WALT DISNEY COMPANY (THE)
CONSOLIDATED RESULTS
(in millions, except per share data)
% Change
Better/(Worse)
2019 2018
vs. vs.
2019 2018 2017 2018 2017
Revenues:
Services $ 60,542 $ 50,869 $ 46,843 19 % 9 %
Products 9,028 8,565 8,294 5 % 3 %
Total revenues 69,570 59,434 55,137 17 % 8 %
Costs and expenses:
Cost of services (exclusive
of depreciation and (36,450 ) (27,528 ) (25,320 ) (32 )% (9 )%
amortization)
Cost of products (exclusive
of depreciation and (5,568 ) (5,198 ) (4,986 ) (7 )% (4 )%
amortization)
Selling, general, (11,541 ) (8,860 ) (8,176 ) (30 )% (8 )%
administrative and other
Depreciation and (4,160 ) (3,011 ) (2,782 ) (38 )% (8 )%
amortization
Total costs and expenses (57,719 ) (44,597 ) (41,264 ) (29 )% (8 )%
Restructuring and impairment (1,183 ) (33 ) (98 ) >(100 )% 66 %
charges
Other income, net 4,357 601 78 >100 % >100 %
Interest expense, net (978 ) (574 ) (385 ) (70 )% (49 )%
Equity in the income (loss) (103 ) (102 ) 320 (1 )% nm
of investees, net
Income from continuing
operations before income 13,944 14,729 13,788 (5 )% 7 %
taxes
Income taxes from continuing (3,031 ) (1,663 ) (4,422 ) (82 )% 62 %
operations
Net income from continuing 10,913 13,066 9,366 (16 )% 40 %
operations
Income from discontinued
operations (includes income 671 - - nm nm
tax expense of $35 , $0 and
$0 , respectively)
Net income 11,584 13,066 9,366 (11 )% 40 %
Less: Net income from
continuing operations
attributable to (472 ) (468 ) (386 ) (1 )% (21 )%
noncontrolling and
redeemable noncontrolling
interests
Less: Net income from
discontinued operations (58 ) - - nm nm
attributable to
noncontrolling interests
Net income attributable to $ 11,054 $ 12,598 $ 8,980 (12 )% 40 %
Disney
Earnings per share
attributable to Disney :
Diluted
Continuing operations $ 6.27 $ 8.36 $ 5.69 (25 )% 47 %
Discontinued operations 0.37 - - nm nm
$ 6.64 $ 8.36 $ 5.69 (21 )% 47 %
Basic
Continuing operations $ 6.30 $ 8.40 $ 5.73 (25 )% 47 %
Discontinued operations 0.37 - - nm nm
$ 6.68 $ 8.40 $ 5.73 (20 )% 47 %
Weighted average number of
common and common equivalent
shares outstanding:
Diluted 1,666 1,507 1,578
Basic 1,656 1,499 1,568
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Organization of Information Management's Discussion and Analysis provides a narrative on 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 and Non-Segment Items
• Business Segment Results - 2019 vs. 2018
• Business Segment Results - 2018 vs. 2017
• Corporate and Unallocated Shared Expenses
• Restructuring in Connection With the Acquisition of TFCF
• Significant Developments
• Liquidity and Capital Resources
• Contractual Obligations, Commitments and Off Balance Sheet Arrangements
• Critical Accounting Policies and Estimates
• Forward-Looking Statements
CONSOLIDATED RESULTS AND NON-SEGMENT ITEMS The Company's financial results for fiscal 2019 are presented in accordance with new accounting guidance for revenue recognition (ASC 606) that we adopted at the beginning of fiscal 2019. Prior period results have not been restated to reflect this change in accounting guidance. Segment operating income for fiscal 2019 includes a$91 million benefit from the adoption of ASC 606 primarily due to the timing of recognition of TV/SVOD distribution revenue atStudio Entertainment . Further information about our adoption of ASC 606 is provided in Note 3 to the Consolidated Financial Statements. 2019 vs. 2018 As discussed in Note 4 to the Consolidated Financial Statements, the Company acquired TFCF onMarch 20, 2019 . Additionally, in connection with the acquisition of TFCF, we acquired a controlling interest in Hulu. The Company began consolidating the results of TFCF and Hulu effectiveMarch 20, 2019 . Revenues for fiscal 2019 increased 17%, or$10.1 billion , to$69.6 billion ; net income attributable toDisney decreased 12%, or$1.5 billion , to$11.1 billion ; and diluted earnings per share from continuing operations attributable toDisney (EPS) decreased 25%, or$2.09 to$6.27 . The decrease in EPS was due to the comparison to a benefit in fiscal 2018 fromU.S. federal income tax legislation (Tax Act), which was enacted in fiscal 2018 (See Note 10 to the Consolidated Financial Statements), amortization expense on intangibles and the fair value step-up on film and television costs from the TFCF acquisition and consolidation of Hulu, an increase in shares outstanding and restructuring costs incurred in connection with the acquisition and integration of TFCF. The increase in shares outstanding was due to shares that were issued in connection with the acquisition of TFCF. Additionally, the decrease in EPS reflected lower segment operating income, which included a$0.5 billion adverse impact from the consolidation of TFCF and Hulu in the current year, the absence of a gain recognized in the prior year on the sale of real estate, a charge in the current year for the extinguishment of debt and higher interest expense. These decreases were partially offset by a non-cash gain recognized in the current year in connection with the acquisition of a controlling interest in Hulu (Hulu Gain) (See Note 4 to the Consolidated Financial Statements). Segment operating income from our legacy operations decreased due to higher losses at Direct-to-Consumer & International and lower results at Media Networks, partially offset by growth at Parks, Experiences and Products. Revenues Service revenues for fiscal 2019 increased 19%, or$9.7 billion , to$60.5 billion , due to the consolidation of TFCF and Hulu's operations and to a lesser extent, growth at our legacy operations. The increase at our legacy operations was due to higher guest spending at our theme parks and resorts, an increase in affiliate fees, higher theatrical distribution revenue and growth in merchandise licensing. These increases were partially offset by lowerABC Studios program sales. Service revenue reflected an approximate 1 percentage point decrease due to the movement of theU.S. dollar against major currencies including the impact of our hedging program (Foreign Exchange Impact). Product revenues for fiscal 2019 increased 5%, or$0.5 billion , to$9.0 billion , due to the consolidation of TFCF's operations and growth at our legacy operations. The increase at our legacy operations was due to guest spending growth at our theme parks and resorts, partially offset by lower home entertainment volumes. Product revenue reflected an approximate 1 percentage point decrease due to an unfavorable Foreign Exchange Impact. 30
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Costs and expenses Cost of services for fiscal 2019 increased 32%, or$8.9 billion , to$36.5 billion , due to the consolidation of TFCF and Hulu's operations and higher costs at our legacy operations. The increase in costs at our legacy operations reflected higher programming and production costs, labor cost inflation at our theme parks and resorts and an increase in film cost amortization. Cost of services reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact. Cost of products for fiscal 2019 increased 7%, or$0.4 billion , to$5.6 billion , due to the consolidation of TFCF's operations and higher costs at our legacy operations. The increase in costs at our legacy operations was due to higher sales of food, beverage and merchandise and labor cost inflation at our theme parks and resorts, partially offset by a decrease in home entertainment volumes. Cost of products reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact. Selling, general, administrative and other costs for fiscal 2019 increased 30%, or$2.7 billion , to$11.5 billion , due to the consolidation of TFCF and Hulu's operations, and increases in marketing and compensation costs at our legacy operations. Selling, general, administrative and other costs reflected an approximate 2 percentage point decrease due to a favorable Foreign Exchange Impact. Depreciation and amortization costs increased 38%, or$1.1 billion , to$4.2 billion due to amortization of intangible assets arising from the acquisition of TFCF and consolidation of Hulu. Restructuring and Impairment Charges The Company recorded$1.2 billion and$33 million of restructuring and impairment charges in fiscal 2019 and 2018, respectively. Charges in fiscal 2019 were due to severance in connection with the acquisition and integration of TFCF. Charges in fiscal 2018 were due to severance costs. Other Income, net % Change (in millions) 2019 2018 Better/(Worse) Hulu Gain$ 4,794 $ - nm Insurance recoveries related to legal matters 46 38 21 % Charge for the extinguishment of a portion of the debt originally assumed in the TFCF acquisition (511 ) -
nm
Gain on sale of real estate, property rights and other 28 563 (95 )% Other income, net$ 4,357 $ 601 >100 % In fiscal 2019, the Company recognized a non-cash gain of$4,794 million in connection with the acquisition of a controlling interest in Hulu. In fiscal 2019 and fiscal 2018, the Company recorded insurance recoveries of$46 million and$38 million , respectively, in connection with the settlement of legal matters. In fiscal 2019, the Company recorded a charge of$511 million for the extinguishment of a portion of the debt originally assumed in TFCF acquisition. In fiscal 2019, the Company recorded a gain of$28 million on the deemed settlement of preexisting relationships with TFCF pursuant to acquisition accounting guidance. In fiscal 2018, the Company recorded gains of$560 million in connection with the sales of real estate and property rights inNew York City and a$3 million adjustment to a fiscal 2017 non-cash net gain of$255 million recorded in connection with the acquisition of a controlling interest inBAMTech . 31
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Interest Expense, net
% Change
(in millions) 2019 2018 Better/(Worse)
Interest expense $ (1,246 ) $ (682 ) (83 )%
Interest income, investment income and other 268 108 >100 %
Interest expense, net $ (978 ) $ (574 ) (70 )%
The increase in interest expense was due to higher average debt balances as a
result of the TFCF acquisition and to a lesser extent, higher average interest
rates. These increases were partially offset by higher capitalized interest and
a benefit from market value adjustments on pay-floating interest rate swap
options.
The increase in interest income, investment income and other for the year was
due to a $102 million benefit related to pension and postretirement benefit
costs, other than service cost, and higher interest income on cash balances. The
comparable benefit related to pension and postretirement benefit costs of $30
million in the prior year was reported in "Costs and expenses." The benefit in
the current year was due to the expected return on pension plan assets exceeding
interest expense on plan liabilities and amortization of prior net actuarial
losses.
Equity in the Loss of Investees
Equity in the loss of investees of $103 million was comparable to the prior year
as higher impairments in the current year were offset by lower equity losses
from Hulu as a result of our consolidation of Hulu following the TFCF
acquisition.
