Item 2. Management’s Discussion and Analysis
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
SIGNIFICANT DEVELOPMENTS
Leadership Change and Restructuring
On November 20, 2022, Robert A. Iger returned to the Company as Chief Executive Officer (“CEO”) and Director. Mr. Iger previously spent more than four decades at the Company, including 15 years as CEO. Mr. Iger agreed to serve as CEO through the end of calendar 2024, with a mandate from the Company’s Board of Directors “to set the strategic direction for renewed growth and to work closely with the Board in developing a successor to lead the Company at the completion of his term.”
Mr. Iger formed a committee to advise him on a new organizational structure and operational changes within the Company to address the Board’s goals. In February 2023, the Company announced that it will be reorganized into three business segments: Disney Entertainment, ESPN and Disney Parks, Experiences and Products. We anticipate reporting under the new structure by the end of the fiscal year, at which time we will have implemented changes to our financial processes to reflect the reorganization. The new organizational structure and operational changes have resulted in restructuring and impairment charges and may result in additional charges.
The Company is also in the process of reviewing content, primarily on our DTC services, for alignment with a strategic change in our approach to content curation and, as a result, will remove certain content from our platforms. We currently expect to take an impairment charge of approximately $1.5 billion to $1.8 billion, which will largely be recognized in the third quarter of fiscal 2023 as we complete the review and remove the content. The Company does not expect any material cash expenditures in connection with this content impairment charge.
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
• Consolidated Results
• Current Quarter Results Compared to Prior-Year Quarter
• Current Six-Month Period Results Compared to Prior-Year Six-Month Period
• Seasonality
• Business Segment Results
• Corporate and Unallocated Shared Expenses
• Financial Condition
• Supplemental Guarantor Financial Information
• Commitments and Contingencies
• Other Matters
• Market Risk
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
CONSOLIDATED RESULTS
Quarter Ended % Change
Better
(Worse) Six Months Ended % Change
Better
(Worse)
(in millions, except per share data) April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022
Revenues:
Services $ 19,586 $ 17,212 14 % $ 40,583 $ 36,754 10 %
Products 2,229 2,037 9 % 4,744 4,314 10 %
Total revenues 21,815 19,249 13 % 45,327 41,068 10 %
Costs and expenses:
Cost of services (exclusive of depreciation and amortization) ( 13,160 ) ( 11,330 ) (16) % ( 27,941 ) ( 24,491 ) (14) %
Cost of products (exclusive of depreciation and amortization) ( 1,456 ) ( 1,264 ) (15) % ( 3,061 ) ( 2,670 ) (15) %
Selling, general, administrative and other ( 3,614 ) ( 3,768 ) 4 % ( 7,441 ) ( 7,555 ) 2 %
Depreciation and amortization ( 1,310 ) ( 1,287 ) (2) % ( 2,616 ) ( 2,556 ) (2) %
Total costs and expenses (19,540) (17,649) (11) % (41,059) (37,272) (10) %
Restructuring and impairment charges ( 152 ) ( 195 ) 22 % ( 221 ) ( 195 ) (13) %
Other income (expense), net 149 ( 158 ) nm 107 ( 594 ) nm
Interest expense, net ( 322 ) ( 355 ) 9 % ( 622 ) ( 666 ) 7 %
Equity in the income of investees 173 210 (18) % 364 449 (19) %
Income from continuing operations before income taxes 2,123 1,102 93 % 3,896 2,790 40 %
Income taxes on continuing operations ( 635 ) ( 505 ) (26) % ( 1,047 ) ( 993 ) (5) %
Net income from continuing operations 1,488 597 >100 % 2,849 1,797 59 %
Loss from discontinued operations, net of income tax benefit of $0, $0, $0 and $14, respectively — — nm — ( 48 ) — %
Net income 1,488 597 >100 % 2,849 1,749 63 %
Net income from continuing operations attributable to noncontrolling interests ( 217 ) ( 127 ) (71) % ( 299 ) ( 175 ) (71) %
Net income attributable to Disney $ 1,271 $ 470 >100 % $ 2,550 $ 1,574 62 %
Diluted earnings per share from continuing operations attributable to Disney $ 0.69 $ 0.26 >100 % $ 1.39 $ 0.89 56 %
CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER
Revenues for the quarter increased 13%, or $2.6 billion, to $21.8 billion; net income attributable to Disney increased to $1.3 billion from $0.5 billion; and diluted earnings per share from continuing operations attributable to Disney (EPS) increased to $0.69 from $0.26 in the prior-year quarter. The EPS increase resulted from the comparison to a revenue reduction for the Content License Early Termination in the prior-year quarter, growth in operating income at DPEP, and an investment gain in the current quarter compared to an investment loss in the prior-year quarter. These increases were partially offset by a decrease in operating income at DMED.
Revenues
Service revenues for the quarter increased 14%, or $2.4 billion, to $19.6 billion resulting from the comparison to the revenue reduction for the Content License Early Termination in the prior-year quarter, growth at our theme parks and resorts, higher DTC subscription revenue and an increase in theatrical distribution revenue. The increase at theme parks and resorts was due to higher volumes and guest spending growth. The increase in DTC subscription revenue was due to subscriber growth and higher rates. These increases were partially offset by lower advertising revenue and, to a lesser extent, lower TV/SVOD distribution and affiliate revenue. Service revenues reflected an approximate 2 percentage point decrease due to an unfavorable movement of the U.S. dollar against major currencies including the impact of our hedging program (Foreign Exchange Impact).
Product revenues for the quarter increased 9%, or $0.2 billion, to $2.2 billion due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts, partially offset by lower home entertainment sales volumes. Product revenues reflected an approximate 2 percentage point decrease due to an unfavorable Foreign Exchange Impact.
30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and expenses
Cost of services for the quarter increased 16%, or $1.8 billion, to $13.2 billion due to higher programming and production costs and, to a lesser extent, increased volumes at our theme parks and resorts and higher technical support costs at Direct-to-Consumer. The increase in programming and production costs was due to higher costs at Direct-to-Consumer, increased sports programming costs at Linear Networks and increased production cost amortization resulting from higher theatrical revenue. Costs of services reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact.
Cost of products for the quarter increased 15%, or $0.2 billion, to $1.5 billion due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts, partially offset by a decrease in home entertainment sales volumes. Costs of products reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact.
Selling, general, administrative and other costs decreased 4% to $3.6 billion reflecting an approximate 3 percentage point decrease due to a favorable Foreign Exchange Impact.
Depreciation and amortization increased 2% to $1.3 billion due to higher depreciation at our domestic theme parks and resorts.
Restructuring and impairment charges
In the current quarter, the Company recorded charges of $152 million primarily for severance.
In the prior-year quarter, the Company recorded charges of $195 million due to the impairment of an intangible asset related to the Disney Channel in Russia.
Other income (expense), net
In the current quarter, the Company recorded a DraftKings gain of $149 million. In the prior-year quarter, the Company recorded a DraftKings loss of $158 million.
Interest expense, net
Interest expense, net is as follows:
Quarter Ended
(in millions) April 1,
2023 April 2,
2022 % Change
Better (Worse)
Interest expense $ (504) $ (374) (35) %
Interest income, investment income and other 182 19 >100 %
Interest expense, net $ (322) $ (355) 9 %
The increase in interest expense was due to higher average rates, partially offset by lower average debt balances.
The increase in interest income, investment income and other resulted from a favorable comparison of pension and postretirement benefit costs, other than service cost, higher interest income on cash balances, and investment gains in the current quarter compared to investment losses in the prior-year quarter.
Equity in the Income of Investees
Income from equity investees decreased $37 million, to $173 million from $210 million, primarily due to lower income from A+E Television Networks.
Effective Income Tax Rate
Quarter Ended
April 1,
2023 April 2,
2022
Income from continuing operations before income taxes $ 2,123 $ 1,102
Income tax on continuing operations 635 505
Effective income tax rate - continuing operations 29.9% 45.8%
The decrease in the effective income tax rate was driven by the comparison to an unfavorable impact in the prior-year quarter from new tax regulations that limit our ability to utilize certain foreign tax credits.
31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Noncontrolling Interests
Quarter Ended
(in millions) April 1,
2023 April 2,
2022 % Change
Better (Worse)
Net income from continuing operations attributable to noncontrolling interests $ (217) $ (127) (71) %
The increase in net income from continuing operations attributable to noncontrolling interests was due to improved results at Shanghai Disney Resort and lower losses at Hong Kong Disneyland Resort and at our DTC sports business, partially offset by lower results at ESPN.
Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable.
Certain Items Impacting Results in the Quarter
Results for the quarter ended April 1, 2023 were impacted by the following:
• TFCF and Hulu acquisition amortization of $558 million
• Restructuring and impairment charges of $152 million
• Other income of $149 million due to the DraftKings gain
Results for the quarter ended April 2, 2022 were impacted by the following:
• A $1.0 billion reduction in revenue for the Content Licence Early Termination
• TFCF and Hulu acquisition amortization of $594 million
• Impairment charges of $195 million
• Other expense of $158 million due to the DraftKings loss
A summary of the impact of these items on EPS is as follows:
(in millions, except per share data) Pre-Tax Income (Loss) Tax Benefit (Expense) (1)
After-Tax Income (Loss) EPS Favorable (Adverse) (2)
Quarter Ended April 1, 2023:
TFCF and Hulu acquisition amortization $ (558) $ 130 $ (428) $ (0.23)
Restructuring and impairment charges (152) 35 (117) (0.06)
Other income (expense), net 149 (35) 114 0.06
Total $ (561) $ 130 $ (431) $ (0.23)
Quarter Ended April 2, 2022:
Content License Early Termination $ (1,023) $ 238 $ (785) $ (0.43)
TFCF and Hulu acquisition amortization (594) 138 (456) (0.24)
Restructuring and impairment charges (195) 45 (150) (0.08)
Other income (expense), net (158) 37 (121) (0.07)
Total $ (1,970) $ 458 $ (1,512) $ (0.82)
(1) Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item.
