WALT DISNEY COMPANY (THE) 
CONSOLIDATED RESULTS
(in millions, except per share data)
% Change
Better
2020 2019 (Worse)
Revenues:
Services $ 59,265 $ 60,579 (2) %
Products 6,123 9,028 (32) %
Total revenues 65,388 69,607 (6) %
Costs and expenses:
Cost of services (exclusive of depreciation and (39,406) (36,493) (8) %
amortization)
Cost of products (exclusive of depreciation and (4,474) (5,568) 20 %
amortization)
Selling, general, administrative and other (12,369) (11,549) (7) % Depreciation and amortization (5,345) (4,167) (28) % Total costs and expenses (61,594) (57,777) (7) % Restructuring and impairment charges (5,735) (1,183) >(100) % Other income, net 1,038 4,357 (76) % Interest expense, net (1,491) (978) (52) % Equity in the income (loss) of investees, net 651 (103) nm
Income (loss) from continuing operations before income (1,743)
13,923 nm
taxes
Income taxes from continuing operations (699) (3,026) 77 % Net income (loss) from continuing operations (2,442) 10,897 nm
Income (loss) from discontinued operations, net of income (32)
687 nm
tax benefit (expense) of
(2,474) 11,584 nm
Less: Net income from continuing operations attributable to (390)
(472) 17 %
noncontrolling and redeemable noncontrolling interests Less: Net income from discontinued operations attributable -
(58) 100 %
to noncontrolling interests
Net income (loss) attributable to Disney $ (2,864) $ 11,054 nm
Earnings (loss) per share attributable to Disney :
Diluted(1)
Continuing operations $ (1.57) $ 6.26 nm
Discontinued operations (0.02) 0.38 nm
$ (1.58) $ 6.64 nm
Basic(1)
Continuing operations $ (1.57) $ 6.30 nm
Discontinued operations (0.02) 0.38 nm
$ (1.58) $ 6.68 nm
Weighted average number of common and common equivalent shares
outstanding:
Diluted 1,808 1,666
Basic 1,808 1,656
(1)Total may not equal the sum of the column due to rounding.
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Organization of Information
Management's Discussion and Analysis provides a narrative on the Company's
financial performance and condition that should be read in conjunction with the
accompanying financial statements. It includes the following sections:
•Significant Developments
•Consolidated Results and Non-Segment Items
•Business Segment Results
•Corporate and Unallocated Shared Expenses
•Restructuring Activities
•Liquidity and Capital Resources
•Supplemental Guarantor Financial Information
•Contractual Obligations, Commitments and Off Balance Sheet Arrangements
•Critical Accounting Policies and Estimates
•Forward-Looking Statements
In Item 7, we discuss fiscal 2020 and 2019 results and comparisons of fiscal
2020 results to fiscal 2019 results. Discussions of fiscal 2018 results and
comparisons of fiscal 2019 results to fiscal 2018 results can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for
the fiscal year ended September 28, 2019 .
SIGNIFICANT DEVELOPMENTS
Strategic Reorganization
In October 2020 , the Company announced a strategic reorganization of our media
and entertainment businesses to accelerate the growth of our DTC strategy. The
operations of the Media Networks, Studio Entertainment and DTCI segments were
reorganized into four groups: three content groups (Studios, General
Entertainment and Sports), which are focused on developing and producing content
that will be used across all of our traditional and DTC platforms and a
distribution group, which is focused on distribution and commercialization
activities across these platforms and which has full accountability for media
and entertainment operating results globally.