Effective Income Tax Rate
Change
2019 2018 Better/(Worse)Effective income tax rate - continuing operations 21.7 % 11.3 % (10.4 ) ppt
The increase in the effective income tax rate was due to the impact of the Tax Act, of which the most significant impacts were a$1.7 billion net benefit (11 percentage points) that was recognized in the prior year, partially offset by a current year benefit from a reduction in the Company'sU.S. statutory federal income tax rate to 21% in fiscal 2019 from 24.5% in fiscal 2018. Noncontrolling Interests % Change (in millions) 2019 2018 Better/(Worse) Net income from continuing operations attributable to noncontrolling interests$ (472 ) $ (468 )
(1 )%
Net income from continuing operations attributable to noncontrolling interests was comparable to the prior year as the accretion of the redeemable noncontrolling interest in Hulu (see Note 4 to the Consolidated Financial Statements) and a lower loss allocation to the noncontrolling interest holders ofBAMTech were offset by a higher loss from our direct-to-consumer sports business. Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable. Discontinued Operations Net income from discontinued operations in fiscal 2019 reflected the operations of the RSNs. 2018 vs. 2017 Revenues for fiscal 2018 increased 8%, or$4.3 billion , to$59.4 billion ; net income attributable toDisney increased 40%, or$3.6 billion , to$12.6 billion ; and EPS for the year increased 47%, or$2.67 to$8.36 . The EPS increase in fiscal 2018 was due to a benefit from the Tax Act, higher segment operating income, a decrease in weighted average shares outstanding as a result of our share repurchase program and gains on the sale of real estate and property rights. These increases were partially 32
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offset by the comparison to a fiscal 2017 non-cash net gain in connection with the acquisition of a controlling interest inBAMTech , impairments of our Vice and Villages Nature equity method investments in fiscal 2018 and higher net interest and corporate and unallocated shared expenses. The increase in segment operating income was due to growth at ourStudio Entertainment , Parks, Experiences and Products and Media Networks segments, partially offset by lower results at our Direct-to-Consumer & International segment. In addition, net income attributable toDisney reflected an approximate 1 percentage point decrease due to an unfavorable Foreign Exchange Impact. Revenues Service revenues for fiscal 2018 increased 9%, or$4.0 billion , to$50.9 billion , due to higher theatrical distribution revenue, growth in guest spending and volumes at our theme parks and resorts, an increase in affiliate fees, increased TV/SVOD distribution revenue and the consolidation ofBAMTech . InSeptember 2017 , the Company increased its ownership inBAMTech and began consolidating its results. These increases were partially offset by lower advertising revenue. Product revenues for fiscal 2018 increased 3%, or$0.3 billion , to$8.6 billion , due to guest spending and volume growth at our theme parks and resorts, partially offset by lower home entertainment volumes and a decrease in retail store sales. Product revenue reflected an approximate 1 percentage point increase due to a favorable Foreign Exchange Impact. Costs and expenses Cost of services for fiscal 2018 increased 9%, or$2.2 billion , to$27.5 billion , due to higher film and television cost amortization driven by an increase in theatrical and TV/SVOD distribution revenue and contractual rate increases for television programming. Costs of services also increased due to the consolidation ofBAMTech and higher costs at our theme parks and resorts reflecting cost inflation, higher technology and operations support expenses and a special fiscal 2018 domestic employee bonus. Cost of products for fiscal 2018 increased 4%, or$0.2 billion , to$5.2 billion due to cost inflation and higher guest spending and volumes at our theme parks and resorts. Cost of products reflected an approximate 1 percentage point increase due to an unfavorable Foreign Exchange Impact. Selling, general, administrative and other costs for fiscal 2018 increased 8%, or$0.7 billion , to$8.9 billion , due to higher marketing spend, the consolidation ofBAMTech , costs incurred in connection with the TFCF acquisition and an increase in compensation costs. Depreciation and amortization costs increased 8%, or$0.2 billion , to$3.0 billion primarily due to depreciation of new attractions at our theme parks and resorts and the consolidation ofBAMTech . Depreciation and amortization costs reflected an approximate 1 percentage point increase due to an unfavorable Foreign Exchange Impact. Restructuring and Impairment Charges The Company recorded$33 million and$98 million of restructuring and impairment charges in fiscal 2018 and 2017, respectively. Charges in fiscal 2018 were due to severance costs. Charges in fiscal 2017 were due to severance costs and asset impairments. Other Income, net % Change (in millions) 2018 2017 Better/(Worse) Gain on sales of real estate and property rights$ 560 $ - nm Insurance recoveries (settlements) related to legal matters 38 (177 ) nm Gain related to the acquisition of BAMTech 3 255 (99 )% Other income, net$ 601 $ 78 >100 % In fiscal 2017, the Company recorded a charge of$177 million in connection with the settlement of a litigation matter, net of committed insurance recoveries, and a gain of$255 million in connection with the acquisition of a controlling interest inBAMTech . 33
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Interest Expense, net
% Change
(in millions) 2018 2017 Better/(Worse)
Interest expense $ (682 ) $ (507 ) (35 )%Interest and investment income 108 122 (11 )% Interest expense, net
$ (574 ) $ (385 ) (49 )% The increase in interest expense was due to an increase in average interest rates, higher average debt balances and financing costs related to the acquisition of TFCF. The decrease in interest and investment income for fiscal 2018 was due to the comparison to gains on investments recognized in fiscal 2017, partially offset by an increase in interest income driven by higher average interest rates. Equity in the income (loss) of investees, net Equity in the income of investees decreased$422 million , to a loss of$102 million due to higher losses from Hulu, impairments of Vice and Villages Nature equity method investments and lower income from A+E. These decreases were partially offset by a favorable comparison to a loss fromBAMTech in fiscal 2017. The decrease at Hulu was driven by higher programming, labor and marketing costs, partially offset by growth in subscription and advertising revenue. The decrease at A +E was due to lower advertising revenue and higher programming costs, partially offset by higher program sales. Effective Income Tax Rate Change 2018 2017 Better/(Worse) Effective income tax rate 11.3 % 32.1 % 20.8 ppt The decrease in the effective income tax rate was due to the impact of the Tax Act, which included: • A net benefit of$1.7 billion , which reflected a$2.1 billion benefit from
remeasuring our deferred tax balances to the new statutory rate (Deferred
Remeasurement), partially offset by a charge of
one-time tax on certain accumulated foreign earnings (Deemed Repatriation
Tax). This benefit had an impact of approximately 11.5 percentage points
on the effective income tax rate.
• A reduction in the Company's fiscal 2018 U.S. statutory federal income tax
rate to 24.5% from 35.0% in fiscal 2017. Net of state tax and other
related effects, the reduction in the statutory rate had an impact of
approximately 8.2 percentage points on the effective income tax rate.
Noncontrolling Interests
% Change
(in millions) 2018 2017 Better/(Worse)
Net income from continuing operations
attributable to noncontrolling interests $ (468 ) $ (386 ) (21 )%
Net income attributable to noncontrolling interests for fiscal 2018 increased$82 million to$468 million due to lower tax expense atESPN , largely due to the Tax Act, and the impact of the Company's acquisition of the noncontrolling interest in Disneyland Paris in the third quarter of fiscal 2017. These increases were partially offset by losses atBAMTech . Certain Items Impacting Comparability Results for fiscal 2019 were impacted by the following: • The Hulu Gain of$4.8 billion
• A benefit of
recoveries related to a legal matter and a gain of
on the settlement of preexisting relationships with TFCF pursuant to
acquisition accounting guidance
• A benefit of
• Amortization of
and fair value step-up on film and television costs
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• Restructuring and impairment charges of
• Impairments of
• A charge of$511 million for the extinguishment of a portion of debt originally assumed in the TFCF acquisition
Results for fiscal 2018 were impacted by the following:
• A benefit of
the Deemed Repatriation Tax
• A benefit of
of real estate and property rights,
in connection with the settlement of a fiscal 2017 litigation matter and
$3 million from an adjustment related to a non-cash gain recognized in
fiscal 2017 for the acquisition of a controlling interest in BAMTech • Impairments of
• Restructuring and impairment charges of
Results for fiscal 2017 were impacted by the following:
• A non-cash net gain of
a controlling interest in BAMTech
• A charge, net of committed insurance recoveries, of $177 million in
connection with the settlement of litigation
• Restructuring and impairment charges of
A summary of the impact of these items on EPS is as follows:
After-Tax
(in millions, except per share data) Pre-Tax Income/(Loss) Tax Benefit/(Expense)(1) Income/(Loss) EPS Favorable/(Adverse) (2)
Year Ended
$ 4,794 $ (1,103 ) $ 3,691 $ 2.22
Insurance recoveries and gains on the
settlement of preexisting relationships 74 (17 ) 57 0.03
Benefit from the Tax Act - 34 34 0.02
Amortization of TFCF and Hulu intangible
assets and fair value step-up on film
and television costs, net of gain(3) (1,595 ) 355 (1,240 ) (0.74 )
Restructuring and impairment charges (1,183 ) 273 (910 ) (0.55 )
Impairment of equity investments (538 ) 123 (415 ) (0.25 )
Charge for the extinguishment of debt (511 ) 118 (393 ) (0.24 )
Total $ 1,041 $ (217 ) $ 824 $ 0.50
Year Ended September 29, 2018 :
Net benefit from the Tax Act $ - $ 1,701 $ 1,701 $ 1.11
Gain from sale of real estate, property
rights and other 601 (158 ) 443 0.30
Impairment of equity investments (210 ) 49 (161 ) (0.11 )
Restructuring and impairment charges (33 ) 7 (26 ) (0.02 )
Total $ 358 $ 1,599 $ 1,957 $ 1.28
Year Ended September 30, 2017 :
Settlement of litigation $ (177 ) $ 65 $ (112 ) $ (0.07 )
Restructuring and impairment charges (98 ) 31 (67 ) (0.04 )
Gain related to the acquisition of
BAMTech 255 (93 ) 162 0.10
Total $ (20 ) $ 3 $ (17 ) $ (0.01 )
(1) Tax benefit/expense adjustments are determined using the tax rate
applicable to the individual item affecting comparability.
(2) EPS is net of noncontrolling interest share, where applicable. Total may
not equal the sum of the column due to rounding.
(3) Includes amortization of intangibles related to TFCF equity investees.