(2) EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.
CURRENT SIX-MONTH PERIOD RESULTS COMPARED TO PRIOR-YEAR SIX-MONTH PERIOD
Revenues for the current period increased $4.3 billion, to $45.3 billion; net income attributable to Disney increased $1.0 billion, to $2.6 billion; and EPS increased to $1.39 from $0.89 in the prior-year period. The EPS increase resulted from the comparison to a revenue reduction for the Content License Early Termination in the prior-year period, growth in operating income at DPEP, and an investment gain in the current period compared to an investment loss in the prior-year period. These increases were partially offset by a decrease in operating income at DMED.
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues
Service revenues for the current period increased 10%, or $3.8 billion, to $40.6 billion, due to increased revenues at our theme parks and resorts, higher DTC subscription revenue, theatrical distribution revenue growth and the comparison to the revenue reduction for the Content License Early Termination in the prior-year period. These increases were partially offset by lower advertising revenue and TV/SVOD distribution and, to a lesser extent, affiliate revenue. The increase at theme parks and resorts was due to higher volumes and guest spending growth. The increase in DTC subscription revenue was due to subscriber growth and higher rates. Service revenues reflected an approximate 2 percentage point decrease due to an unfavorable Foreign Exchange Impact.
Product revenues for the current period increased 10%, or $0.4 billion, to $4.7 billion, due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts, partially offset by lower home entertainment sales volumes. Product revenues reflected an approximate 2 percentage point decrease due to an unfavorable Foreign Exchange Impact.
Costs and expenses
Cost of services for the current period increased 14%, or $3.5 billion, to $27.9 billion, due to higher programming and production costs and, to a lesser extent, increased volumes at our theme parks and resorts and higher technical support costs at Direct-to-Consumer. The increase in programming and production costs was due to higher costs at Direct-to-Consumer and increased production cost amortization resulting from higher theatrical revenue. Costs of services reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact.
Cost of products for the current period increased 15%, or $0.4 billion, to $3.1 billion, due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts, partially offset by a decrease in home entertainment volumes. Costs of products reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact.
Selling, general, administrative and other costs for the current period decreased 2%, or $0.1 billion, to $7.4 billion reflecting an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact.
Depreciation and amortization increased 2% to 2.6 billion due to higher depreciation at our domestic theme parks and resorts.
Restructuring and impairment charges
In the current period, the Company recorded charges of $221 million primarily for severance and costs related to exiting our businesses in Russia. In the prior-year period, the Company recorded charges of $195 million due to the impairment of an intangible asset related to the Disney Channel in Russia.
Other income (expense), net
Other income in the current period includes a DraftKings gain of $79 million and a $28 million gain on the sale of a business. Other expense in the prior-year period included a DraftKings loss of $590 million.
Interest expense, net
Interest expense, net is as follows:
Six Months Ended
(in millions) April 1,
2023 April 2,
2022 % Change
Better (Worse)
Interest expense $ (969) $ (735) (32) %
Interest income, investment income and other 347 69 >100 %
Interest expense, net $ (622) $ (666) 7 %
The increase in interest expense was due to higher average rates, partially offset by lower average debt balances.
The increase in interest income, investment income and other resulted from a favorable comparison of pension and postretirement benefit costs, other than service cost and higher interest income on cash balances.
Equity in the Income of Investees
Income from equity investees decreased $85 million, to $364 million from $449 million, due to lower income from A+E Television Networks.
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Effective Income Tax Rate
Six Months Ended
April 1,
2023 April 2,
2022
Income from continuing operations before income taxes $ 3,896 $ 2,790
Income tax on continuing operations 1,047 993
Effective income tax rate - continuing operations 26.9% 35.6%
The decrease in the effective income tax rate was driven by the comparison to unfavorable items in the prior-year period for adjustments related to prior years and for new tax regulations that limit our ability to utilize certain foreign tax credits. These impacts were partially offset by the tax effect of employee share-based awards, which had an unfavorable impact in the current period and a favorable impact in the prior-year period.
Noncontrolling Interests
Six Months Ended
(in millions) April 1,
2023 April 2,
2022 % Change
Better (Worse)
Net income from continuing operations attributable to noncontrolling interests $ (299) $ (175) (71) %
The increase in net income from continuing operations attributable to noncontrolling interests was due to the purchase of Major League Baseball’s 15% interest in BAMTech LLC, improved results at Shanghai Disney Resort and lower losses at Hong Kong Disneyland Resort and at our DTC sports business, partially offset by lower results at ESPN.
Certain Items Impacting Results in the Six-Month Period
Results for the six months ended April 1, 2023 were impacted by the following:
• TFCF and Hulu acquisition amortization of $1,137 million
• Restructuring and impairment charges of $221 million
• Other income of $107 million due to the DraftKings gain of $79 million and a gain on the sale of a business of $28 million
Results for the six months ended April 2, 2022 were impacted by the following:
• A $1.0 billion reduction in revenue for the Content License Early Termination
• TFCF and Hulu acquisition amortization of $1,189 million
• Impairment charges of $195 million
• Other expense of $594 million due to the DraftKings loss
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
A summary of the impact of these items on EPS is as follows:
(in millions, except per share data) Pre-Tax Income (Loss) Tax Benefit
(Expense) (1)
After-Tax Income (Loss) EPS Favorable
(Adverse) (2)
Six Months Ended April 1, 2023:
TFCF and Hulu acquisition amortization $ (1,137) $ 264 $ (873) $ (0.47)
Restructuring and impairment charges (221) 43 (178) (0.10)
Other income (expense), net 107 (18) 89 0.05
Total $ (1,251) $ 289 $ (962) $ (0.52)
Six Months Ended April 2, 2022:
TFCF and Hulu acquisition amortization $ (1,189) $ 277 $ (912) $ (0.49)
Content License Early Termination (1,023) 238 (785) (0.43)
Other income (expense), net (594) 138 (456) (0.25)
Restructuring and impairment charges (195) 45 (150) (0.08)
Total $ (3,001) $ 698 $ (2,303) $ (1.25)
(1) Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item.
(2) EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.
SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the six months ended April 1, 2023 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
DMED revenues are subject to seasonal advertising patterns, changes in viewership and subscriber levels, timing and performance of film releases in the theatrical and home entertainment markets, timing of and demand for film and television programs, and the availability of and demand for sports programming. In general, domestic advertising revenues are typically somewhat higher during the fall and somewhat lower during the summer months. In addition, advertising revenues generated from sports programming are impacted by the timing of sports seasons and events, which varies throughout the year or may take place periodically (e.g. biannually, quadrennially). Affiliate revenues vary with the subscriber trends of multi-channel video programming distributors (i.e. cable, satellite telecommunications and digital over-the-top service providers). Theatrical release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
DPEP revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities, which generally results in higher revenues during the Company’s first and fourth fiscal quarters. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early winter and spring holiday periods. Consumer products revenue fluctuates with consumer purchasing behavior, which generally results in higher revenues during the Company’s first fiscal quarter due to the winter holiday season and in the fourth quarter due to back-to-school. In addition, licensing revenues fluctuate with the timing and performance of our film and television content.
35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
BUSINESS SEGMENT RESULTS
The Company evaluates the performance of its operating businesses based on segment revenue and segment operating income.
The following table presents revenues from our operating segments and other components of revenues:
Quarter Ended % Change
Better
(Worse) Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022
Disney Media and Entertainment Distribution $ 14,039 $ 13,620 3 % $ 28,815 $ 28,205 2 %
Disney Parks, Experiences and Products 7,776 6,652 17 % 16,512 13,886 19 %
Content License Early Termination — (1,023) 100 % — (1,023) 100 %
Revenues $ 21,815 $ 19,249 13 % $ 45,327 $ 41,068 10 %
The following table presents income from our operating segments and other components of income from continuing operations before income taxes:
Quarter Ended % Change
Better
(Worse) Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022
Disney Media and Entertainment Distribution operating income $ 1,119 $ 1,944 (42) % $ 1,109 $ 2,752 (60) %
Disney Parks, Experiences and Products operating income 2,166 1,755 23 % 5,219 4,205 24 %
Content License Early Termination — (1,023) 100 % — (1,023) 100 %
Corporate and unallocated shared expenses (279) (272) (3) % (559) (500) (12) %
Restructuring and impairment charges (152) (195) 22 % (221) (195) (13) %
Other expense, net 149 (158) nm 107 (594) nm
Interest expense, net (322) (355) 9 % (622) (666) 7 %
TFCF and Hulu acquisition amortization (558) (594) 6 % (1,137) (1,189) 4 %
Income from continuing operations before income taxes $ 2,123 $ 1,102 93 % $ 3,896 $ 2,790 40 %
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Depreciation expense is as follows:
Quarter Ended % Change
Better
(Worse) Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022
Disney Media and Entertainment Distribution $ 169 $ 169 — % $ 333 $ 322 (3) %
Disney Parks, Experiences and Products
Domestic 455 404 (13) % 907 802 (13) %
International 169 167 (1) % 333 335 1 %
Total Disney Parks, Experiences and Products 624 571 (9) % 1,240 1,137 (9) %
Corporate 52 46 (13) % 100 94 (6) %
Total depreciation expense $ 845 $ 786 (8) % $ 1,673 $ 1,553 (8) %
Amortization of intangible assets is as follows:
Quarter Ended % Change
Better
(Worse) Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022
Disney Media and Entertainment Distribution $ 30 $ 39 23 % $ 64 $ 79 19 %
Disney Parks, Experiences and Products 27 27 — % 54 54 — %
TFCF and Hulu intangible assets 408 435 6 % 825 870 5 %
Total amortization of intangible assets $ 465 $ 501 7 % $ 943 $ 1,003 6 %
BUSINESS SEGMENT RESULTS - Current Quarter Results Compared to Prior-Year Quarter
Disney Media and Entertainment Distribution
Revenue and operating results for the DMED segment are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues:
Linear Networks $ 6,625 $ 7,116 (7) %
Direct-to-Consumer 5,514 4,903 12 %
Content Sales/Licensing and Other 2,197 1,866 18 %
Elimination of Intrasegment Revenue (1)
(297) (265) (12) %
$ 14,039 $ 13,620 3 %
Segment operating income (loss):
Linear Networks $ 1,828 $ 2,815 (35) %
Direct-to-Consumer (659) (887) 26 %
Content Sales/Licensing and Other (50) 16 nm
$ 1,119 $ 1,944 (42) %
(1) Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services.