COVID-19 Pandemic
During fiscal 2020 and continuing into fiscal 2021, the world has been, and
continues to be, impacted by COVID-19. COVID-19 and measures to prevent its
spread impacted our segments in a number of ways, most significantly at Parks,
Experiences and Products where our theme parks were closed or operating at
significantly reduced capacity for a significant portion of the year, cruise
ship sailings and guided tours were suspended since late in the second quarter
and retail stores were closed for a significant portion of the year. We also had
an adverse impact on our merchandise licensing business. Our Studio
Entertainment segment has delayed, or in some cases, shortened or cancelled,
theatrical releases, and stage play performances have been suspended since late
in the second quarter. We also had adverse impacts on advertising sales at Media
Networks and Direct-to-Consumer & International. Since March 2020 , we have
experienced significant disruptions in the production and availability of
content, including the shift of key live sports programming from our third
quarter to the fourth quarter and into fiscal 2021, as well as the suspension of
production of most film and television content since late in the second quarter,
although some film and television production resumed in the fourth quarter.
We have taken a number of mitigation efforts in response to the impacts of
COVID-19 on our businesses. We have significantly increased cash balances
through the issuance of senior notes in March and May 2020 , and we entered into
an additional $5.0 billion credit facility in April 2020 . The Company (or our
Board of Directors, as applicable) did not declare a dividend with respect to
fiscal 2020 operations; suspended certain capital projects; reduced certain
discretionary expenditures (such as spending on marketing); reduced management
compensation for several months and temporarily eliminated Board of Director
retainers and committee fees. In addition, we furloughed over 120,000 of our
employees (who continued to receive Company provided medical benefits), many of
which have returned from furlough as certain business operations have reopened.
At the end of September, the Company announced a workforce reduction plan that
would primarily impact Parks, Experiences and Products. Overall, approximately
32,000 employees will be terminated in the first half of fiscal 2021. We may
take additional mitigation actions in the future such as raising additional
financing; not declaring future dividends; reducing, or not making, certain
payments, such as some contributions to our pension and postretirement medical
plans; further suspending capital spending, reducing film and television content
investments; or implementing additional furloughs or reductions in force. Some
of these measures may have an adverse impact on our businesses.
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The most significant impact of COVID-19 on fiscal 2020 operating results was an
estimated detriment of approximately $6.9 billion on operating income at our
Parks, Experiences and Products segment due to revenue lost as a result of the
closures or reduced operating capacities. The impacts at the Media Networks,
Direct-to-Consumer & International and Studio Entertainment segments were less
significant. Media Networks had a modest benefit reflecting the deferral of
sports programming costs to fiscal 2021, when we expect rescheduled events to
occur, partially offset by lower advertising revenue. At Direct-to-Consumer &
International, lower advertising revenue was partially offset by lower costs
including the deferral of sports programming costs into fiscal 2021. At Studio
Entertainment , lower revenues due to the deferral or cancellation of significant
film releases as a result of theater closures were partially offset by lower
amortization, marketing and distribution costs. In total, we estimate the net
adverse impact of COVID-19 on our full year segment operating income across all
of our businesses was approximately $7.4 billion , inclusive of the impact at
Parks, Experiences and Products. The estimated impact is net of approximately
$500 million in government credits, from the Coronavirus Aid, Relief, and
Economic Security Act ("CARES Act") in the U.S. and a similar program in France ,
both primarily at our Parks, Experiences and Products segment. The impact in
fiscal 2020 is not necessarily indicative of the impact on future period
results, including the impact of sports programming cost deferrals.
The impact of these disruptions and the extent of their adverse impact on our
financial and operational results will be dictated by the length of time that
such disruptions continue, which will, in turn, depend on the currently
unknowable duration and severity of the impacts of COVID-19, and among other
things, the impact and duration of governmental actions imposed in response to
COVID-19 and individuals' and companies' risk tolerance regarding health matters
going forward. While we cannot be certain as to the duration of the impacts of
COVID-19, we currently expect COVID-19 to adversely impact our financial results
at least through fiscal 2021.