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BUSINESS SEGMENT RESULTS - 2019 vs. 2018 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 Media Networks segment generates revenue from affiliate fees, advertising (excluding addressable ad sales) and other revenues, which include the sale and distribution of television programs. Significant expenses include amortization of programming and production costs, participations and residuals expense, technical support costs, operating labor and distribution costs. Our Parks, Experiences and Products segment 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 intellectual properties and sale of branded merchandise. Revenues are also generated from sponsorships and co-branding opportunities, real estate rent and sales, and royalties fromTokyo 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. OurStudio Entertainment segment generates revenue from the distribution of films in the theatrical, home entertainment and TV/SVOD markets, stage play ticket sales and licensing of our intellectual properties for use in live entertainment productions. Significant expenses include amortization of production, participations and residuals costs, marketing and sales costs, distribution expenses and costs of sales. Our Direct-to-Consumer & International segment generates revenue from affiliate fees, advertising sales (includes addressable ad sales), subscription fees for our DTC streaming and other services, and fees charged for technology support services. Significant expenses include operating expenses, selling general and administrative costs and depreciation and amortization. Operating expenses include programming and production costs (including programming, production and branded digital content obtained from other Company segments), technology support costs, operating labor and distribution costs. 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. 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. The following table reconciles income from continuing operations before income taxes to total segment operating income. % Change Better/(Worse) 2019 2018 vs. vs. (in millions) 2019 2018 2017 2018 2017 Income before income taxes$ 13,944 $ 14,729 $ 13,788 (5 )% 7 % Add/(subtract): Corporate and unallocated shared expenses 987 744 582 (33 )% (28 )% Restructuring and impairment charges 1,183 33 98 >(100 )% 66 % Other income, net (4,357 ) (601 ) (78 ) >100 % >100 % Interest expense, net 978 574 385 (70 )% (49 )% Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs (1) 1,595 - - nm nm Impairment of equity investments 538 210 - >(100 )% nm Total segment operating income$ 14,868 $ 15,689 $ 14,775 (5 )% 6 % (1) Includes amortization of intangibles related to TFCF equity investees 36
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The following is a summary of segment revenue and operating income:
% Change
Better/(Worse)
2019 2018
vs. vs.
(in millions) 2019 2018 2017 2018 2017
Revenues:
Media Networks $ 24,827 $ 21,922 $ 21,299 13 % 3 %
Parks, Experiences and Products 26,225 24,701 23,024 6 % 7 %
Studio Entertainment 11,127 10,065 8,352 11 % 21 %
Direct-to-Consumer & International 9,349 3,414 3,075 100 % 11 %
Eliminations (1,958 ) (668 ) (613 ) >(100 )% (9 )%
$ 69,570 $ 59,434 $ 55,137 17 % 8 %
Segment operating income / (loss):
Media Networks $ 7,479 $ 7,338 $ 7,196 2 % 2 %
Parks, Experiences and Products 6,758 6,095 5,487 11 % 11 %
Studio Entertainment 2,686 3,004 2,363 (11 )% 27 %
Direct-to-Consumer & International (1,814 ) (738 ) (284 ) >(100 )% (100 )%
Eliminations (241 ) (10 ) 13 >(100 )% nm
$ 14,868 $ 15,689 $ 14,775 (5 )% 6 %
Media Networks
Operating results for the Media Networks segment are as follows:
Year Ended % Change
Better /
(in millions) September 28, 2019 September 29, 2018 (Worse)
Revenues
Affiliate fees $ 13,433 $ 11,907 13 %
Advertising 6,965 6,586 6 %
TV/SVOD distribution and other 4,429 3,429 29 %
Total revenues 24,827 21,922 13 %
Operating expenses (15,499 ) (13,197 ) (17 )%
Selling, general, administrative and other (2,361 ) (1,899 ) (24 )%
Depreciation and amortization (191 ) (199 ) 4 %
Equity in the income of investees 703 711 (1 )%
Operating Income $ 7,479 $ 7,338 2 %
Revenues
The increase in affiliate fees was due to increases of 8% from the consolidation
of TFCF's operations and 7% from higher contractual rates, partially offset by a
decrease of approximately 2 and one-half percent from fewer subscribers.
The increase in advertising revenues was due to increases of $374 million at
Cable Networks, from $3,129 million to $3,503 million and $5 million at
Broadcasting, from $3,457 million to $3,462 million . Cable Networks advertising
revenue reflected increases of 11% from the consolidation of TFCF's operations
and 2% from higher impressions reflecting higher units delivered, partially
offset by lower average viewership. Broadcasting advertising revenue was
comparable to the prior-year period as increases of 7% from higher network rates
and 2% from the consolidation of TFCF's operations were offset by a decrease of
9% from average viewership.
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TV/SVOD distribution and other revenue increased$1,000 million , due to sales of TFCF programs, partially offset by a decrease inABC Studios program sales. The decrease inABC Studios program sales reflects the prior-year sales of Daredevil,Luke Cage and Iron Fist, partially offset by the current-year sale of The Punisher. Costs and Expenses Operating expenses include programming and production costs, which increased$2,142 million from$12,555 million to$14,697 million . At Cable Networks, programming and production costs increased$1,255 million due to the consolidation of TFCF's operations and contractual rate increases for college sports, NFL, NBA and MLB programming. At Broadcasting, programming and production costs increased$887 million due to the consolidation of TFCF's operations, partially offset by the impact of lowerABC Studios program sales. Selling, general, administrative and other costs increased from$1,899 million to$2,361 million due to the consolidation of TFCF's operations. Segment Operating Income Segment operating income increased 2%, or$141 million , to$7,479 million due to the consolidation of TFCF's operations, partially offset by lower income fromABC Studios program sales. The following table provides supplemental revenue and operating income detail for the Media Networks segment: Year Ended % Change Better / (in millions) September 28, 2019 September 29, 2018 (Worse) Revenues Cable Networks $ 16,486 $ 14,610 13 % Broadcasting 8,341 7,312 14 % $ 24,827 $ 21,922 13 % Segment operating income Cable Networks $ 5,425 $ 5,225 4 % Broadcasting 1,351 1,402 (4 )% Equity in the income of investees 703 711 (1 )% $ 7,479 $ 7,338 2 %
Items Excluded from Segment Operating Income Related to Media Networks The following table presents supplemental information for items related to the Media Network segment that are excluded from segment operating income:
Year Ended
September 28, September 29, % Change
(in millions) 2019 2018 Better/(Worse)
Amortization of TFCF intangible assets
and fair value step-up on film and
television costs(1) $ (684 ) $ - nm
Restructuring and impairment charges (105 ) (2 ) >(100) %
Impairment of equity investments (184 ) - >(100) %
(1) Amortization of step-up on film and television costs was
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Parks, Experiences and Products
Operating results for the Parks, Experiences and Products segment are as
follows:
Year Ended % Change
Better /
(in millions) September 28, 2019 September 29, 2018 (Worse)
Revenues
Theme park admissions $ 7,540 $ 7,183 5 %
Parks & Experiences merchandise, food and
beverage 5,963 5,674 5 %
Resorts and vacations 6,266 5,938 6 %
Merchandise licensing and retail 4,519 4,249 6 %
Parks licensing and other 1,937 1,657 17 %
Total revenues 26,225 24,701 6 %
Operating expenses (14,015 ) (13,326 ) (5 )%
Selling, general, administrative and
other (3,133 ) (2,930 ) (7 )%
Depreciation and amortization (2,306 ) (2,327 ) 1 %
Equity in the loss of investees (13 ) (23 ) 43 %
Operating Income $ 6,758 $ 6,095 11 %
Revenues
The increase in theme park admissions revenue was due to an increase of 8% from
higher average ticket prices, partially offset by decreases of 2% from lower
attendance and 1% from an unfavorable Foreign Exchange Impact. The decrease in
attendance was due to lower attendance at Shanghai Disney Resort . Attendance at
our domestic theme parks was comparable to the prior year.
Parks & Experiences merchandise, food and beverage revenue growth was due to an
increase of 6% from higher average guest spending, partially offset by a
decrease of 1% from lower volumes.
The increase in resorts and vacations revenue was primarily due to increases of
2% from higher average daily hotel room rates, 1% from an increase in average
ticket prices for cruise line sailings and 1% from the consolidation of TFCF's
operations.
Merchandise licensing and retail revenue growth was due to increases of 3% from
merchandise licensing, 1% from our retail stores, 1% from a favorable Foreign
Exchange Impact and 1% from our publishing business due to the consolidation of
TFCF's operations. The increase in merchandise licensing revenues was primarily
due to higher revenue from products based on Toy Story, an increase in
guaranteed shortfall recognition and higher revenues from Avengers and Frozen
merchandise. These increases were partially offset by lower revenues from
products based on Star Wars and Cars. Higher revenues at our retail stores were
due to an increase in online sales.
The increase in parks licensing and other revenue was due to the adoption of ASC
606 and higher real estate sales. The adoption of ASC 606 required certain cost
reimbursements from licensees to be recognized as revenue rather than recorded
as an offset to operating expenses.
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The following table presents supplemental park and hotel statistics:
Domestic International (2) Total
Fiscal 2019 Fiscal 2018 Fiscal 2019 Fiscal 2018 Fiscal 2019 Fiscal 2018
Parks
Increase/
(decrease)
Attendance - % 4 % (7 )% 4 % (2 )% 4 %
Per Capita Guest
Spending 7 % 6 % 13 % 5 % 8 % 6 %
Hotels (1)
Occupancy 90 % 88 % 81 % 84 % 88 % 87 %
Available Room
Nights
(in thousands) 10,030 10,045 3,182 3,179 13,212 13,224
Per Room Guest
Spending $353 $345 $330 $315 $348 $338 (1) Per room guest spending consists of the average daily hotel room rate as
well as guest spending on food, beverage and merchandise at the hotels.
Hotel statistics include rentals of
(2) Per capita guest spending growth rate is stated on a constant currency
basis. Per room guest spending is stated at the fiscal 2018 average
foreign exchange rate.