37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Linear Networks
Operating results for Linear Networks are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
Affiliate fees $ 4,691 $ 4,867 (4) %
Advertising 1,768 2,083 (15) %
Other 166 166 — %
Total revenues 6,625 7,116 (7) %
Operating expenses (3,999) (3,584) (12) %
Selling, general, administrative and other (945) (902) (5) %
Depreciation and amortization (28) (36) 22 %
Equity in the income of investees 175 221 (21) %
Operating Income $ 1,828 $ 2,815 (35) %
Revenues
Affiliate revenue is as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Domestic Channels $ 4,044 $ 4,123 (2) %
International Channels 647 744 (13) %
$ 4,691 $ 4,867 (4) %
The decrease in affiliate revenue at the Domestic Channels was due to a decrease of 6% from fewer subscribers, partially offset by an increase of 3% from higher contractual rates. Contractual rate growth was negatively impacted by the timing of revenue recognition from non-owned TV stations in the prior-year quarter.
The decrease in affiliate revenue at the International Channels was due to decreases of 10% from an unfavorable Foreign Exchange Impact and 6% from fewer subscribers related to channel closures in Latin America and Europe. These decreases were partially offset by an increase of 5% from higher contractual rates.
Advertising revenue is as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Cable $ 813 $ 833 (2) %
Broadcasting 657 796 (17) %
Domestic Channels 1,470 1,629 (10) %
International Channels 298 454 (34) %
$ 1,768 $ 2,083 (15) %
Lower advertising revenue at Cable resulted from a decrease of 6% from fewer impressions due to lower average viewership at our non-sports channels, partially offset by an increase of 3% from a benefit from the timing of College Football Playoff (CFP) games relative to our fiscal periods. The current quarter included three CFP games compared to one game in the prior-year quarter.
Lower Broadcasting advertising revenue was due to decreases of 10% from fewer impressions at ABC, 4% from lower rates at the owned television stations and 2% from lower rates at ABC. Fewer impressions at ABC reflected lower average viewership and, to a lesser extent, fewer units delivered.
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The decline in International Channels advertising revenue was due to decreases of 18% from fewer impressions, 9% from lower rates and 7% from an unfavorable Foreign Exchange Impact. Lower impressions were attributable to decreases in average viewership at our sports and non-sports channels. The decrease at our sports channels was primarily due to cricket programming, which reflected airing fewer Indian Premier League (IPL) matches in the current quarter compared to the prior-year quarter as the 2023 IPL season started approximately one week later than the 2022 season. This decrease was partially offset by airing more Board of Control for Cricket in India (BCCI) matches in the current quarter compared to the prior-year quarter.
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Cable $ (2,178) $ (1,774) (23) %
Broadcasting (766) (738) (4) %
Domestic Channels (2,944) (2,512) (17) %
International Channels (639) (694) 8 %
$ (3,583) $ (3,206) (12) %
Programming and production costs at Cable increased due to higher CFP and NFL programming costs and, to a lesser extent, contractual rate increases for NBA programming and an increase in sports production costs. The increase in costs for CFP programming was due to the timing of games. Higher NFL rights costs were due to the timing of costs under our new agreement compared to the prior NFL agreement.
The increase in programming and production costs at Broadcasting was due to a higher average cost mix of programming aired in the current quarter and the timing of the Citrus Bowl college football game. The current quarter included more hours of scripted series and fewer hours of reality programming. The Citrus Bowl aired in the current quarter compared to the first quarter of the prior year.
Programming and production costs at the International Channels decreased due to a favorable Foreign Exchange Impact, partially offset by costs for new soccer rights.
Selling, general administrative and other costs increased $43 million, to $945 million from $902 million, driven by higher overhead costs and an increase in marketing spend, partially offset by a favorable Foreign Exchange Impact.
Depreciation and amortization decreased $8 million, to $28 million from $36 million, driven by technology assets that were fully depreciated.
Equity in the Income of Investees
Income from equity investees decreased $46 million, to $175 million from $221 million, primarily due to lower income from A+E Television Networks attributable to a decrease in advertising revenue and higher programming costs.
Operating Income from Linear Networks
Operating income from Linear Networks decreased $987 million, to $1,828 million from $2,815 million, due to decreases at Cable, Broadcasting, the International Channels and, to a lesser extent, lower income from our equity investees.
39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The following table provides supplemental revenue and operating income detail for Linear Networks:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Supplemental revenue detail
Domestic Channels $ 5,573 $ 5,826 (4) %
International Channels 1,052 1,290 (18) %
$ 6,625 $ 7,116 (7) %
Supplemental operating income detail
Domestic Channels $ 1,568 $ 2,349 (33) %
International Channels 85 245 (65) %
Equity in the income of investees 175 221 (21) %
$ 1,828 $ 2,815 (35) %
Direct-to-Consumer
Operating results for Direct-to-Consumer are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
Subscription fees $ 4,605 $ 3,887 18 %
Advertising 750 891 (16) %
TV/SVOD distribution and other 159 125 27 %
Total revenues 5,514 4,903 12 %
Operating expenses (5,056) (4,402) (15) %
Selling, general, administrative and other (1,029) (1,290) 20 %
Depreciation and amortization (88) (98) 10 %
Operating Loss $ (659) $ (887) 26 %
Revenues
Growth in subscription fees reflected increases of 13% from higher subscribers and 8% from higher rates, partially offset by a decrease of 2% from an unfavorable Foreign Exchange Impact. The increase in subscribers was due to growth at Disney+ and, to a lesser extent, at Hulu and ESPN+. Higher rates were attributable to increases in retail pricing at Hulu, Disney+ and, to a lesser extent, at ESPN+.
Lower advertising revenue reflected a decrease of 16% from fewer impressions due to a decrease at Hulu. The decrease was partially offset by an increase of 3% from higher rates at Hulu.
The increase in TV/SVOD distribution and other revenue was driven by an increase in Ultimate Fighting Championship (UFC) pay-per-view fees due to airing four events in the current quarter compared to three events in the prior-year quarter.
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The following tables present additional information about our Disney+, ESPN+ and Hulu DTC product offerings (1) .
Paid subscribers (2) at:
% Change Better (Worse)
(in millions) April 1,
2023 December 31,
2022 April 2,
2022 Apr. 1, 2023 vs.
Dec. 31, 2022 Apr. 1, 2023 vs.
Apr. 2, 2022
Disney+
Domestic (U.S. and Canada) 46.3 46.6 44.4 (1) % 4 %
International (excluding Disney+ Hotstar) (3)
58.6 57.7 43.2 2 % 36 %
Disney+ Core (4)
104.9 104.3 87.6 1 % 20 %
Disney+ Hotstar 52.9 57.5 50.1 (8) % 6 %
Total Disney+ (4)
157.8 161.8 137.7 (2) % 15 %
ESPN+ 25.3 24.9 22.3 2 % 13 %
Hulu
SVOD Only 43.7 43.5 41.4 — % 6 %
Live TV + SVOD 4.4 4.5 4.1 (2) % 7 %
Total Hulu (4)
48.2 48.0 45.6 — % 6 %
Average Monthly Revenue Per Paid Subscriber (5) :
Quarter Ended % Change Better (Worse)
April 1,
2023 December 31,
2022 April 2,
2022 Apr. 1, 2023 vs.
Dec. 31, 2022 Apr. 1, 2023 vs.
Apr. 2, 2022
Disney+
Domestic (U.S. and Canada) $ 7.14 $ 5.95 $ 6.32 20 % 13 %
International (excluding Disney+ Hotstar) (3)
5.93 5.62 6.35 6 % (7) %
Disney+ Core 6.47 5.77 6.33 12 % 2 %
Disney+ Hotstar 0.59 0.74 0.76 (20) % (22) %
Global Disney+ 4.44 3.93 4.35 13 % 2 %
ESPN+ 5.64 5.53 4.73 2 % 19 %
Hulu
SVOD Only 11.73 12.46 12.77 (6) % (8) %
Live TV + SVOD 92.32 87.90 88.77 5 % 4 %
(1) In the U.S., Disney+, ESPN+ and Hulu SVOD Only are each offered as a standalone service or together as part of various multi-product offerings. Hulu Live TV + SVOD includes Disney+ and ESPN+. Disney+ is available in more than 150 countries and territories outside the U.S. and Canada. In India and certain other Southeast Asian countries, the service is branded Disney+ Hotstar. In certain Latin American countries, we offer Disney+ as well as Star+, a general entertainment SVOD service, which is available on a standalone basis or together with Disney+ (Combo+). Depending on the market, our services can be purchased on our websites or through third-party platforms/apps or are available via wholesale arrangements.