Some of our businesses have reopened with limited operations. We have incurred
and will continue to incur additional costs to address government regulations
and the safety of our employees, talent and guests. For example, as we reopened
theme parks and retail stores, we incurred and will continue to incur costs for
such things as additional custodial services, personal protection equipment,
temperature screenings and testing, sanitizer and cleaning supplies and signage,
among other items. As we resume production of film and television content,
including live sporting events, we anticipate incurring similar costs and
productions may take longer to complete. The timing, duration and extent of
these costs will depend on the timing and scope of the resumption of our
operations. We currently estimate these costs may total approximately $1 billion
in fiscal 2021. Some of these costs may be capitalized and amortized over future
periods. With the unknown duration of COVID-19 and yet to be determined timing
of the phased reopening of certain businesses, it is not possible to precisely
estimate the impact of COVID-19 on our operations in future quarters. As we
reopen our businesses, we will no longer benefit from certain savings related to
the closure of those businesses, such as related furloughs. The reopening or
closure of our businesses is dependent on applicable government requirements,
which vary by location, are subject to ongoing changes, which could result from
increasing COVID-19 cases.
Additionally, see Part I., Item 1A. Risk Factors - The adverse impact of
COVID-19 on our businesses will continue for an unknown length of time and may
continue to impact certain of our key sources of revenue.
Direct-to-Consumer
In November 2019 , the Company launched Disney+, a subscription based DTC
streaming service with Disney , Pixar, Marvel, Star Wars and National Geographic
branded programming in the U.S. and four other countries and has expanded to
select Western European countries in the Spring of 2020. In April 2020 , our
Hotstar service in India was converted to Disney+Hotstar, and in June 2020 ,
current subscribers of the Disney Deluxe service in Japan were converted to
Disney+. In September 2020 , Disney+ was launched in additional European
countries and Disney+ Hotstar was launched in Indonesia . In November 2020 ,
Disney+ was launched in Latin America . Additional launches are planned for
various Asia-Pacific territories in calendar year 2021.
The Company also plans to launch a general entertainment DTC video streaming
offering under the Star brand outside the U.S. in calendar year 2021.
As we will use our branded film and television content on our DTC offerings, we
are forgoing certain licensing revenue from the sale of this content to third
parties in TV/SVOD markets. We also expect to forgo revenue as we shut down
channels in certain markets as a result of investment in our DTC offerings. In
addition, we are increasing programming and production investments to create
exclusive content for our DTC offerings.
CONSOLIDATED RESULTS AND NON-SEGMENT ITEMS
Fiscal 2019 includes the consolidated results of TFCF and Hulu for the period
March 20, 2019 through September 28, 2019 , whereas the fiscal 2020 results
include the consolidated results of TFCF and Hulu for the full year. We refer to
the impact of the approximately six month non-comparable period as "the
consolidation of TFCF and Hulu".
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The Company's fiscal year end is on the Saturday closest to September 30 and
consists of fifty-two weeks with the exception that approximately every six
years, we have a fifty-three week year. Fiscal 2020 is a fifty-three week year,
which began on September 29, 2019 and ended on October 3, 2020 . We estimate that
the additional week of operations in fiscal 2020 resulted in a benefit to
pre-tax income of approximately $200 million , primarily at the Media Networks
segment.
Revenues for fiscal 2020 decreased 6%, or $4.2 billion , to $65.4 billion ; net
income attributable to Disney decreased $13.9 billion , to a loss of
$2.9 billion ; and diluted earnings per share from continuing operations
attributable to Disney decreased to a loss of $1.57 compared to income of $6.26
in the prior year. The EPS decrease for the year was due to lower segment
operating income, goodwill and intangible asset impairments at our International
Channels business, the comparison to a prior-year non-cash gain in connection
with the acquisition of Hulu (Hulu gain), higher amortization of intangible
assets and fair value step-up on film and television costs from the TFCF
acquisition and the consolidation of Hulu and higher interest expense. These
decreases were partially offset by an investment gain in the current year and
the comparison to investment impairments and a charge for the extinguishment of
debt recorded in the prior year. The decrease in segment operating income was
due to lower results at Parks, Experiences and Products and higher losses at
Direct-to-Consumer & International, partially offset by an increase at our Media
Networks segment. Segment operating results for the current period include a
$0.5 billion net benefit from the consolidation of TFCF and Hulu.