Costs and Expenses Operating expenses include operating labor, which increased$237 million from$5,937 million to$6,174 million , cost of sales and distribution costs, which increased$154 million from$2,764 million to$2,918 million , and infrastructure costs, which increased$99 million from$2,370 million to$2,469 million . The increase in operating labor was due to inflation, including the impact of wage increases for union employees, partially offset by the comparison to a special domestic employee bonus that was recognized in fiscal 2018. The increase in cost of sales and distribution costs was driven by higher sales of food, beverage and merchandise at our theme parks and resorts. Higher infrastructure costs were due to an increase in technology spending and costs for new guest offerings, including expenses associated with Star Wars: Galaxy's Edge. Other operating expenses, which include costs for such items as supplies, commissions and entertainment offerings, increased$199 million , from$2,255 million to$2,454 million , due to the recognition of certain cost reimbursements from licensees as revenue rather than recorded as an offset to operating expenses. Selling, general, administrative and other costs increased$203 million from$2,930 million to$3,133 million primarily due to inflation and higher marketing spend at our parks and resorts. Segment Operating Income Segment operating income increased 11%, or$663 million , to$6,758 million due to growth at our domestic theme parks and resorts and our consumer products businesses. 40
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The following table presents supplemental revenue and operating income detail
for the Parks, Experiences and Products segment to provide continuity with our
legacy reporting:
Year Ended % Change
September 28, September 29, Better /
(in millions) 2019 2018 (Worse)
Supplemental revenue detail
Parks & Experiences
Domestic $ 17,369 $ 16,161 7 %
International 4,223 4,135 2 %
Consumer Products 4,633 4,405 5 %
$ 26,225 $ 24,701 6 %
Supplemental operating income detail
Parks & Experiences
Domestic $ 4,412 $ 4,013 10 %
International 507 456 11 %
Consumer Products 1,839 1,626 13 %
$ 6,758 $ 6,095 11 %
Studio Entertainment
Operating results for the Studio Entertainment segment are as follows:
Year Ended % Change
Better /
(in millions) September 28, 2019 September 29, 2018 (Worse)
Revenues
Theatrical distribution $ 4,726 $ 4,303 10 %
Home entertainment 1,734 1,647 5 %
TV/SVOD distribution and other 4,667 4,115 13 %
Total revenues 11,127 10,065 11 %
Operating expenses (5,187 ) (4,449 ) (17 )%
Selling, general, administrative and other (3,119 ) (2,493 ) (25 )%
Depreciation and amortization (135 ) (119 ) (13 )%
Operating Income $ 2,686 $ 3,004 (11 )%
Revenues
The increase in theatrical distribution revenue was due to the comparison of
four significant Disney live-action titles, Lion King, Aladdin, Mary Poppins
Returns and Dumbo in the current year to no significant Disney live-action
titles in the prior year, and the consolidation of TFCF's operations. These
increases were partially offset by two Marvel titles, Avengers: Endgame and
Captain Marvel and no Star Wars title in the current year compared to four
Marvel titles, Avengers: Infinity War, Black Panther, Thor: Ragnarok and Ant-Man
and the Wasp, and two Star Wars titles, Star Wars: The Last Jedi and Solo: A
Star Wars Story in the prior year. The current year also included Toy Story 4
and Ralph Breaks the Internet, while the prior year included Incredibles 2 and
Coco.
Higher home entertainment revenue was due to an increase of 16% from the
consolidation of TFCF's operations, partially offset by decreases of 9% from
lower unit sales and 1% from a decrease in net effective pricing at our legacy
operations. The decrease in unit sales was due to the release of Star Wars: The
Last Jedi in the prior year compared to no Star Wars release in the current
year. Other significant titles in release included Avengers: Endgame,
Incredibles 2, Captain Marvel , Ant-Man and the Wasp, and Ralph Breaks the
Internet in the current year and Avengers: Infinity War, Black Panther, Thor:
Ragnarok, Coco and Cars 3 in the prior year.
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Higher TV/SVOD distribution and other revenue was due to an increase of 14% from TV/SVOD distribution, partially offset by a decrease of 2% fromLucasfilm's special effects business due to fewer projects. The increase in TV/SVOD distribution was due to the consolidation of TFCF's operations and, to a lesser extent, the impact of the adoption of ASC 606. Costs and Expenses Operating expenses include film cost amortization, which increased$575 million , from$3,187 million to$3,762 million , due to the consolidation of TFCF's operations. Operating expenses also include cost of goods sold and distribution costs, which increased$163 million , from$1,262 million to$1,425 million , due to the consolidation of TFCF's operations, partially offset by fewer projects atLucasfilm's special effects business. Selling, general, administrative and other costs increased$626 million from$2,493 million to$3,119 million due to the consolidation of TFCF's operations. The increase in depreciation and amortization was due to the consolidation of TFCF's operations. Segment Operating Income Segment operating income decreased 11%, or$318 million to$2,686 million due to the consolidation of TFCF's operations and lower home entertainment results, partially offset by decreases in film impairments and write-offs from our legacy operations. Items Excluded from Segment Operating Income Related toStudio Entertainment The following table presents supplemental information for items related to theStudio Entertainment segment that are excluded from segment operating income: Year Ended September 28, September 29, % Change (in millions) 2019 2018 Better/(Worse) Amortization of TFCF intangible assets and fair value step-up on film and television costs(1)$ (206 ) $ - nm Restructuring and impairment charges (219 ) (8 ) >(100) %
(1) Amortization of step-up on film and television costs was
Direct-to-Consumer & International
Operating results for the Direct-to-Consumer & International segment are as
follows:
Year Ended % Change
Better /
(in millions) September 28, 2019 September 29, 2018 (Worse)
Revenues
Affiliate fees $ 2,740 $ 1,372 100 %
Advertising 3,534 1,311 >100 %
Subscription fees and other 3,075 731 >100 %
Total revenues 9,349 3,414 >100 %
Operating expenses (8,497 ) (2,384 ) >(100 )%
Selling, general, administrative and other (2,108 ) (1,003 ) >(100 )%
Depreciation and amortization (318 ) (185 ) (72 )%
Equity in the loss of investees (240 ) (580 ) 59 %
Operating Loss $ (1,814 ) $ (738 ) >(100 )%
Revenues
The increase in affiliate fees was due to the consolidation of TFCF's operations
and to a lesser extent, higher rates at our legacy operations, partially offset
by an unfavorable Foreign Exchange Impact.
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The increase in advertising revenues was due to increases of$1,178 million in addressable advertising sales, driven by the consolidation of Hulu's operations, and$1,045 million at our International Channels, driven by the consolidation of TFCF's operations. Subscription fees and other revenue increased due to the consolidation of Hulu's operations and, to a lesser extent, the consolidation of TFCF's international program sales and higher subscription fees for ESPN+, which launched inApril 2018 . Costs and Expenses Operating expenses include an increase of$5,208 million in programming and production costs, from$1,572 million to$6,780 million , and an increase of$905 million in other operating expenses, from$812 million to$1,717 million . The increase in programming and production costs was due to the consolidation of Hulu and TFCF's operations and, to a lesser extent, the ramp up of our investment in ESPN+ and the upcoming launch of Disney+. Other operating expenses, which include technical support and distribution costs, increased due to the consolidation of Hulu and TFCF's operations. Selling, general, administrative and other costs increased$1,105 million , from$1,003 million to$2,108 million , due to the consolidation of TFCF and Hulu's operations. Depreciation and amortization increased$133 million , from$185 million to$318 million , due to the consolidation of TFCF and Hulu's operations and increased investment in technology. Equity in the Loss of Investees Loss from equity investees decreased$340 million , from$580 million to$240 million , due to the consolidation of Hulu. Segment Operating Loss Segment operating loss increased from$738 million to$1,814 million due to the ramp up of our investment in ESPN+, which launched inApril 2018 , the consolidation of Hulu's operations and costs associated with the upcoming launch of Disney+, partially offset by the consolidation of TFCF's operations. The following table presents supplemental revenue and operating income/(loss) detail for the Direct-to-Consumer & International segment. Fiscal 2019 includes revenues and operating income from the consolidation of TFCF and Hulu's operations: Year Ended % Change September 28, September 29, Better / (in millions) 2019 2018 (Worse) Supplemental revenue detail International Channels$ 4,690 $ 1,920 >100 % Direct-to-Consumer businesses and other 4,659 1,494
>100 %
$ 9,349 $ 3,414 >100 % Supplemental operating income/(loss) detail International Channels $ 670 $ 311 >100 % Direct-to-Consumer businesses and other (2,244 ) (469 ) >(100 )% Equity in the loss of investees (240 ) (580 ) 59 %$ (1,814 ) $ (738 ) >(100 )% Items Excluded from Segment Operating Loss Related to Direct-to-Consumer & International The following table presents supplemental information for items related to the Direct-to-Consumer & International segment that are excluded from segment operating loss: Year Ended September 28, September 29, % Change (in millions) 2019 2018 Better/(Worse) Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(1)$ (701 ) $ - nm Hulu Gain 4,822 - nm Restructuring and impairment charges (456 ) - nm Impairment of equity investments (354 ) (157 ) >(100) %
(1) Amortization of intangible assets was
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Eliminations
Intersegment content transactions are as follows:
Year Ended % Change
September 28, September 29, Better/
(in millions) 2019 2018 (Worse)
Revenues
37 %
Content transactions with
Direct-to-Consumer & International (272 ) (28 ) >(100) %
Media Networks:
Content transactions with
Direct-to-Consumer & International (1,580 ) (471 ) >(100) %
Total $ (1,958 ) $ (668 ) >(100) %
Operating income
Studio Entertainment :
Content transactions with Media Networks $ (19 ) $ (8 ) >(100) %
Content transactions with
Direct-to-Consumer & International (80 ) - nm
Media Networks:
Content transactions with
Direct-to-Consumer & International (142 ) (2 ) >(100) %
Total $ (241 ) $ (10 ) >(100) %
Revenues and Operating Income
The increase in the impact from eliminations was due to the elimination of sales
of ABC Studios and Twentieth Century Fox Television programs to Hulu and the
sales of films to Disney+.
BUSINESS SEGMENT RESULTS - 2018 vs. 2017
Media Networks
Operating results for the Media Networks segment are as follows:
Year Ended % Change
Better /
(in millions) September 29, 2018 September 30, 2017 (Worse)
Revenues
Affiliate fees $ 11,907 $ 11,324 5 %
Advertising 6,586 6,938 (5 )%
TV/SVOD distribution and other 3,429 3,037 13 %
Total revenues 21,922 21,299 3 %
Operating expenses (13,197 ) (12,754 ) (3 )%
Selling, general, administrative and other (1,899 ) (1,909 ) 1 %
Depreciation and amortization (199 ) (206 ) 3 %
Equity in the income of investees 711 766 (7 )%
Operating Income $ 7,338 $ 7,196 2 %
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Revenues
The increase in affiliate fees was due to an increase of 7% from higher contractual rates, partially offset by a decrease of 2% from fewer subscribers. The decrease in advertising revenues was due to decreases of$229 million at Cable Networks, from$3,358 million to$3,129 million and$123 million at Broadcasting, from$3,580 million to$3,457 million . The decrease at Cable Networks was due to a decrease of 6% from lower impressions as lower average viewership was partially offset by higher units delivered. The decrease at Broadcasting was due to decreases of 7% from lower network impressions and 2% from lower impressions at the owned television stations, both of which were driven by lower average viewership. The decrease was partially offset by an increase of 6% from higher network rates. TV/SVOD distribution and other revenue increased$392 million due to higherABC Studios program sales driven by increased revenue from programs licensed to Hulu and higher sales of Grey's Anatomy and Black-ish. Additionally, fiscal 2018 included the sales ofLuke Cage , Daredevil andJessica Jones compared to fiscal 2017 sales of The Punisher and The Defenders. Costs and Expenses Operating expenses include programming and production costs, which increased$486 million from$12,069 million to$12,555 million . At Broadcasting, programming and production costs increased$317 million due to higher program sales and a higher average cost of network programming, including the impact of American Idol, Roseanne and The Goldbergs in fiscal 2018. At Cable Networks, programming and production costs increased$169 million due to contractual rate increases for college sports, NFL, NBA and MLB programming, partially offset by lower production costs. Equity in the Income of Investees Income from equity investees decreased$55 million from$766 million to$711 million due to lower income from A+E driven by decreased advertising revenue and higher programming costs, partially offset by higher program sales. Segment Operating Income Segment operating income increased 2%, or$142 million , to$7,338 million due to higher program sales and an increase at the Domestic Disney Channels, partially offset by lower income from equity investees. The following table provides supplemental revenue and operating income detail for the Media Networks segment: Year Ended % Change Better / (in millions) September 29, 2018 September 30, 2017 (Worse) Revenues Cable Networks $ 14,610 $ 14,416 1 % Broadcasting 7,312 6,883 6 % $ 21,922 $ 21,299 3 % Segment operating income Cable Networks $ 5,225 $ 5,174 1 % Broadcasting 1,402 1,256 12 % Equity in the income of investees 711 766 (7 )% $ 7,338 $ 7,196 2 % 45
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Parks, Experiences and Products
Operating results for the Parks, Experiences and Products segment are as
follows:
Year Ended % Change
Better /
(in millions) September 29, 2018 September 30, 2017 (Worse)
Revenues
Theme park admissions $ 7,183 $ 6,504 10 %
Parks & Experiences merchandise, food and
beverage 5,674 5,154 10 %
Resorts and vacations 5,938 5,378 10 %
Merchandise licensing and retail 4,249 4,494 (5 )%
Parks licensing and other 1,657 1,494 11 %
Total revenues 24,701 23,024 7 %
Operating expenses (13,326 ) (12,455 ) (7 )%
Selling, general, administrative and
other (2,930 ) (2,896 ) (1 )%
Depreciation and amortization (2,327 ) (2,161 ) (8 )%
Equity in the loss of investees (23 ) (25 ) 8 %
Operating Income $ 6,095 $ 5,487 11 %
Revenues
The increase in theme park admissions revenue was due to increases of 6% from
higher average ticket prices, 4% from attendance growth and 1% from a favorable
Foreign Exchange Impact. Attendance growth included a favorable comparison to
the fiscal 2017 impacts of Hurricanes Irma and Matthew at Walt Disney World
Resort .