(2) Reflects subscribers for which we recognized subscription revenue. Subscribers cease to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method. Subscribers to multi-product offerings in the U.S. are counted as a paid subscriber for each service included in the multi-product offering and subscribers to Hulu Live TV + SVOD are counted as one paid subscriber for each of the Hulu Live TV + SVOD, Disney+ and ESPN+ services. In Latin America, if a subscriber has either the standalone Disney+ or Star+ service or subscribes to Combo+, the subscriber is counted as one Disney+ paid subscriber. Subscribers include those who receive a service through wholesale arrangements including those for which we receive a fee for the distribution of the service to each subscriber
41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
of an existing content distribution tier. When we aggregate the total number of paid subscribers across our DTC streaming services, we refer to them as paid subscriptions.
Supplemental information about paid subscribers:
(in millions) April 1,
2023 December 31,
2022 April 2,
2022
Domestic (U.S. and Canada) standalone 57.0 58.5 61.6
Domestic (U.S.and Canada) multi-product (a)
21.4 20.8 17.0
78.4 79.3 78.6
International standalone 102.5 107.0 89.3
International multi-product (b)
9.0 8.1 4.0
111.5 115.2 93.3
Total (4)
189.9 194.4 171.9
(a) At April 1, 2023, there were 20.0 million and 1.4 million subscribers to three-service and two-service multi-product offerings, respectively. At December 31, 2022, there were 19.6 million and 1.2 million subscribers to three-service and two-service multi-product offerings, respectively. At April 2, 2022, there were 16.8 million and 0.2 million subscribers to three-service and two-service multi-product offerings, respectively.
(b) Consists of subscribers to Combo+.
(3) Includes the Disney+ service outside the U.S. and Canada and the Star+ service in Latin America.
(4) Total may not equal the sum of the column due to rounding.
(5) Average monthly revenue per paid subscriber is calculated based on the average of the monthly average paid subscribers for each month in the period. The monthly average paid subscribers is calculated as the sum of the beginning of the month and end of the month paid subscriber count, divided by two. Disney+ average monthly revenue per paid subscriber is calculated using a daily average of paid subscribers for the period. Revenue includes subscription fees, advertising (excluding revenue earned from selling advertising spots to other Company businesses) and premium and feature add-on revenue but excludes Premier Access and Pay-Per-View revenue. The average revenue per paid subscriber is net of discounts on offerings that carry more than one service. Revenue is allocated to each service based on the relative retail price of each service on a standalone basis. Hulu Live TV + SVOD revenue is allocated to the SVOD services based on the wholesale price of the Hulu SVOD Only, Disney+ and ESPN+ multi-product offering. In general, wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third-party platforms.
Average Monthly Revenue Per Paid Subscriber - Second Quarter of Fiscal 2023 Comparison to First Quarter of Fiscal 2023
Domestic Disney+ average monthly revenue per paid subscriber increased from $5.95 to $7.14 due to an increase in average retail pricing.
International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber increased from $5.62 to $5.93 due to a favorable Foreign Exchange Impact, a lower mix of wholesale subscribers and an increase in wholesale pricing.
Disney+ Hotstar average monthly revenue per paid subscriber decreased from $0.74 to $0.59 due to lower per-subscriber advertising revenue.
ESPN+ average monthly revenue per paid subscriber increased from $5.53 to $5.64 driven by higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.
Hulu SVOD Only average monthly revenue per paid subscriber decreased from $12.46 to $11.73 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product offerings, partially offset by an increase in average retail pricing.
Hulu Live TV + SVOD average monthly revenue per paid subscriber increased from $87.90 to $92.32 primarily due to an increase in average retail pricing, partially offset by lower per-subscriber advertising revenue.
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Average Monthly Revenue Per Paid Subscriber - Second Quarter of Fiscal 2023 Comparison to Second Quarter of Fiscal 2022
Domestic Disney+ average monthly revenue per paid subscriber increased from $6.32 to $7.14 due to an increase in average retail pricing, partially offset by a higher mix of subscribers to multi-product offerings.
International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber decreased from $6.35 to $5.93 due to a higher mix of subscribers from lower-priced markets and an unfavorable Foreign Exchange Impact, partially offset by a lower mix of wholesale subscribers and an increase in average retail pricing.
Disney+ Hotstar average monthly revenue per paid subscriber decreased from $0.76 to $0.59 due to lower per-subscriber advertising revenue.
ESPN+ average monthly revenue per paid subscriber increased from $4.73 to $5.64 due to an increase in retail pricing, partially offset by a higher mix of subscribers to multi-product offerings.
Hulu SVOD Only average monthly revenue per paid subscriber decreased from $12.77 to $11.73 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product offerings, partially offset by an increase in average retail pricing.
Hulu Live TV + SVOD average monthly revenue per paid subscriber increased from $88.77 to $92.32 due to an increase in average retail pricing, partially offset by lower per-subscriber advertising revenue, a higher mix of subscribers to multi-product offerings and lower per-subscriber premium and feature add-on revenue.
Costs and Expenses
Operating expenses are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Programming and production costs
Disney+ $ (1,567) $ (1,196) (31) %
Hulu (2,128) (1,913) (11) %
ESPN+ and other (450) (454) 1 %
Total programming and production costs (4,145) (3,563) (16) %
Other operating expense (911) (839) (9) %
$ (5,056) $ (4,402) (15) %
The increase in programming and production costs at Disney+ was due to more content provided on the service.
Higher programming and production costs at Hulu were attributable to more content provided on the service and increased subscriber-based fees for programming the Live TV service, which resulted from rate increases and an increase in the number of subscribers. These increases were partially offset by a lower average cost mix of SVOD content.
Programming and production costs at ESPN+ and other were comparable to the prior-year quarter as fewer docuseries and lower costs for soccer and NHL programming were offset by higher costs for UFC programming primarily due to an additional event in the current quarter compared to the prior-year quarter. A greater percentage of soccer and NHL games were aired or simulcast at Linear Networks in the current quarter compared to the prior-year quarter.
Other operating expenses increased due to higher technology and distribution costs at Disney+.
Selling, general, administrative and other costs decreased $261 million, to $1,029 million from $1,290 million, resulting from lower marketing costs at Disney+ and, to a lesser extent, Hulu.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer decreased $228 million, to $659 million from $887 million, due to improved results at Disney+ and ESPN+, partially offset by lower operating income at Hulu.
43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Content Sales/Licensing and Other
Operating results for Content Sales/Licensing and Other are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
TV/SVOD distribution $ 845 $ 977 (14) %
Theatrical distribution 767 224 >100 %
Home entertainment 148 230 (36) %
Other 437 435 — %
Total revenues 2,197 1,866 18 %
Operating expenses (1,605) (1,232) (30) %
Selling, general, administrative and other (560) (541) (4) %
Depreciation and amortization (83) (74) (12) %
Equity in the income (loss) of investees 1 (3) nm
Operating Income (Loss) $ (50) $ 16 nm
Revenues
The decrease in TV/SVOD distribution revenue was primarily due to lower sales of theatrical film content due to a decrease in sales volume including the impact of the shift from licensing content to third parties to distributing it on our DTC services.
The increase in theatrical distribution revenue was due to the continued performance of Avatar: The Way of Water, which was released in the first quarter of the current year, and the release of Ant-Man and the Wasp: Quantumania in the current quarter compared to Death on the Nile and the co-produced title Spider-Man: No Way Home in the prior-year quarter.
The decrease in home entertainment revenue was primarily due to lower unit sales of new release titles and, to a lesser extent, catalog titles. Lower unit sales of new release titles were driven by the performance of Strange World in the current quarter compared to Encanto in the prior-year quarter.
Costs and Expenses
Operating expenses are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Programming and production costs $ (1,268) $ (909) (39) %
Cost of goods sold and distribution costs (337) (323) (4) %
$ (1,605) $ (1,232) (30) %
The increase in programming and production costs was due to higher production cost amortization driven by the increase in theatrical revenue, partially offset by decreases due to lower home entertainment and TV/SVOD distribution revenue.
The increase in cost of goods sold and distribution costs was primarily due to increased theatrical distribution costs, partially offset by lower home entertainment volumes.
Selling, general, administrative and other costs increased $19 million, to $560 million from $541 million, due to higher theatrical marketing costs attributable to spending on Ant-Man and the Wasp: Quantumania in the current quarter compared to spending on Death on the Nile in the prior-year quarter.
Depreciation and amortization increased $9 million, to $83 million from $74 million, primarily due to increased investment in technology assets.
Operating Income (Loss) from Content Sales/Licensing and Other
Operating results from Content Sales/Licensing and Other decreased from income of $16 million to a loss of $50 million, due to lower TV/SVOD distribution results, partially offset by improved theatrical distribution results.
44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Items Excluded from Segment Operating Income Related to Disney Media and Entertainment Distribution
The following table presents supplemental information for items related to the DMED segment that are excluded from segment operating income:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Content License Early Termination $ — $ (1,023) 100 %
TFCF and Hulu acquisition amortization (1)
(556) (592) 6 %
Restructuring and impairment charges (2)
(122) (195) 37 %
(1) In the current quarter, amortization of intangible assets was $406 million and amortization of step-up on film and television costs was $147 million. In the prior-year quarter, amortization of intangible assets was $433 million and amortization of step-up on film and television costs was $156 million.
(2) Charges for the current period were primarily for severance. Charges for the prior-year quarter were due to the impairment of an intangible asset related to the Disney Channel in Russia.
Disney Parks, Experiences and Products
Operating results for the DPEP segment are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
Theme park admissions $ 2,428 $ 1,973 23 %
Parks & Experiences merchandise, food and beverage 1,903 1,515 26 %
Resorts and vacations 1,949 1,451 34 %
Merchandise licensing and retail 1,011 1,164 (13) %
Parks licensing and other 485 549 (12) %
Total revenues 7,776 6,652 17 %
Operating expenses (4,106) (3,485) (18) %
Selling, general, administrative and other (853) (809) (5) %
Depreciation and amortization (651) (598) (9) %
Equity in the loss of investees — (5) 100 %
Operating Income $ 2,166 $ 1,755 23 %
Revenues
Higher theme park admissions revenue was due to increases of 17% from attendance growth and 8% from higher average per capita ticket revenue.