Revenues
Service revenues for fiscal 2020 decreased 2%, or $1.3 billion , to $59.3
billion , driven by lower volumes at our theme parks, resorts and cruise line, a
decrease in theatrical distribution and stage play revenues, lower advertising
revenue and a decrease in sales of our television and film programs to third
parties. These decreases were partially offset by the consolidation of TFCF and
Hulu and an increase in subscription revenue from Disney+/Disney+Hotstar and
Hulu. Theme park, resort, cruise line, theatrical distribution, stage play and
advertising revenue were adversely impacted by COVID-19.
Product revenues for fiscal 2020 decreased 32%, or $2.9 billion , to $6.1
billion , due to lower volumes at our theme parks and resorts, which were
impacted by being closed or operating at reduced capacity for a significant part
of the year as a result of COVID-19.
Costs and expenses
Cost of services for fiscal 2020 increased 8%, or $2.9 billion , to $39.4
billion , due to the consolidation of TFCF and Hulu and an increase in
programming and production costs, partially offset by lower theatrical and
TV/SVOD production cost amortization and distribution costs and decreased
volumes at our theme parks, resorts and cruise line. The increase in programming
and production costs reflected costs for Disney+ programming, partially offset
by a decrease due to a shift in timing of major sporting events to fiscal 2021.
Cost of products for fiscal 2020 decreased 20%, or $1.1 billion , to $4.5
billion , due to lower volumes at our theme parks and resorts.
Selling, general, administrative and other costs for fiscal 2020 increased 7%,
or $0.8 billion , to $12.4 billion , due to the consolidation of TFCF and Hulu,
partially offset by lower marketing costs. The decrease in marketing costs
reflected lower spending at the theatrical distribution and theme parks and
resorts businesses, partially offset by increased spend for Disney+.
Depreciation and amortization costs increased 28%, or $1.2 billion , to $5.3
billion due to the amortization of intangible assets arising from the
acquisition of TFCF and consolidation of Hulu and, to a lesser extent, higher
depreciation for new attractions at our domestic parks and resorts.
Restructuring and Impairment Charges
Restructuring and impairment charges of $5.7 billion for fiscal 2020 were due to
$4,953 million of impairment charges for goodwill and intangible assets at our
International Channels business and $782 million of restructuring costs.
Restructuring costs were primarily for severance costs and contract termination
charges in connection with the acquisition and integration of TFCF and severance
in connection with the reduction-in-force at our Parks, Experiences and Products
segment.
Restructuring and impairment charges of $1.2 billion in fiscal 2019 were
primarily for severance and equity-based compensation costs in connection with
the acquisition and integration of TFCF .
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Other Income, net
% Change
(in millions) 2020 2019 Better (Worse)
DraftKings Gain $ 973 $ - nm
Gain on sale of an investment 65 - nm
Hulu Gain - 4,794 nm
Insurance recoveries related to legal matters - 46 nm
Gain recognized in connection with the
acquisition of TFCF - 28 nm
Charge for the extinguishment of a portion of
the debt originally assumed in the TFCF
acquisition - (511) nm
Other income, net $ 1,038 $ 4,357 (76) %
In fiscal 2020, the Company recognized a non-cash gain of $973 million to adjust
its investment in DraftKings, Inc. to fair value (DraftKings gain). In addition,
the Company recognized a gain of $65 million on the sale of an investment.
In fiscal 2019, the Company recognized the $4,794 million Hulu gain, recorded
insurance recoveries of $46 million in connection with the settlement of legal
matters, and recorded a gain of $28 million on the deemed settlement of
preexisting relationships with TFCF pursuant to acquisition accounting guidance.
In addition, the Company recorded a charge of $511 million for the
extinguishment of a portion of the debt originally assumed in the TFCF
acquisition.