Parks & Experiences merchandise, food and beverage revenue growth was due to
increases of 5% from higher average guest spending, 3% from volume growth and 2%
from a favorable Foreign Exchange Impact. Volume growth included a benefit from
the favorable comparison to the fiscal 2017 impacts of Hurricanes Irma and
Matthew.
The increase in resorts and vacations revenue was primarily due to increases of
3% from higher average daily hotel room rates, 1% from higher average ticket
prices for cruise line sailings, 1% from a favorable Foreign Exchange Impact, 1%
from an increase in passenger cruise ship days and 1% from higher occupied hotel
room nights. Higher occupied hotel room nights were due to an increase at our
international resorts, partially offset by a decrease at our domestic resorts,
reflecting fewer available room nights at Walt Disney World Resort due to room
refurbishments and conversions to vacation club units.
Merchandise licensing and retail revenues were lower primarily due to decreases
of 2% from licensing, 2% from lower retail sales and 1% from an unfavorable
Foreign Exchange Impact. The decrease in revenue from licensing was driven by a
decrease in licensee settlements and lower revenues from products based on
Frozen, Cars and Princess, partially offset by an increase from products based
on Mickey and Minnie and Avengers. Lower retail revenue was driven by a decrease
in comparable store sales at The Disney Stores, partially offset by higher
online revenue. The decrease in comparable store sales reflected lower sales of
Star Wars and Moana merchandise in the fiscal 2018, partially offset by higher
sales of Mickey and Minnie merchandise.
The increase in parks licensing and other revenue was primarily due to an
increase in real estate rental and sponsorship revenues.
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The following table presents supplemental park and hotel statistics:
Domestic International (2) Total
Fiscal 2018 Fiscal 2017 Fiscal 2018 Fiscal 2017 Fiscal 2018 Fiscal 2017
Parks
Increase/
(decrease)
Attendance 4 % 2 % 4 % 47 % 4 % 13 %
Per Capita Guest
Spending 6 % 2 % 5 % (1 )% 6 % (1 )%
Hotels (1)
Occupancy 88 % 88 % 84 % 80 % 87 % 86 %
Available Room
Nights
(in thousands) 10,045 10,205 3,179 3,022 13,224 13,227
Per Room Guest
Spending $345 $317 $297 $289 $334 $311 (1) Per room guest spending consists of the average daily hotel room rate as
well as guest spending on food, beverage and merchandise at the hotels.
Resort statistics include rentals of
(2) Per capita guest spending growth rate is stated on a constant currency
basis. Per room guest spending is stated at the fiscal 2017 average
foreign exchange rate.
Costs and Expenses Operating expenses include operating labor, which increased$525 million from$5,412 million to$5,937 million , cost of goods sold and distribution costs, which increased$94 million from$2,670 million to$2,764 million and infrastructure costs, which increased$111 million from$2,259 million to$2,370 million . The increase in operating labor was due to inflation, higher volumes, an unfavorable Foreign Exchange Impact and a special fiscal 2018 domestic employee bonus. The increase in cost of goods sold and distribution costs was due to higher volumes and inflation. Higher infrastructure costs were driven by increased technology spending at our theme parks and resorts and inflation. Other operating expenses, which include costs such as supplies, commissions and entertainment offerings increased$141 million from$2,114 million to$2,255 million due to an unfavorable Foreign Exchange Impact, inflation and new guest offerings at our theme parks and resorts. Selling, general, administrative and other costs increased$34 million from$2,896 million to$2,930 million primarily due to inflation and higher technology spending, partially offset by lower costs at our games business. Depreciation and amortization increased$166 million from$2,161 million to$2,327 million primarily due to new attractions at our domestic parks and resorts andHong Kong Disneyland Resort and asset impairments in fiscal 2018. Segment Operating Income Segment operating income increased 11%, or$608 million , to$6.1 billion due to growth at our domestic and international Parks & Experiences, partially offset by decreases at our merchandise licensing and retail businesses. 47
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The following table presents supplemental revenue and operating income detail
for the Parks, Experiences and Products segment to provide continuity with our
legacy reporting:
Year Ended % Change
September 29, September 30, Better /
(in millions) 2018 2017 (Worse)
Supplemental revenue detail
Parks & Experiences
Domestic $ 16,161 $ 14,812 9 %
International 4,135 3,603 15 %
Consumer Products 4,405 4,609 (4) %
$ 24,701 $ 23,024 7 %
Supplemental operating income detail
Parks & Experiences
Domestic $ 4,013 $ 3,464 16 %
International 456 310 47 %
Consumer Products 1,626 1,713 (5) %
$ 6,095 $ 5,487 11 %
Studio Entertainment
Operating results for the Studio Entertainment segment are as follows:
Year Ended % Change
Better /
(in millions) September 29, 2018 September 30, 2017 (Worse)
Revenues
Theatrical distribution $ 4,303 $ 2,903 48 %
Home entertainment 1,647 1,677 (2 )%
TV/SVOD distribution and other 4,115 3,772 9 %
Total revenues 10,065 8,352 21 %
Operating expenses (4,449 ) (3,718 ) (20 )%
Selling, general, administrative and other (2,493 ) (2,156 ) (16 )%
Depreciation and amortization (119 ) (115 ) (3 )%
Operating Income $ 3,004 $ 2,363 27 %
Revenues
The increase in theatrical distribution revenue was due to the release of four
Marvel titles in fiscal 2018 compared to two Marvel titles in fiscal 2017. The
Marvel titles in fiscal 2018 were Avengers: Infinity War, Black Panther, Thor:
Ragnarok and Ant-Man and the Wasp, whereas fiscal 2017 included Guardians of the
Galaxy Vol. 2 and Doctor Strange. Other significant titles in fiscal 2018
included Star Wars: The Last Jedi, Incredibles 2 and Coco, while fiscal 2017
included Beauty and the Beast, Rogue One : A Star Wars Story, Pirates of the
Caribbean: Dead Men Tell No Tales and Moana.
Lower home entertainment revenue reflected a 5% decrease from lower unit sales,
partially offset by an increase of 3% from higher average net effective pricing.
Lower unit sales were driven by the success of Moana and Finding Dory in fiscal
2017 compared to Coco and Cars 3 in fiscal 2018. The decrease was also driven by
three live-action titles in fiscal 2017 as compared to two live-action titles in
fiscal 2018 and the carryover performance of fiscal 2016 new release titles in
fiscal 2017 compared to the carryover performance of fiscal 2017 new release
titles in fiscal 2018. These decreases were partially offset by the release of
three Marvel titles and two Lucasfilm titles in fiscal 2018 compared to two
Marvel titles and one Lucasfilm title in fiscal 2017. The increase in average
net effective pricing was due to higher rates and a higher sales mix of Blu-ray
discs, partially offset by a lower mix of new release titles.
