 | | | $ | 2,468 | |
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 higher spend on cruise ship fleet expansion.
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The Company currently expects its fiscal 2022 capital expenditures will be approximately $5.0 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 and corporate facilities.
Financing Activities
Cash used in financing activities was $2.2 billion in the current nine months compared to $2.8 billion in the prior-year nine months. In the current nine months, the Company made payments on borrowings of $1.5 billion compared to payments of $2.4 billion in the prior-year nine months. In addition, in the current nine months, the Company received proceeds from exercise of stock options of $0.1 billion compared to proceeds of $0.4 billion in the prior-year nine months.
See Note 5 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the nine months ended July 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 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 is 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. In addition, the Company could undertake other measures to ensure sufficient liquidity, 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 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 July 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 (Positive), respectively, and Fitch’s long- and short-term debt ratings for the Company were A- and F2 (Stable), respectively. 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 July 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 July 2, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| TWDC | | Legacy Disney |
| (in millions) | Par Value | | Carrying Value | | Par Value | | Carrying Value |
| Registered debt with unconditional guarantee | $ | 37,320 | | $ | 38,162 | | $ | 9,170 | | $ | 9,007 |
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) | Nine Months Ended July 2, 2022 |
| Revenues | $ | — |
| Costs and expenses | — |
| Net income (loss) from continuing operations | (642) |
| Net income (loss) | (642) |
| Net income (loss) attributable to TWDC shareholders | (642) |
| | | | | | | | | | | |
| Balance Sheet (in millions) | July 2, 2022 | | October 2, 2021 |
| Current assets | $ | 5,502 | | $ | 9,506 |
| Noncurrent assets | 1,629 | | 1,689 |
| Current liabilities | 6,059 | | 6,878 |
| Noncurrent liabilities (excluding intercompany to non-Guarantors) | 48,584 | | 51,439 |
| Intercompany payables to non-Guarantors | 146,296 | | 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 factor affecting estimates of Ultimate Revenues is 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.