Parks & Experiences merchandise, food and beverage revenue growth reflected increases of 17% from higher volumes and 6% from higher average guest spending.
Higher resorts and vacations revenue was due to increases of 22% from additional passenger cruise days and 6% from higher occupied hotel room nights.
Merchandise licensing and retail revenue was lower due to decreases of 9% from merchandise licensing and 3% from retail. The decrease in merchandise licensing was primarily attributable to a decrease in sales of merchandise based on Spider-Man, Star Wars, Frozen and Avengers. Lower retail revenue was primarily due to a decrease at our publishing business.
The decrease in parks licensing and other revenue was due to lower real estate sales, partially offset by higher royalties from Tokyo Disney Resort and an increase in sponsorship revenue.
45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business:
Domestic International (1)
Total
Quarter Ended Quarter Ended Quarter Ended
Apr 1,
2023 Apr 2,
2022 Apr 1,
2023 Apr 2,
2022 Apr 1,
2023 Apr 2,
2022
Parks
Increase (decrease)
Attendance (2)
7 % >100 % >100 % 78 % 27 % >100 %
Per Capita Guest Spending (3)
2 % 20 % 20 % 28 % (1) % 26 %
Hotels
Occupancy (4)
89 % 84 % 72 % 46 % 85 % 75 %
Available Hotel Room Nights (in thousands) (5)
2,518 2,521 787 787 3,305 3,308
Change in Per Room Guest Spending (6)
— % 30 % 25 % (20) % 1 % 23 %
(1) Per capita guest spending growth rate and per room guest spending growth rate exclude the impact of changes in foreign exchange rates.
(2) Attendance is used to analyze volume trends at our theme parks and is based on the number of unique daily entries, i.e. a person visiting multiple theme parks in a single day is counted only once. Our attendance count includes complimentary entries but excludes entries by children under the age of three.
(3) Per capita guest spending is used to analyze guest spending trends and is defined as total revenue from ticket sales and sales of food, beverage and merchandise in our theme parks, divided by total theme park attendance.
(4) Occupancy is used to analyze the usage of available capacity at hotels and is defined as the number of room nights occupied by guests as a percentage of available hotel room nights.
(5) Available hotel room nights is defined as the total number of room nights that are available at our hotels and at Disney Vacation Club (DVC) properties located at our theme parks and resorts that are not utilized by DVC members. Available hotel room nights include rooms temporarily taken out of service.
(6) Per room guest spending is used to analyze guest spending at our hotels and is defined as total revenue from room rentals and sales of food, beverage and merchandise at our hotels, divided by total occupied hotel room nights.
Costs and Expenses
Operating expenses are as follows:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Operating labor $ (1,826) $ (1,610) (13) %
Cost of goods sold and distribution costs (767) (642) (19) %
Infrastructure costs (750) (651) (15) %
Other operating expense (763) (582) (31) %
$ (4,106) $ (3,485) (18) %
The increase in operating labor was attributable to inflation, increased costs for new guest offerings and higher volumes. Higher cost of goods sold and distribution costs were due to volume growth. The increase in infrastructure costs consisted of higher operations support costs and increased technology spending. Other operating expense increased primarily due to higher volumes, inflation and increased costs for new guest offerings.
Selling, general, administrative and other costs increased $44 million, to $853 million from $809 million, driven by higher marketing spend.
Depreciation and amortization increased $53 million, to $651 million from $598 million, due to higher depreciation at our domestic parks and experiences.
46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Segment Operating Income
Segment operating income increased from $1.8 billion to $2.2 billion due to growth at our international parks and resorts and, to a lesser extent, our domestic parks and experiences, partially offset by a decrease at our consumer products business.
The following table presents supplemental revenue and operating income detail for the DPEP segment:
Quarter Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Supplemental revenue detail
Parks & Experiences
Domestic $ 5,572 $ 4,898 14 %
International 1,184 574 >100 %
Consumer Products 1,020 1,180 (14) %
$ 7,776 $ 6,652 17 %
Supplemental operating income detail
Parks & Experiences
Domestic $ 1,519 $ 1,385 10 %
International 156 (268) nm
Consumer Products 491 638 (23) %
$ 2,166 $ 1,755 23 %
47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
BUSINESS SEGMENT RESULTS - Current Period Six-Month Results Compared to the Prior-Year Six-Month Period
Disney Media and Entertainment Distribution
Revenue and operating results for the DMED segment are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues:
Linear Networks $ 13,918 $ 14,822 (6) %
Direct-to-Consumer 10,821 9,593 13 %
Content Sales/Licensing and Other 4,657 4,299 8 %
Elimination of Intrasegment Revenue (1)
(581) (509) (14) %
$ 28,815 $ 28,205 2 %
Segment operating income (loss):
Linear Networks $ 3,083 $ 4,314 (29) %
Direct-to-Consumer (1,712) (1,480) (16) %
Content Sales/Licensing and Other (262) (82) >(100) %
$ 1,109 $ 2,752 (60) %
(1) Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services.
Linear Networks
Operating results for Linear Networks are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
Affiliate fees $ 9,217 $ 9,482 (3) %
Advertising 4,266 4,922 (13) %
Other 435 418 4 %
Total revenues 13,918 14,822 (6) %
Operating expenses (9,408) (9,240) (2) %
Selling, general, administrative and other (1,748) (1,657) (5) %
Depreciation and amortization (50) (74) 32 %
Equity in the income of investees 371 463 (20) %
Operating Income $ 3,083 $ 4,314 (29) %
Revenues
Affiliate revenue is as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Domestic Channels $ 7,929 $ 7,985 (1) %
International Channels 1,288 1,497 (14) %
$ 9,217 $ 9,482 (3) %
48
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Affiliate revenue at the Domestic Channels was comparable to the prior-year period as a decrease of 6% from fewer subscribers was largely offset by an increase of 5% from higher contractual rates.
The decrease in affiliate revenue at the International Channels was due to decreases of 9% from an unfavorable Foreign Exchange Impact and 7% from fewer subscribers, primarily due to channel closures. These decreases were partially offset by an increase of 3% from higher contractual rates.
Advertising revenue is as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Cable $ 2,018 $ 2,126 (5) %
Broadcasting 1,539 1,696 (9) %
Domestic Channels 3,557 3,822 (7) %
International Channels 709 1,100 (36) %
$ 4,266 $ 4,922 (13) %
Lower advertising revenue at Cable reflected decreases of 3% from lower rates and 1% from fewer impressions.
The decrease in Broadcasting advertising revenue was due to decreases of 10% from fewer impressions at ABC and 1% from lower rates at ABC, partially offset by an increase of 2% from the owned television stations. The decrease in ABC impressions was attributable to lower average viewership. The increase at the owned television stations was due to higher rates resulting from an increase in political advertising.
The decrease in International Channels advertising revenue was due to decreases of 16% from fewer impressions attributable to lower average viewership, 11% from lower rates and 8% from an unfavorable Foreign Exchange Impact. The decrease in average viewership reflected the timing of IPL matches. Three IPL matches aired in the current period compared to 23 matches in the prior-year period as matches from the 2021 season shifted into fiscal 2022 due to COVID-19, and the 2023 IPL season started approximately one week later than the 2022 season.
Other revenue increased $17 million, to $435 million from $418 million, due to higher sub-licensing fees from International Cricket Council (ICC) T20 World Cup matches in the current period compared to the prior-year period.
Costs and Expenses
Operating expenses primarily consist of programming and production costs, which are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Cable $ (5,587) $ (5,357) (4) %
Broadcasting (1,579) (1,538) (3) %
Domestic Channels (7,166) (6,895) (4) %
International Channels (1,420) (1,588) 11 %
$ (8,586) $ (8,483) (1) %
The increase in programming and production costs at Cable was due to contractual rate increases for CFP, NBA and NFL programming, an increase in sports production costs and higher costs for NHL and MLB programming. These increases were partially offset by lower non-sports programming costs due to a lower cost mix of programming at FX Channels. Higher sports production costs were primarily due to increased talent costs and programming additions in the current period. The increase in NHL rights costs was due to more games aired in the current period. Higher MLB programming costs in the current period were a result of fewer games aired in the prior-year period, as the start of the 2022 season was delayed.
The increase in programming and production costs at Broadcasting was due to higher development costs and an increase in costs for sports programming at ABC.
The decrease in programming and production costs at the International Channels was due to a favorable Foreign Exchange Impact and lower sports programming costs. The decrease in sports programming costs was due to lower costs for IPL matches in the current period compared to the prior-year period, partially offset by an increase in sports production costs and costs for new soccer rights.
49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Selling, general administrative and other costs increased $91 million, to $1,748 million from $1,657 million, driven by higher overhead costs, partially offset by a gain on the sale of an interest in our X Games business and a favorable Foreign Exchange Impact.
Depreciation and amortization decreased $24 million, to $50 million from $74 million, driven by technology assets that were fully depreciated.
Equity in the Income of Investees
Income from equity investees decreased $92 million, to $371 million from $463 million, due to lower income from A+E Television Networks attributable to a decrease in advertising revenue and higher programming costs.
Operating Income from Linear Networks
Operating income from Linear Networks decreased $1,231 million, to $3,083 million from $4,314 million, due to decreases at Cable, the International Channels, Broadcasting, and to a lesser extent, lower income from our equity investees.