TV/SVOD distribution and other revenue reflected a 5% increase from TV/SVOD
distribution and a 3% increase from stage plays. The increase in TV/SVOD
distribution revenue was due to an increase in our free television business
driven by
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new international agreements and the sale of Star Wars: The Force Awakens in fiscal 2018 with no comparable title in fiscal 2017. Higher stage play revenue was due to the opening of additional productions in fiscal 2018. Costs and Expenses Operating expenses include film cost amortization, which increased$625 million , from$2,562 million to$3,187 million and cost of goods sold and distribution costs, which increased$106 million , from$1,156 million to$1,262 million . Higher film cost amortization was due to the impact of higher theatrical distribution revenues. Higher cost of goods sold and distribution costs were due to an increase in stage play production and theatrical distribution costs. Selling, general, administrative and other costs increased$337 million from$2,156 million to$2,493 million primarily due to higher theatrical marketing costs reflecting more titles released in fiscal 2018 and, to a lesser extent, higher stage play marketing costs due to additional productions in fiscal 2018. Segment Operating Income Segment operating income increased 27%, or$641 million to$3,004 million due to an increase in theatrical distribution results. Direct-to-Consumer & International Operating results for the Direct-to-Consumer & International segment are as follows: Year Ended % Change Better / (in millions) September 29, 2018 September 30, 2017 (Worse) Revenues Affiliate fees $ 1,372 $ 1,335 3 % Advertising 1,311 1,293 1 % Subscription fees and other 731 447 64 % Total revenues 3,414 3,075 11 % Operating expenses (2,384 ) (1,983 ) (20 )% Selling, general, administrative and other (1,003 ) (861 ) (16 )% Depreciation and amortization (185 ) (94 ) (97 )% Equity in the income of investees (580 ) (421 ) (38 )% Operating Income $ (738 ) $ (284 ) >(100 )% Revenues The increase in affiliate fees was due to an increase of 5% from higher contractual rates, partially offset by a decrease of 2% from an unfavorable Foreign Exchange Impact. Advertising revenue increased 1% as higher addressable ad sales were largely offset by lower revenue generated from content distributed on YouTube. Other revenue increased$284 million due to the consolidation ofBAMTech . In fiscal 2017, the Company acquired a controlling interest inBAMTech and began consolidating its results. The Company's share ofBAMTech's results was previously reported in equity in the loss of investees. Costs and Expenses Operating expenses included a$147 million increase in programming and production costs, from$1,425 million to$1,572 million and a$254 million increase in other operating expenses, from$558 million to$812 million . The increase in programming and production costs was due to the consolidation ofBAMTech , partially offset by lower talent costs for digital programming. Other operating costs, which include technical support and distribution costs, increased due to the consolidation ofBAMTech . Selling, general, administrative and other costs increased$142 million from$861 million to$1,003 million due to the consolidation ofBAMTech , partially offset by lower marketing costs at our International Channels. Depreciation and amortization increased$91 million from$94 million to$185 million due to the consolidation ofBAMTech . 49
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Equity in the Loss of Investees Loss from equity investees increased$159 million from a loss of$421 million to a loss of$580 million primarily due to a higher loss from our investment in Hulu, partially offset by a favorable comparison to a loss fromBAMTech in fiscal 2017. OnSeptember 25, 2017 , the Company acquired a controlling interest inBAMTech and began consolidating its results. The Company's share ofBAMTech's results was previously reported in equity in the loss of investees. The higher loss at Hulu was driven by higher programming, labor and marketing costs, partially offset by growth in subscription and advertising revenue. Segment Operating Loss Segment operating loss increased$454 million , to$738 million due to the consolidation ofBAMTech and a higher loss from Hulu, partially offset by growth at our International Channels. The following table presents supplemental revenue and operating income/(loss) detail for the Direct-to-Consumer & International segment to provide information on International Channels that were historically reported in the Media Networks segment: Year Ended % Change Better / (unaudited; in millions) September 29, 2018 September 30, 2017 (Worse) Supplemental revenue detail International Channels $ 1,920 $ 1,853 4 % DTC businesses and other 1,494 1,222 22 % $ 3,414 $ 3,075 11 % Supplemental operating income/(loss) detail International Channels $ 311 $ 233 33 % DTC businesses and other (469 ) (96 ) >(100 )% Equity in the loss of investees (580 ) (421 ) (38 )% $ (738 ) $ (284 ) >(100 )% Eliminations
Intersegment content transactions are as follows:
Year Ended % Change
September 29, September 30, Better/
(in millions) 2018 2017 (Worse)
Revenues
Studio Entertainment :
Content transactions with Media Networks $ (169 ) $ (137 ) (23) %
Content transactions with Direct-to-Consumer
& International (28 ) (22 ) (27) %
Media Networks:
Content transactions with Direct-to-Consumer
& International (471 ) (454 ) (4) %
Total $ (668 ) $ (613 ) (9) %
Operating income
Studio Entertainment :
Content transactions with Media Networks $ (8 ) $ 15 nm
Content transactions with Direct-to-Consumer
& International - - nm
Media Networks:
Content transactions with Direct-to-Consumer
& International (2 ) (2 ) - %
Total $ (10 ) $ 13 nm
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CORPORATE AND UNALLOCATED SHARED EXPENSES
Corporate and unallocated shared expenses are as follows:
% Change
Better/(Worse)
2019 2018
vs. vs.
(in millions) 2019 2018 2017 2018 2017
Corporate and unallocated shared expenses $ (987 ) $ (744 ) $ (582 ) (33 )% (28 )%
The increases in corporate and unallocated shared expenses from fiscal 2018 to fiscal 2019 and from fiscal 2017 to fiscal 2018 were due to costs incurred in connection with the acquisition of TFCF and higher compensation costs. RESTRUCTURING IN CONNECTION WITH THE ACQUISITION OF TFCF As discussed in Note 18 to the Consolidated Financial Statements, in connection with the acquisition of TFCF the Company has begun implementing a restructuring and integration plan as a part of its initiative to realize cost synergies from the acquisition of TFCF. During fiscal 2019, we recorded charges of$1.2 billion , including$0.9 billion of severance and related costs in connection with the plan and$0.3 billion of equity-based compensation costs, primarily for TFCF awards that were accelerated to vest upon the closing of the TFCF acquisition. These charges are recorded in "Restructuring and impairment charges" in the Consolidated Statements of Income. Although our plans are not yet finalized, we anticipate that the total severance and related costs could be on the order of$1.5 billion . The Company may incur other restructuring costs, such as contract termination costs, but we expect these will not be material. For fiscal 2018, restructuring and impairment charges were not material. The following table summarizes the changes in restructuring reserves related to TFCF integration efforts in fiscal 2019: Beginning
Ending
Balance Additions Payments Other Balance
Restructuring reserves $ - $ 906 $ (230 ) $ - $ 676
SIGNIFICANT DEVELOPMENTS
In November 2019 , the Company launched Disney+, a subscription based
direct-to-consumer streaming service with Disney , Pixar, Marvel, Star Wars and
National Geographic branded programming in the U.S. and four other countries.
Further launches are planned for Western Europe in spring 2020, Latin America in
fall 2021, Eastern Europe starting in late 2020 and continuing in 2021, and
various Asia-Pacific territories throughout 2020 and 2021. As we will use our
branded film and television content on the Disney+ service, we expect to forgo
licensing revenue from the sale of this content to third parties in TV/SVOD
markets. In addition, we anticipate an increase in programming and production
investments to create exclusive content for Disney+.
Due to the circumstances in Hong Kong , we have seen a significant decrease in
tourism from China and other parts of Asia to Hong Kong Disneyland Resort . If
current trends continue, Hong Kong Disneyland Resort's fiscal 2020 operating
income could decrease by approximately $275 million compared to fiscal 2019.
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LIQUIDITY AND CAPITAL RESOURCES The change in cash, cash equivalents and restricted cash is as follows: (in millions) 2019 2018 2017 Cash provided by operations - continuing operations$ 5,984 $ 14,295 $ 12,343 Cash used in investing activities - continuing operations (15,096 ) (5,336 ) (4,111 ) Cash used in financing activities - continuing operations (464 ) (8,843 ) (8,959 ) Cash provided by operations - discontinued operations 622 - - Cash provided by investing activities - discontinued operations 10,978 - - Cash used in financing activities - discontinued operations (626 ) - - Impact of exchange rates on cash, cash equivalents and restricted cash (98 ) (25 ) 31 Change in cash, cash equivalents and restricted cash$ 1,300 $ 91 $ (696 ) Operating Activities Continuing operations Cash provided by operating activities for fiscal 2019 decreased 58% or$8.3 billion to$6.0 billion compared to fiscal 2018 due to the payment of approximately$7.6 billion of tax obligations that arose from the spin-off of Fox Corporation in connection with the TFCF acquisition and the sale of the RSNs acquired with TFCF, higher pension plan contributions and higher interest payments. Lower operating cash flows at our DTCI and Media Networks segments were largely offset by increases at Parks, Experiences andProducts and Studio Entertainment . The decreases at DTCI and Media Networks were due to higher film and television spending and operating disbursements, partially offset by higher operating cash receipts driven by increases in revenue. The increases atStudio Entertainment and Parks, Experiences and Products were due to higher operating cash receipts driven by increases in revenue. The increase atStudio Entertainment was partially offset by higher operating cash disbursements driven by higher marketing expenses. The increase at Parks, Experiences and Products was partially offset by higher operating cash disbursements driven by cost inflation and higher marketing expenses. Cash provided by operating activities for fiscal 2018 increased 16% or$2.0 billion to$14.3 billion compared to fiscal 2017 due to a decrease in tax payments resulting from the Tax Act, a decrease in pension plan contributions and higher operating cash flows atStudio Entertainment and Parks, Experiences and Products, partially offset by lower operating cash flows at Media Networks and DTCI and a payment for the rights to develop a real estate property inNew York . The increase in operating cash flow atStudio Entertainment was due to higher operating cash receipts driven by an increase in revenue, partially offset by higher operating cash disbursements driven by higher marketing expenses. Parks, Experiences and Products cash flow reflected higher operating cash receipts due to increased revenue, partially offset by higher payments for labor and other costs. Lower operating cash flow at Media Networks was due to higher television production spending. The decrease in operating cash flow at DTCI was due to higher operating cash disbursements. Depreciation expense is as follows: (in millions) 2019 2018 2017 Media Networks Cable Networks$ 107 $ 111 $ 122 Broadcasting 84 88 84 Total Media Networks 191 199 206 Parks, Experiences and Products Domestic 1,474 1,449 1,371 International 724 768 679
Total Parks, Experiences and Products 2,198 2,217 2,050
74 55 50
Direct-to-Consumer & International 207 106 74
Corporate 167 181 206
Total depreciation expense $ 2,837 $ 2,758 $ 2,586
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Amortization of intangible assets is as follows: (in millions) 2019 2018 2017 Media Networks $ - $ - $ - Parks, Experiences and Products 108 110 111 Studio Entertainment 61 64 65 Direct-to-Consumer & International 111 79 20 TFCF and Hulu 1,043 - -
Total amortization of intangible assets
The Company'sStudio Entertainment , Media Networks and DTCI segments incur costs to acquire and produce feature film and television programming. Film and television production costs include all internally produced content such as live-action and animated feature films, animated direct-to-video programming, television series, television specials, theatrical stage plays or other similar product. Programming costs include film or television product licensed for a specific period from third parties for use on the Company's broadcast, cable networks, television stations or DTC services. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities. Accordingly, we analyze our programming assets net of the related liability. The Company's film and television production and programming activity related to continuing operations for fiscal 2019, 2018 and 2017 are as follows: (in millions) 2019 2018
2017
Beginning balances: Production and programming assets$ 9,202 $ 8,759 $ 7,547 Programming liabilities (1,178 ) (1,106 ) (1,063 ) 8,024 7,653 6,484 Spending: Television program licenses and rights 10,517 7,770
7,406
Film and television production 7,104 5,590
5,319
17,621 13,360 12,725
Amortization:
Television program licenses and rights (10,608 ) (7,966 )
(7,595 )
Film and television production (6,471 ) (4,871 ) (4,055 )
(17,079 ) (12,837 ) (11,650 )
Change in film and television
production and
programming costs 542 523 1,075
Film and television production costs
from the TFCF acquisition and
consolidation of Hulu, net of
programming liabilities assumed 14,227 - -
Other non-cash activity 11 (152 ) 94
Ending balances:
Production and programming assets 27,407 9,202 8,759
Programming liabilities (4,061 ) (1,178 ) (1,106 )
$ 23,346 $ 8,024 $ 7,653
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Discontinued operations Cash provided by operating activities for discontinued operations in fiscal 2019 reflected the operations of the RSNs. Investing Activities Continuing operations 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 fiscal 2019, 2018 and 2017 are as follows: (in millions) 2019 2018 2017 Media Networks Cable Networks$ 93 $ 96 $ 64 Broadcasting 81 107 67 Parks, Experiences and Products Domestic 3,294 3,223 2,392 International 852 677 827 Studio Entertainment 88 96 85
Direct-to-Consumer & International 258 107 30 Corporate
210 159 158
$ 4,876 $ 4,465 $ 3,623
Capital expenditures for the Parks, Experiences and Products segment are
principally for theme park and resort expansion, new attractions, cruise ships,
capital improvements and systems infrastructure. The increase in capital
expenditures at our domestic parks and resorts in fiscal 2019 compared to fiscal
2018 was due to higher spending on new attractions at Walt Disney World Resort ,
partially offset by lower spending on new attractions at Disneyland Resort ,
while the increase in fiscal 2018 compared to fiscal 2017 was due to spending on
new attractions at Walt Disney World Resort and Disneyland Resort , including
Star Wars: Galaxy's Edge. The increase in capital expenditures at our
international parks and resorts in fiscal 2019 compared to fiscal 2018 was due
to higher spending at Disneyland Paris, while the decrease in fiscal 2018
compared to fiscal 2017 was due to lower spending at Shanghai Disney Resort and
Hong Kong Disneyland Resort .
Capital expenditures at Media Networks primarily reflect investments in
facilities and equipment for expanding and upgrading broadcast centers,
production facilities and television station facilities.
Capital expenditures at DTCI primarily reflect investments in technology. The
increase in fiscal 2019 compared to fiscal 2018 and 2018 compared to fiscal 2017
was due to spending on technology to support our DTC services.
Capital expenditures at Corporate primarily reflect investments in corporate
facilities, information technology infrastructure and equipment. The increase in
fiscal 2019 compared to fiscal 2018 was driven by investments in corporate
facilities.
The Company currently expects its fiscal 2020 capital expenditures will be
approximately $0.5 billion higher than fiscal 2019 capital expenditures of $4.9
billion due to increased spending on technology and facilities at DTCI and
Corporate.
Other Investing Activities
The fiscal 2019 spending of $9.9 billion on acquisitions reflects $35.7 billion
of cash paid to acquire TFCF less $25.7 billion of cash acquired in the
transaction (See Note 4 to the Consolidated Financial Statements). Cash used in
other investing activities of $319 million in fiscal 2019 reflects contributions
of $347 million to Hulu prior to the consolidation of Hulu.
The fiscal 2018 spending of $1.6 billion on acquisitions was for the September
2017 acquisition of an additional 42% of BAMTech . Cash provided by other
investing activities of $710 million in fiscal 2018 reflected $1.2 billion of
cash received in connection with the sales of real estate and property rights,
partially offset by contributions of $442 million to Hulu.
The fiscal 2017 spending of $417 million on acquisitions was for the January
2017 acquisition of additional interests in BAMTech net of cash assumed upon the
consolidation of BAMTech . Cash used in other investing activities of $71 million
in fiscal 2017 reflected $266 million of contributions to joint ventures and
investment purchases, partially offset by $173 million of proceeds from
investment dispositions.
Discontinued operations
Cash provided by investing activities from discontinued operations in fiscal
2019 reflects the sale of the RSNs.
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Financing Activities Continuing operations Cash used in financing activities was$0.5 billion in fiscal 2019 compared to$8.8 billion in fiscal 2018. The net use of cash in the current year was due to$2.9 billion in dividends and$1.4 billion in acquisitions of noncontrolling interests, partially offset by proceeds from borrowing of$3.7 billion . The decrease in cash used in financing activities in fiscal 2019 compared to fiscal 2018 was due to a net increase in borrowings in the current year compared to net repayments in the prior year ($3.7 billion borrowing in fiscal 2019 compared to$2.6 billion repayment in fiscal 2018) and the absence of common stock repurchases in the current year (compared to$3.6 billion in fiscal 2018), partially offset by acquisitions of noncontrolling interests in the current year ($1.4 billion in fiscal 2019). Cash used in financing activities was$8.8 billion in fiscal 2018 compared to$9.0 billion in fiscal 2017. The net use of cash in fiscal 2018 was due to$3.6 billion of common stock repurchases,$2.5 billion in dividends and a net repayment of borrowings of$2.6 billion . Cash used in financing activities was comparable to fiscal 2017 as lower common stock repurchases ($3.6 billion in fiscal 2018 compared to$9.4 billion in fiscal 2017) and higher contributions from noncontrolling interest holders of$0.4 billion was essentially offset by a net repayment of borrowings in fiscal 2018 compared to a net increase in borrowings in fiscal 2017 ($2.6 billion repayment in fiscal 2018 compared to$3.7 billion borrowing in fiscal 2017). Discontinued operations Cash used in financing activities by discontinued operations in fiscal 2019 was due to redemption of noncontrolling interests of the RSNs. Borrowings activities and other During the year endedSeptember 28, 2019 , the Company's borrowing activity was as follows: Borrowings Assumed in Acquisition of Other (in millions) September 29, 2018 Borrowings Payments TFCF Activity September 28, 2019 Commercial paper with original maturities less than three months (1) $ 50$ 1,881 $ - $ -$ 3 $ 1,934 Commercial paper with original maturities greater than three months 955 6,889 (4,452 ) - 163,408 U.S. dollar denominated notes 18,045 6,930 (7,044 ) 21,174 319 39,424 Asia Theme Parks borrowings 1,145 - (47 ) - 16 1,114 Foreign currency denominated debt and other (2) 679 210 (690 ) 549 358 1,106 Credit facilities to acquire TFCF - 31,100 (31,100 ) - - - 20,874 47,010 (43,333 ) 21,723 712 46,986 Liabilities held for sale (3) - 50 (68 ) 1,069 (1,051 ) - $ 20,874$ 47,060 $ (43,401 ) $ 22,792$ (339 ) $ 46,986
(1) Borrowings and reductions of borrowings are reported net.
(2) The other activity is due to market value adjustments for debt with
qualifying hedges.
(3) The other activity is due to the sale of the RSNs in fiscal 2019.
See Note 9 to the Consolidated Financial Statements for information regarding
the Company's bank facilities. The Company may use commercial paper borrowings
up to the amount of its unused bank facilities, in conjunction with term debt
issuance and operating cash flow, to retire or refinance other borrowings before
or as they come due.
See Note 12 to the Consolidated Financial Statements for a summary of the
Company's dividends and share repurchases in fiscal 2019, 2018 and 2017.
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, taken together, provide adequate
resources to fund ongoing operating requirements and future capital expenditures
related to the expansion of existing businesses and development of new projects.
However, the Company's operating cash flow and access to the capital markets can
be impacted by macroeconomic factors outside of its control. In addition to
macroeconomic factors, the Company's borrowing costs can 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 interest coverage and leverage ratios. As of
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September 28, 2019 , Moody's Investors Service's long- and short-term debt ratings for the Company were A2 and P-1, respectively, Standard and Poor's long- and short-term debt ratings for the Company were A and A-1, and Fitch's long- and short-term debt ratings for the Company were A and F1, respectively. The Company's bank facilities contain only one financial covenant, relating to interest coverage, which the Company met onSeptember 28, 2019 , 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. CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTSThe Company has various contractual obligations, which are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. For example, the Company is contractually committed to acquire broadcast programming and make certain minimum lease payments for the use of property under operating lease agreements. The following table summarizes our significant contractual obligations and commitments on an undiscounted basis atSeptember 28, 2019 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding borrowings based on their contractual maturities. Additional details regarding these obligations are provided in the Notes to the Consolidated Financial Statements, as referenced in the table: Payments Due by Period Less than 1-3 4-5 More than (in millions) Total 1 Year Years Years 5 Years Borrowings (Note 9)(1)$ 65,888 $ 10,398 $ 10,021 $ 6,516 $ 38,953 Operating lease commitments (Note 15) 5,931 982 1,519 939 2,491 Capital lease obligations (Note 15) 549 19 39 33 458 Sports programming commitments (Note 15) 43,940 8,878 15,613 9,315 10,134 Broadcast programming commitments (Note 15) 6,474 2,599 2,277 946 652 Total sports and other broadcast programming commitments 50,414 11,477 17,890 10,261 10,786 Other(2) 12,918 3,210 3,292 2,218 4,198 Total contractual obligations(3)$ 135,700 $ 26,086 $ 32,761 $ 19,967 $ 56,886
(1) Excludes market value adjustments, which reduce recorded borrowings by
million. Includes interest payments based on contractual terms for fixed
rate debt and on current interest rates for variable rate debt. In 2023,
the Company has the ability to call a debt instrument prior to its
scheduled maturity, which if exercised by the Company would reduce future
interest payments by $1.0 billion .
(2) Primarily contracts for the construction of three new cruise ships,creative talent and employment agreements and unrecognized tax benefits.
Creative talent and employment agreements include obligations to actors,
producers, sports, television and radio personalities and executives.
(3) Contractual commitments include the following:
Liabilities recorded on the balance sheet
$ 135,700 The Company also has obligations with respect to its pension and postretirement medical benefit plans. See Note 11 to the Consolidated Financial Statements. Contingent Commitments and Contractual Guarantees See Notes 4, 7 and 15 to the Consolidated Financial Statements for information regarding the Company's contingent commitments and contractual guarantees. Legal and Tax Matters As disclosed in Notes 10 and 15 to the Consolidated Financial Statements, the Company has exposure for certain tax and legal matters. 56
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CRITICAL 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.
Film and Television Revenues and Costs
We produce films and television series for distribution in the theatrical and
television markets and on our DTC streaming services. We expense the production,
participation and residual costs over the applicable product life cycle based
upon the ratio of the current period's revenues to the estimated remaining total
revenues (Ultimate Revenues) for each production. If our estimate of Ultimate
Revenues decreases, amortization of film and television costs may be
accelerated. Conversely, if our estimate of Ultimate Revenues increases, film
and television cost amortization may be slowed. For film productions, Ultimate
Revenues include revenues from all sources that will be earned within ten years
from the date of the initial theatrical release. For television series, Ultimate
Revenues include revenues that will be earned within ten years from delivery of
the first episode, or if still in production, five years from delivery of the
most recent episode, if later.
With respect to films intended for theatrical release, the most sensitive factor
affecting our estimate of Ultimate Revenues (and therefore affecting future film
cost amortization and/or impairment) is theatrical performance. Revenues derived
from other markets subsequent to the theatrical release (e.g. the home
entertainment or television markets) have historically been highly correlated
with the 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 are revised based on
historical relationships and an analysis of current market trends. The most
sensitive factor affecting our estimate of Ultimate Revenues for released films
is the level of expected home entertainment sales. Home entertainment sales vary
based on the number and quality of competing home entertainment products, as
well as the manner in which retailers market and price our products.