The following table provides supplemental revenue and operating income detail for Linear Networks:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Supplemental revenue detail
Domestic Channels $ 11,639 $ 11,978 (3) %
International Channels 2,279 2,844 (20) %
$ 13,918 $ 14,822 (6) %
Supplemental operating income detail
Domestic Channels $ 2,496 $ 3,237 (23) %
International Channels 216 614 (65) %
Equity in the income of investees 371 463 (20) %
$ 3,083 $ 4,314 (29) %
Direct-to-Consumer
Operating results for Direct-to-Consumer are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
Subscription fees $ 8,845 $ 7,485 18 %
Advertising 1,647 1,871 (12) %
TV/SVOD distribution and other 329 237 39 %
Total revenues 10,821 9,593 13 %
Operating expenses (10,164) (8,324) (22) %
Selling, general, administrative and other (2,185) (2,565) 15 %
Depreciation and amortization (184) (184) — %
Operating Loss $ (1,712) $ (1,480) (16) %
Revenues
The increase in subscription fees reflected increases of 15% from higher subscribers due to growth at Disney+ and, to a lesser extent, Hulu and ESPN+, and 6% from higher rates due to increases in retail pricing at Hulu, ESPN+ and Disney+, partially offset by a decrease of 3% from an unfavorable Foreign Exchange Impact.
Lower advertising revenue reflected a decrease of 13% from fewer impressions due to a decrease at Hulu, partially offset by an increase of 4% from higher rates due to an increase at Hulu.
The increase in TV/SVOD distribution and other revenue was due to a favorable Foreign Exchange Impact and an increase in UFC pay-per-view fees. The increase in UFC pay-per-view fees reflected the impact of airing seven events in the
50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
current period compared to five events in the prior-year period and higher pricing, partially offset by lower average buys per event.
The following table presents Average Monthly Revenue Per Paid Subscriber:
Six Months Ended % Change
Better
(Worse)
April 1,
2023 April 2,
2022
Disney+
Domestic (U.S. and Canada) $ 6.56 $ 6.49 1 %
International (excluding Disney+ Hotstar) 5.78 6.17 (6) %
Disney+ (excluding Disney+ Hotstar) 6.13 6.33 (3) %
Disney+ Hotstar 0.67 0.89 (25) %
Global Disney+ 4.19 4.38 (4) %
ESPN+ 5.58 4.92 13 %
Hulu
SVOD Only 12.10 12.87 (6) %
Live TV + SVOD 90.11 87.89 3 %
Domestic Disney+ average monthly revenue per paid subscriber increased from $6.49 to $6.56 due to an increase in average retail pricing, partially offset by a higher mix of subscribers to multi-product offerings.
International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber decreased from $6.17 to $5.78 due to an unfavorable Foreign Exchange Impact and a higher mix of subscribers from lower-priced markets, partially offset by a lower mix of wholesale subscribers and an increase in average retail pricing.
Disney+ Hotstar average monthly revenue per paid subscriber decreased from $0.89 to $0.67 due to lower per-subscriber advertising revenue.
ESPN+ average monthly revenue per paid subscriber increased from $4.92 to $5.58 due to an increase in retail pricing, partially offset by a higher mix of subscribers to multi-product offerings.
Hulu SVOD Only average monthly revenue per paid subscriber decreased from $12.87 to $12.10 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product offerings, partially offset by an increase in average retail pricing.
Hulu Live TV + SVOD average monthly revenue per paid subscriber increased from $87.89 to $90.11 due to an increase in average retail pricing, partially offset by a higher mix of subscribers to multi-product offerings and, to a lesser extent, lower per-subscriber premium and feature add-on revenue and a decrease in per-subscriber advertising revenue.
Costs and Expenses
Operating expenses are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Programming and production costs
Disney+ $ (3,248) $ (2,116) (53) %
Hulu (4,234) (3,745) (13) %
ESPN+ and other (845) (881) 4 %
Total programming and production costs (8,327) (6,742) (24) %
Other operating expense (1,837) (1,582) (16) %
$ (10,164) $ (8,324) (22) %
The increase in programming and production costs at Disney+ was primarily due to more content provided on the service.
51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Higher programming and production costs at Hulu were attributable to more content provided on the service and increased subscriber-based fees for programming the Live TV service, which resulted from rate increases and an increase in the number of subscribers.
The decrease in programming and production costs at ESPN+ and other was due to fewer docuseries and lower costs for soccer and NHL programming, partially offset by higher rights costs for UFC programming. The decreases in soccer and NHL programming reflected the impact from a greater percentage of games aired or simulcast at Linear Networks in the current period compared to the prior-year period. Higher costs for UFC programming rights were attributable to two additional events and an increase in contractual rates.
Other operating expenses increased due to higher technology and distribution costs at Disney+.
Selling, general, administrative and other costs decreased $380 million, to $2,185 million from $2,565 million, due to lower marketing costs at Disney+.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer increased $232 million, to $1,712 million from $1,480 million, due to lower operating income at Hulu and a higher loss at Disney+, partially offset by improved results at ESPN+.
Content Sales/Licensing and Other
Operating results for Content Sales/Licensing and Other are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
TV/SVOD distribution $ 1,607 $ 2,172 (26) %
Theatrical distribution 1,907 753 >100 %
Home entertainment 283 524 (46) %
Other 860 850 1 %
Total revenues 4,657 4,299 8 %
Operating expenses (3,460) (2,857) (21) %
Selling, general, administrative and other (1,297) (1,381) 6 %
Depreciation and amortization (163) (143) (14) %
Equity in the income loss of investees 1 — nm
Operating Loss $ (262) $ (82) >(100) %
Revenues
The decrease in TV/SVOD distribution revenue was due to lower sales of both theatrical film and episodic television content. The decrease in theatrical film content was due to lower sales volume including the impact of the shift from licensing content to third parties to distributing it on our DTC services. The decrease in sales of episodic television content was due to non-returning series, which were sold in the prior-year period.
The increase in theatrical distribution revenue was due to the release of Avatar: The Way of Water , Black Panther: Wakanada Forever and Ant-Man and the Wasp: Quantumania in the current period compared to Eternals , the co-produced title Spider-Man: No Way Home and Encanto in the prior-year period. Other titles released in the current period included The Menu and Strange World , while other titles released in the prior-year period included Death on the Nile , The King’s Man , West Side Story and Ron’s Gone Wrong.
The decrease in home entertainment revenue was primarily due to lower unit sales of new release and catalog titles.
52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and Expenses
Operating expenses are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Programming and production costs $ (2,754) $ (2,169) (27) %
Cost of goods sold and distribution costs (706) (688) (3) %
$ (3,460) $ (2,857) (21) %
The increase in programming and production costs was due to higher production cost amortization attributable to the increase in theatrical revenue, partially offset by decreases due to lower TV/SVOD and home entertainment distribution revenues.
Higher cost of goods sold and distribution costs were attributable to increased theatrical distribution costs, partially offset by lower home entertainment volumes.
Selling, general, administrative and other costs decreased $84 million, to $1,297 million from $1,381 million, due to lower theatrical marketing costs as fewer titles were released in the current period compared to the prior-year period.
Depreciation and amortization increased $20 million, to $163 million from $143 million, driven by increased investment in technology assets.
Operating Loss from Content Sales/Licensing and Other
The operating loss from Content Sales/Licensing and Other increased $180 million, to $262 million from $82 million, primarily due to lower TV/SVOD and home entertainment distribution results, partially offset by improved theatrical distribution results.
Items Excluded from Segment Operating Income Related to Disney Media and Entertainment Distribution
The following table presents supplemental information for items related to the DMED segment that are excluded from segment operating income:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
TFCF and Hulu acquisition amortization (1)
$ (1,133) $ (1,185) 4 %
Content License Early Termination — (1,023) 100 %
Restructuring and impairment charges (2)
(191) (195) 2 %
Gain on sale of a business 28 — nm
(1) In the current period, amortization of intangible assets was $821 million and amortization of step-up on film and television costs was $306 million. In the prior-year period, amortization of intangible assets was $866 million and amortization of step-up on film and television costs was $313 million.
(2) Charges for the current period were primarily for severance and exiting our businesses in Russia. Charges for the prior-year period were due to the impairment of an intangible asset related to the Disney Channel in Russia.
53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Disney Parks, Experiences and Products
Operating results for the DPEP segment are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Revenues
Theme park admissions $ 5,069 $ 4,125 23 %
Parks & Experiences merchandise, food and beverage 3,883 3,141 24 %
Resorts and vacations 3,929 2,896 36 %
Merchandise licensing and retail 2,557 2,727 (6) %
Parks licensing and other 1,074 997 8 %
Total revenues 16,512 13,886 19 %
Operating expenses (8,245) (6,936) (19) %
Selling, general, administrative and other (1,752) (1,546) (13) %
Depreciation and amortization (1,294) (1,191) (9) %
Equity in the loss of investees (2) (8) 75 %
Operating Income $ 5,219 $ 4,205 24 %
Revenues
The increase in theme park admissions revenue was due to increases of 14% from attendance growth and 10% from higher average per capita ticket revenue.
Parks & Experiences merchandise, food and beverage revenue growth reflected increases of 16% from higher volumes and 5% from higher average guest spending.
Higher resorts and vacations revenue was attributable to increases of 20% from additional passenger cruise days and 8% from higher occupied hotel room nights.
The decrease in merchandise licensing and retail revenue was due to decreases of 2% from retail, 2% from merchandise licensing and 1% from an unfavorable Foreign Exchange Impact. Lower retail revenue was due to a decrease in sales at our publishing business and lower online sales. The decrease in merchandise licensing revenue was due to lower sales of merchandise based on Star Wars and Frozen.
The increase in parks licensing and other revenue was driven by increases in royalties from Tokyo Disney Resort and co-branding and sponsorship revenues, partially offset by lower real estate sales.