With respect to television series or other television productions intended for
broadcast, the most sensitive factors affecting estimates of Ultimate Revenues
are program ratings and the strength of the advertising market. Program ratings,
which are an indication of market acceptance, directly affect the Company's
ability to generate advertising revenues during the airing of the program. In
addition, television series with greater market acceptance are more likely to
generate incremental revenues through the licensing of program rights worldwide
to television distributors, SVOD services and in home entertainment formats.
Alternatively, poor ratings may result in cancellation of the program, which
would require an immediate write-down of any unamortized production costs. A
significant decline in the advertising market would also negatively impact our
estimates.
We expense the cost of television broadcast rights for acquired series, movies
and other programs based on an accelerated or straight-line basis over the
useful life or over the number of times the program is expected to be aired, as
appropriate. Amortization of those television programming assets being amortized
on a number of airings basis may be accelerated if we reduce the estimated
future airings and slowed if we increase the estimated future airings. The
number of future airings of a particular program is impacted primarily by the
program's ratings in previous airings, expected advertising rates and
availability and quality of alternative programming. Accordingly, planned usage
is reviewed periodically and revised if necessary. We amortize rights costs for
multi-year sports programming arrangements during the applicable seasons based
on the estimated relative value of each year in the arrangement. The estimated
value of each year is based on our projections of revenues over the contract
period, which include advertising revenue and an allocation of affiliate
revenue. 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 planned usage patterns or estimated
relative values by year were to change significantly, amortization of our sports
rights costs may be accelerated or slowed.
We also acquire, license and produce films and television series for our
direct-to-consumer streaming platforms. We expense these costs based on
historical and estimated viewing patterns, which may be on an accelerated or
straight-line basis, as appropriate.
Costs of film and television productions are subject to regular recoverability
assessments, which compare the estimated fair values with the unamortized costs.
The net realizable values of television broadcast program licenses and rights
are reviewed using a daypart methodology. A daypart is defined as an aggregation
of programs broadcast during a particular time of day or programs of a similar
type. The Company's dayparts are: primetime, daytime, late night, news and
sports (includes broadcast and cable networks). The net realizable values of
other cable programming assets are reviewed on an aggregated basis for each
cable network. Individual programs are written off when there are no plans to
air or sublicense the program.
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Estimated values are based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than our projections, film, television and programming cost write-downs may be required. For film and television series that are exploited on our direct-to-consumer streaming services, the unamortized costs are reviewed for impairment on an aggregate basis for each service. Fixed license fees charged for the right to use our television and motion picture productions are recognized as revenue when the content is available for use by the licensee. TV/SVOD distribution contracts may contain more than one title and/or provide that certain titles are only available for use during defined periods of time during the contract term. In these instances, each title and/or period of availability is generally considered a separate performance obligation. For these contracts, license fees are allocated to each title and period of availability at contract inception based on relative standalone selling price using management's best estimate. Estimates used to determine a performance obligation's standalone selling price impact the timing of revenue recognition, but not the total revenue to be recognized under the arrangements. Revenue Recognition The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. We have updated our revenue recognition policies in conjunction with our adoption of the new revenue recognition guidance as further described in Note 2 to the Condensed Consolidated Financial Statements. Pension and Postretirement Medical Plan Actuarial AssumptionsThe 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. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase. 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 expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. We reduced our discount rate to 3.22% at the end of fiscal 2019 from 4.31% at the end of fiscal 2018 to reflect market interest rate conditions at our fiscal 2019 year-end measurement date. 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. A one percentage point decrease in the assumed discount rate would increase total benefit expense for fiscal 2020 by approximately$313 million and would increase the projected benefit obligation atSeptember 28, 2019 by approximately$3.6 billion . A one percentage point increase in the assumed discount rate would decrease total benefit expense and the projected benefit obligation by approximately$273 million and$3.0 billion , respectively. 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. Our expected return on plan assets is 7.25%. A lower expected rate of return on pension plan assets will increase pension expense, while a higher expected rate of return on pension plan assets will decrease pension expense. A one percentage point change in the long-term asset return assumption would impact fiscal 2020 annual benefit expense by approximately$157 million .Goodwill , Other Intangible Assets, Long-Lived Assets and InvestmentsThe 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.Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. The Company compares the fair value of each 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 generally use a present value technique (discounted cash flows) corroborated by market multiples when available and as appropriate. We apply what we believe to be the most appropriate valuation methodology for each of our reporting units. The discounted cash flow analyses are sensitive to our estimates of future revenue growth and margins for these businesses. 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. In addition, the projected cash flows of our reporting units reflect intersegment revenues and expenses for the sale and use of intellectual property as if it was licensed to an unrelated third party. We believe our estimates are consistent with how a marketplace participant would value our reporting units. 58
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The Company is required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts. 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 other 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 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 cash flows expected to be generated over the useful life of an asset group to the carrying value of the asset group. An asset group is 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 or segments. If the carrying value 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 group's long-lived assets and the carrying value of the group's long-lived assets. The impairment is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts, but only to the extent the carrying value of each asset is above its fair value. 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 triggering event has occurred, the identification of the asset groups, estimates of future cash flows and the discount rate used to determine fair values. The Company tested its goodwill and other indefinite-lived intangible assets and long-lived assets for impairment. The impairment charges recorded for fiscal 2019, 2018 and 2017 were not material. For fiscal 2019, the fair value of our International Channels reporting unit exceeds its carrying value by less than 10%. Our International Channels reporting unit comprises the Company's international cable networks that provide programming under multi-year licensing agreements with MVPDs. A majority of the operations in this reporting unit consist of businesses acquired in the TFCF acquisition and therefore the fair value approximates carrying value.Goodwill of this reporting unit is approximately$3 billion . Changes to key assumptions, market trends, or macroeconomic events could produce test results in the future that differ, and we could be required to record an impairment charge. 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 inherit in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded. The Company tested its investments for impairment and recorded non-cash impairment charges of$538 million and$210 million in fiscal 2019 and 2018, respectively. The fiscal 2019 and fiscal 2018 impairment charges were recorded in "Equity in the income (loss) of investees, net" in the Consolidated Statements of Income. The fiscal 2017 impairment charges recorded were not material. Allowance for Doubtful Accounts We evaluate our allowance for doubtful accounts and estimate collectability of accounts receivable based on our analysis of historical bad debt experience in conjunction with our assessment of the financial condition of individual companies with which we do business. In times of domestic or global economic turmoil, 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. 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 may also be involved in other contingent matters for which we have accrued 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 15 to the Consolidated Financial Statements for more detailed information on litigation exposure. Income Tax Audits 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. The acquisition of TFCF increased the Company's uncertain tax benefits as the Company assumed the tax liabilities of TFCF. The Company is still obtaining information related to the evaluation of the 59
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income tax impact of certain pre-acquisition transactions of TFCF which may result in adjustments to the recorded amount of uncertain tax benefits. 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. New Accounting Pronouncements See Note 20 to the Consolidated Financial Statements for information regarding new accounting pronouncements. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. We may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with theSEC and in reports to our shareholders. Such statements may, for example, express expectations or projections about future actions that we may take, including restructuring or strategic initiatives, or about developments beyond our control including changes in domestic or global economic conditions. These statements are made on the basis of management's views and assumptions as of the time the statements are made and we undertake no obligation to update these statements. There can be no assurance, however, that our expectations will necessarily come to pass. Significant factors affecting these expectations are set forth under Item 1A - Risk Factors of this Report on Form 10-K as well as in this Item 7 - Management's Discussion and Analysis and Item 1 - Business. ITEM 7A. Quantitative and Qualitative Disclosures About Market RiskThe 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 theU.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 toU.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 theU.S. dollar equivalent value of the related exposures. The economic or political conditions in a country 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. 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. 60
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Value at Risk (VAR) The Company utilizes a VAR model to estimate the maximum potential one-day loss in the fair value of its interest rate, foreign exchange, commodities and market sensitive equity financial instruments. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. Various modeling techniques can be used in a VAR computation. The Company's computations are based on the interrelationships between movements in various interest rates, currencies, commodities and equity prices (a variance/co-variance technique). These interrelationships were determined by observing interest rate, foreign currency, commodity and equity market changes over the preceding quarter for the calculation of VAR amounts at each fiscal quarter end. The model includes all of the Company's debt as well as all interest rate and foreign exchange derivative contracts, commodities and market sensitive equity investments. Forecasted transactions, firm commitments, and accounts receivable and payable denominated in foreign currencies, which certain of these instruments are intended to hedge, were excluded from the model. The VAR model is a risk analysis tool and does not purport to represent actual losses in fair value that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market factors. VAR on a combined basis increased to$322 million atSeptember 28, 2019 from$44 million atSeptember 29, 2018 driven by an increase in borrowings and higher interest rate volatility of our debt. The estimated maximum potential one-day loss in fair value, calculated using the VAR model, is as follows (unaudited, in millions): Interest Rate Currency Equity Sensitive Sensitive Sensitive Commodity Sensitive Financial Financial Financial Financial Combined Fiscal 2019 Instruments Instruments Instruments Instruments Portfolio
Year end fiscal 2019 VAR$317 $28 $1 $2 $322 Average VAR 180 25 1 2 63 Highest VAR 317 28 1 2 322 Lowest VAR 39 23 1 1 51 Year end fiscal 2018 VAR 32 32 1 1 44 The VAR forHong Kong Disneyland Resort andShanghai Disney Resort is immaterial as ofSeptember 28, 2019 and accordingly has been excluded from the above table. ITEM 8. Financial Statements and Supplementary Data See Index to Financial Statements and Supplemental Data on page 72. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified inSEC rules and forms and that such information is accumulated and made known to the officers who certify the Company's financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation as ofSeptember 28, 2019 , the principal executive officer and principal financial officer of the Company have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective. Management's Report on Internal Control Over Financial Reporting Management's report set forth on page 73 is incorporated herein by reference. 61
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Changes in Internal Controls We are in the process of integrating TFCF, which was recently acquired, and Hulu into our overall internal control over financial reporting process. Other than this ongoing integration, there have been no changes in our internal control over financial reporting during the fourth quarter of the fiscal year endedSeptember 28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted below. ITEM 9B. Other Information Costs Associated with Exit or Disposal Activities The information set forth below is included herein for the purpose of providing disclosure under "Item 2.05 - Costs Associated with Exit or Disposal Activities" of Form 8-K. The Company previously disclosed a restructuring and integration plan as part of its initiative to realize cost synergies from its acquisition of TFCF, including the Company's estimate that it will incur severance and related costs on the order of$1.5 billion . The Company may incur other restructuring costs, such as contract termination costs, but currently expects that these will not be material. 62
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