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business:
Domestic International Total
Six Months Ended Six Months Ended Six Months Ended
April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022
Parks
Increase (decrease)
Attendance 9 % >100 % 52 % >100 % 19 % >100 %
Per Capita Guest Spending 6 % 25 % 21 % 19 % 4 % 29 %
Hotels
Occupancy 89 % 78 % 70 % 49 % 84 % 71 %
Available Hotel Room Nights (in thousands) 5,038 5,062 1,587 1,587 6,625 6,649
Change in Per Room Guest Spending 1 % 31 % 16 % (10) % 2 % 24 %
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Costs and Expenses
Operating expenses are as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Operating labor $ (3,615) $ (3,125) (16) %
Cost of goods sold and distribution costs (1,679) (1,440) (17) %
Infrastructure costs (1,472) (1,227) (20) %
Other operating expense (1,479) (1,144) (29) %
$ (8,245) $ (6,936) (19) %
The increase in operating labor was attributable to higher volumes, inflation and increased costs for new guest offerings. Cost of goods sold and distribution costs increased due to higher volumes, while the increase in infrastructure costs was primarily attributable to higher operations support costs and increased technology spending. Other operating expense increased primarily due to volume growth, inflation, higher operations support costs and increased costs for new guest offerings, partially offset by a favorable Foreign Exchange Impact.
Selling, general, administrative and other costs increased $206 million, to $1,752 million from $1,546 million, driven by a loss on the disposal of our ownership interest in Villages Nature and higher marketing spend.
Depreciation and amortization increased $103 million, to $1,294 million from $1,191 million, due to higher depreciation at our domestic theme parks and resorts.
Segment Operating Income
Segment operating income increased from $4.2 billion to $5.2 billion due to growth at our domestic and international parks and experiences, partially offset by a decrease at our consumer products business.
The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Supplemental revenue detail
Parks & Experiences
Domestic $ 11,644 $ 9,698 20 %
International 2,278 1,435 59 %
Consumer Products 2,590 2,753 (6) %
$ 16,512 $ 13,886 19 %
Supplemental operating income (loss) detail
Parks & Experiences
Domestic $ 3,632 $ 2,940 24 %
International 235 (247) nm
Consumer Products 1,352 1,512 (11) %
$ 5,219 $ 4,205 24 %
CORPORATE AND UNALLOCATED SHARED EXPENSES
Quarter Ended % Change
Better
(Worse) Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022 April 1,
2023 April 2,
2022
Corporate and unallocated shared expenses $ (279) $ (272) (3) % $ (559) $ (500) (12) %
Corporate and unallocated shared expenses for the current period increased $59 million, from $500 million to $559 million, primarily due to marketing spend on the Disney100 celebration and increases in technology costs and rent expense.
55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
FINANCIAL CONDITION
The change in cash and cash equivalents is as follows:
Six Months Ended % Change
Better
(Worse)
(in millions) April 1,
2023 April 2,
2022
Cash provided by operations - continuing operations $ 2,262 $ 1,556 45 %
Cash used in investing activities - continuing operations (2,541) (2,024) (26) %
Cash used in financing activities - continuing operations (1,126) (2,097) 46 %
Cash used in discontinued operations — (4) 100 %
Impact of exchange rates on cash, cash equivalents and restricted cash 197 (116) nm
Change in cash, cash equivalents and restricted cash $ (1,208) $ (2,685) 55 %
Operating Activities
Cash provided by operations increased $706 million to $2,262 million for the current period compared to $1,556 million in the prior-year period. The increase was due to higher operating cash flow at DMED and DPEP resulting from higher operating cash receipts driven by higher revenue, partially offset by higher operating cash disbursements due to higher operating expenses.
Produced and licensed programming costs
The DMED segment incurs costs to produce and license feature film and television content. Film and television production costs include all internally produced content such as live-action and animated feature films, television series, television specials and theatrical stage plays. Programming costs include film or television content rights licensed from third parties for use on the Company’s Linear Networks and DTC services. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities.
The Company’s film and television production and programming activity for the six months ended April 1, 2023 and April 2, 2022 are as follows:
Six Months Ended
(in millions) April 1,
2023 April 2,
2022
Beginning balances:
Produced and licensed programming assets $ 37,667 $ 31,732
Programming liabilities (3,940) (4,113)
33,727 27,619
Spending:
Programming licenses and rights 7,498 7,335
Produced film and television content 7,336 7,586
14,834 14,921
Amortization:
Programming licenses and rights (7,735) (7,650)
Produced film and television content (6,275) (4,992)
(14,010) (12,642)
Change in produced and licensed content costs 824 2,279
Other non-cash activity 12 215
Ending balances:
Produced and licensed programming assets 38,821 34,145
Programming liabilities (4,258) (4,032)
$ 34,563 $ 30,113
The Company currently expects its fiscal 2023 spend on produced and licensed content, including sports rights, to be roughly comparable with fiscal 2022 spend of $30 billion.
56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Investing Activities
Investing activities consist principally of investments in parks, resorts and other property and acquisition and divestiture activity. The Company’s investments in parks, resorts and other property for the six months ended April 1, 2023 and April 2, 2022 are as follows:
(in millions) April 1,
2023 April 2,
2022
Disney Media and Entertainment Distribution $ 548 $ 334
Disney Parks, Experiences and Products
Domestic 1,024 1,047
International 410 391
Total Disney Parks, Experiences and Products 1,434 1,438
Corporate 448 288
$ 2,430 $ 2,060
Capital expenditures at the DMED segment primarily reflect investments in technology and in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities. The increase in the current period compared to the prior-year period was driven by higher technology spending to support our streaming services.
Capital expenditures at the DPEP segment are principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and technology.
Capital expenditures at Corporate primarily reflect investments in corporate facilities, technology and equipment. The increase in the current period compared to the prior-year period was due to higher spending on facilities.
The Company currently expects its fiscal 2023 capital expenditures to be approximately $5.6 billion. Fiscal 2022 spend was $5 billion. The expected increase in capital expenditures is due to higher spending at DMED and on Corporate facilities, partially offset by lower spending at DPEP.
Financing Activities
Cash used in financing activities was $1.1 billion in the current six months compared to $2.1 billion in the prior-year six months. Cash used in financing activities in the current six months was due to the purchase of a redeemable non-controlling interest and a reduction in borrowings, partially offset by the sale of a non-controlling interest. Cash used in financing activities in the prior-year six months was due to a reduction in net borrowings.
See Note 5 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the six months ended April 1, 2023 and information regarding the Company’s bank facilities. The Company may use operating cash flows, commercial paper borrowings up to the amount of its unused $12.25 billion bank facilities and incremental term debt issuances to retire or refinance other borrowings before or as they come due.
The Company’s operating cash flow and access to the capital markets can be impacted by factors outside of its control. We believe that the Company’s financial condition is strong and that its cash balances, other liquid assets, operating cash flows, access to debt and equity capital markets and borrowing capacity under current bank facilities, taken together, provide adequate resources to fund ongoing operating requirements, contractual obligations, upcoming debt maturities as well as future capital expenditures related to the expansion of existing businesses and development of new projects. In addition, the Company could undertake other measures to ensure sufficient liquidity, such as continuing to not declare dividends; raising financing; suspending or reducing capital spending; reducing film and television content investments; or implementing furloughs or reductions in force.
The Company’s borrowing costs can also be impacted by short- and long-term debt ratings assigned by nationally recognized rating agencies, which are based, in significant part, on the Company’s performance as measured by certain credit metrics such as leverage and interest coverage ratios. As of April 1, 2023, Moody’s Investors Service’s long- and short-term debt ratings for the Company were A2 and P-1 (Stable), respectively, Standard and Poor’s long- and short-term debt ratings for the Company were BBB+ and A-2 (Positive), respectively, and Fitch’s long- and short-term debt ratings for the Company were A- and F2 (Stable), respectively. The Company’s bank facilities contain only one financial covenant relating to interest coverage of three times earnings before interest, taxes, depreciation and amortization, including both intangible amortization and amortization of our film and television production and programming costs. On April 1, 2023, the Company met this covenant 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.
57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
On March 20, 2019 as part of the acquisition of TFCF, The Walt Disney Company (“TWDC”) became the ultimate parent of TWDC Enterprises 18 Corp. (formerly known as The Walt Disney Company) (“Legacy Disney”). Legacy Disney and TWDC are collectively referred to as “Obligor Group”, and individually, as a “Guarantor”. Concurrent with the close of the TFCF acquisition, $16.8 billion of TFCF’s assumed public debt (which then constituted 96% of such debt) was exchanged for senior notes of TWDC (the “exchange notes”) issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an Indenture, dated as of March 20, 2019, between TWDC, Legacy Disney, as guarantor, and Citibank, N.A., as trustee (the “TWDC Indenture”) and guaranteed by Legacy Disney. On November 26, 2019, $14.0 billion of the outstanding exchange notes were exchanged for new senior notes of TWDC registered under the Securities Act, issued pursuant to the TWDC Indenture and guaranteed by Legacy Disney. In addition, contemporaneously with the closing of the March 20, 2019 exchange offer, TWDC entered into a guarantee of the registered debt securities issued by Legacy Disney under the Indenture dated as of September 24, 2001 between Legacy Disney and Wells Fargo Bank, National Association, as trustee (the “2001 Trustee”) (as amended by the first supplemental indenture among Legacy Disney, as issuer, TWDC, as guarantor, and the 2001 Trustee, as trustee).
Other subsidiaries of the Company do not guarantee the registered debt securities of either TWDC or Legacy Disney (such subsidiaries are referred to as the “non-Guarantors”). The par value and carrying value of total outstanding and guaranteed registered debt securities of the Obligor Group at April 1, 2023 was as follows:
TWDC Legacy Disney
(in millions) Par Value Carrying Value Par Value Carrying Value
Registered debt with unconditional guarantee $ 35,363 $ 35,944 $ 8,125 $ 7,921
The guarantees by TWDC and Legacy Disney are full and unconditional and cover all payment obligations arising under the guaranteed registered debt securities. The guarantees may be released and discharged upon (i) as a general matter, the indebtedness for borrowed money of the consolidated subsidiaries of TWDC in aggregate constituting no more than 10% of all consolidated indebtedness for borrowed money of TWDC and its subsidiaries (subject to certain exclusions), (ii) upon the sale, transfer or disposition of all or substantially all of the equity interests or all or substantially all, or substantially as an entirety, the assets of Legacy Disney to a third party, and (iii) other customary events constituting a discharge of a guarantor’s obligations. In addition, in the case of Legacy Disney’s guarantee of registered debt securities issued by TWDC, Legacy Disney may be released and discharged from its guarantee at any time Legacy Disney is not a borrower, issuer or guarantor under certain material bank facilities or any debt securities.
Operations are conducted almost entirely through the Company’s subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service its debt, including the public debt, are dependent upon the earnings of the Company’s subsidiaries and the distribution of those earnings to the Obligor Group, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities have a direct claim only against the Obligor Group.
58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Set forth below is summarized financial information for the Obligor Group on a combined basis after elimination of (i) intercompany transactions and balances between TWDC and Legacy Disney and (ii) equity in the earnings from and investments in any subsidiary that is a non-Guarantor. This summarized financial information has been prepared and presented pursuant to the Securities and Exchange Commission Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with GAAP.
Results of operations (in millions) Six Months Ended April 1, 2023
Revenues $ —
Costs and expenses —
Net income (loss) from continuing operations (841)
Net income (loss) (841)
Net income (loss) attributable to TWDC shareholders (841)
Balance Sheet (in millions) April 1, 2023 October 1, 2022
Current assets $ 3,610 $ 5,665
Noncurrent assets 2,078 1,948
Current liabilities 3,933 3,741
Noncurrent liabilities (excluding intercompany to non-Guarantors) 45,982 46,218
Intercompany payables to non-Guarantors 147,989 148,958
COMMITMENTS AND CONTINGENCIES
Legal Matters
As disclosed in Note 13 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters.
Guarantees
See Note 14 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K.
Tax Matters
As disclosed in Note 9 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K, the Company has exposure for certain tax matters.
Contractual Commitments
See Note 14 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K.
OTHER MATTERS
Accounting Policies and Estimates
We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K.
Produced and Acquired/Licensed Content Costs
We amortize and test for impairment of capitalized film and television production costs based on whether the content is predominantly monetized individually or as a group. See Note 7 to the Condensed Consolidated Financial Statements for further discussion.
Production costs that are classified as individual are amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues).
With respect to produced films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues is theatrical performance. Revenues derived from other markets subsequent to the theatrical release are generally highly correlated with theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort. Upon a film’s release and determination of the theatrical performance, the Company’s estimates of revenues from succeeding windows
59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
and markets, which may include imputed license fees for content that is used on our DTC streaming services, are revised based on historical relationships and an analysis of current market trends.
With respect to capitalized television production costs that are classified as individual, the most sensitive factor affecting estimates of Ultimate Revenues is program ratings of the content on our licensees’ platforms. Program ratings, which are an indication of market acceptance, directly affect the program’s ability to generate advertising and subscriber revenues and are correlated with the license fees we can charge for the content in subsequent windows and for subsequent seasons.
Ultimate Revenues are reassessed each reporting period and the impact of any changes on amortization of production cost is accounted for as if the change occurred at the beginning of the current fiscal year. If our estimate of Ultimate Revenues decreases, amortization of costs may be accelerated or result in an impairment. Conversely, if our estimate of Ultimate Revenues increases, cost amortization may be slowed.
Production costs classified as individual are tested for impairment at the individual title level by comparing that title’s unamortized costs to the present value of discounted cash flows directly attributable to the title. To the extent the title’s unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess.
Produced content costs that are part of a group and acquired/licensed content costs are amortized based on projected usage, typically resulting in an accelerated or straight-line amortization pattern. The determination of projected usage requires judgment and is reviewed on a regular basis for changes. Adjustments to projected usage are applied prospectively in the period of the change. The most sensitive factors affecting projected usage are historical and estimated viewing patterns. If projected usage changes we may need to accelerate or slow the recognition of amortization expense.
Cost of content that is predominantly monetized as a group is tested for impairment by comparing the present value of the discounted cash flows of the group to the aggregate unamortized costs of the group. The group is established by identifying the lowest level for which cash flows are independent of the cash flows of other produced and licensed content. If the unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess and allocated to individual titles based on the relative carrying value of each title in the group. If there are no plans to continue to use an individual film or television program that is part of a group, the unamortized cost of the individual title is written down to its estimated fair value. Licensed content is included as part of the group within which it is monetized for purposes of impairment testing.
The amortization of multi-year sports rights is based on projections of revenues for each season relative to projections of total revenues over the contract period (estimated relative value). Projected revenues 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 estimated relative values by year were to change significantly, amortization of our sports rights costs may be accelerated or slowed.
Revenue Recognition
The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. Refer to Note 2 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K for our revenue recognition policies.
Pension and Postretirement Medical Plan Actuarial Assumptions
The Company’s pension and postretirement medical benefit obligations and related costs are calculated using a number of actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement, which we evaluate annually. See Note 10 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K for estimated impacts of changes in these assumptions. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase.
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension and postretirement medical expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. The Company’s discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans’ liability cash flows to the yield curves.
To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension and postretirement medical expense.
60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Goodwill, Other Intangible Assets, Long-Lived Assets and Investments
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis. The Company performs its annual test of goodwill and indefinite-lived intangible assets for impairment in its fiscal fourth quarter.
Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. To test goodwill for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of a reporting unit exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows of the reporting unit.
The quantitative assessment compares the fair value of each goodwill reporting unit to its carrying amount, and to the extent the carrying amount exceeds the fair value, an impairment of goodwill is recognized for the excess up to the amount of goodwill allocated to the reporting unit.
The impairment test for goodwill requires judgment related to the identification of reporting units, the assignment of assets and liabilities to reporting units including goodwill, and the determination of fair value of the reporting units. To determine the fair value of our reporting units, we apply what we believe to be the most appropriate valuation methodology for each of our reporting units. We generally use a present value technique (discounted cash flows) corroborated by market multiples when available and as appropriate. The discounted cash flow analyses are sensitive to our estimates of future revenue growth and margins for these businesses as well as the discount rates used to calculate the present value of future cash flows. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. We believe our estimates are consistent with how a marketplace participant would value our reporting units. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.
To test its other indefinite-lived intangible assets for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of each of its indefinite-lived intangible assets exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows.
The quantitative assessment compares the fair value of an indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized for the excess. Fair values of indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company tests long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of the estimated undiscounted future cash flows expected to be generated over the useful life of the significant assets of an asset group to the carrying amount of the asset group. An asset group is generally established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the asset group and the carrying amount of the asset group. For assets held for sale, to the extent the carrying amount 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 asset groups, estimates of future cash flows and the discount rate used to determine fair values.
The Company has investments in equity securities. For equity securities that do not have a readily determinable fair value, we consider forecasted financial performance of the investee companies, as well as volatility inherent in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded.
Allowance for Credit Losses
We evaluate our allowance for credit losses and estimate collectability of accounts receivable based on historical bad debt experience, our assessment of the financial condition of individual companies with which we do business, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, including
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, costs and expenses may increase in future periods, and if it is too high, costs and expenses may decrease in future periods. See Note 3 to the Condensed Consolidated Financial Statements for additional discussion.
Contingencies and Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for the resolution of these proceedings. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and have been developed in consultation with outside counsel as appropriate. From time to time, we are also involved in other contingent matters for which we accrue estimates for a probable and estimable loss. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to legal proceedings or our assumptions regarding other contingent matters. See Note 13 to the Condensed Consolidated Financial Statements for more detailed information on litigation exposure.
Income Tax
As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in proposed assessments. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized by the Company may differ from those recognized in our future financial statements based on a number of factors, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and the Company’s success in supporting its filing positions with taxing authorities.
New Accounting Pronouncements
See Note 17 to the Condensed Consolidated Financial Statements for information regarding new accounting pronouncements.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, commodity fluctuations and changes in the market values of its investments.
Policies and Procedures
In the normal course of business, we employ established policies and procedures to manage the Company’s exposure to changes in interest rates, foreign currencies and commodities using a variety of financial instruments.
Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to the Company’s portfolio of borrowings. By policy, the Company targets fixed-rate debt as a percentage of its net debt between minimum and maximum percentages.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow in order to allow management to focus on core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the U.S. dollar equivalent value of its existing foreign currency assets, liabilities, commitments and forecasted foreign currency revenues and expenses. The Company utilizes option strategies and forward contracts that provide for the purchase or sale of foreign currencies to hedge probable, but not firmly committed, transactions. The Company also uses forward and option contracts to hedge foreign currency assets and liabilities. The principal foreign currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings to U.S. dollar denominated borrowings. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its forecasted foreign exchange exposures generally for periods not to exceed four years. The gains and losses on these contracts are intended to offset changes in the U.S. dollar equivalent value of the related exposures. The economic or political conditions in a country have reduced and in the future could reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country.
Our objectives in managing exposure to commodity fluctuations are to use commodity derivatives to reduce volatility of earnings and cash flows arising from commodity price changes. The amounts hedged using commodity swap contracts are based on forecasted levels of consumption of certain commodities, such as fuel oil and gasoline.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Our objectives in managing exposures to market-based fluctuations in certain retirement liabilities are to use total return swap contracts to reduce the volatility of earnings arising from changes in these retirement liabilities. The amounts hedged using total return swap contracts are based on estimated liability balances.
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 15 to the Condensed Consolidated Financial Statements.
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