Interest Expense, net
% Change
(in millions) 2020 2019 Better (Worse)
Interest expense $ (1,647) $ (1,246) (32) %
Interest income, investment income and other 156 268 (42) %
Interest expense, net $ (1,491) $ (978) (52) %
The increase in interest expense was due to higher average debt balances,
partially offset by lower average interest rates.
The decrease in interest income, investment income and other was due to a lower
benefit from pension and postretirement benefit costs, other than service cost
and higher net investment impairments, partially offset by higher imputed
interest income on long-term receivables for film and television program sales
driven by the consolidation of TFCF .
Equity in the Income (Loss) of Investees
Equity in the income (loss) of investees reflected income of $651 million in the
current year compared to a loss of $103 million in the prior year. The change
reflected the comparison to impairments in the prior year on our investment in
Vice Group Holding Inc. and on an investment in a cable channel at A+E
Television Networks and lower equity losses from Hulu as a result of our
consolidation of Hulu following the TFCF acquisition.
Effective Income Tax Rate
Change
2020 2019 Better (Worse)
Effective income tax rate - continuing operations (40.1)% 21.7% (61.8) ppt
The change in effective income tax rate is due to the fiscal 2020 impairment of
International Channels goodwill, which is not tax deductible, and foreign losses
in fiscal 2020 for which we are unable to recognize a tax benefit.
Noncontrolling Interests
% Change
(in millions) 2020 2019 Better (Worse)
Net income from continuing operations
attributable to noncontrolling interests $ (390) $ (472) 17%
The decrease in net income from continuing operations attributable to
noncontrolling interests was due to lower results at Hong Kong Disneyland Resort
and Shanghai Disney Resort , partially offset by a higher adverse impact from the
accretion of the Hulu redeemable noncontrolling interest due to the
consolidation of Hulu.
Net income attributable to noncontrolling interests is determined on income
after royalties and management fees, financing costs and income taxes, as
applicable.
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Discontinued Operations
Net income from discontinued operations in fiscal 2019 reflected the operations
of the RSNs.
Certain Items Impacting Comparability
Results for fiscal 2020 were impacted by the following:
•Goodwill and intangible asset impairments of $4,953 million and restructuring
charges of $782 million
•Amortization expense of $2,846 million related to TFCF and Hulu intangible
assets and fair value step-up on film and television costs
•The DraftKings gain of $973 million
•A gain of $65 million on the sale of an investment
Results for fiscal 2019 were impacted by the following:
•The Hulu Gain of $4,794 million
•A benefit of $74 million consisting of $46 million from insurance recoveries
related to a legal matter and a gain of $28 million recognized on the settlement
of preexisting relationships with TFCF pursuant to acquisition accounting
guidance
•A benefit of $34 million from U.S. federal income tax legislation enacted in
fiscal 2018
•Amortization expense of $1,595 million related to TFCF and Hulu intangible
assets and fair value step-up on film and television costs
•Restructuring and impairment charges of $1,183 million
•Impairments of $538 million on equity investments
•A charge of $511 million for the extinguishment of a portion of debt originally
assumed in the TFCF acquisition
A summary of the impact of these items on EPS is as follows:
Pre-Tax Income Tax Benefit After-Tax Income EPS Favorable
(in millions, except per share data) (Loss) (Expense)(1) (Loss) (Adverse)(2)
Year Ended October 3, 2020 :
Restructuring and impairment charges $ (5,735) $ 571 $ (5,164) $ (2.86)
Amortization of TFCF and Hulu intangible
assets and fair value step-up on film and
television costs(3) (2,846) 662 (2,184) (1.17)
DraftKings gain 973 (227) 746 0.41
Gain on sale of an investment 65 (15) 50 0.03
Total $ (7,543) $ 991 $ (6,552) $ (3.59)
Year Ended September 28, 2019 :
Hulu Gain $ 4,794 $ (1,103) $ 3,691 $ 2.22
Insurance recoveries and gains on the
settlement of preexisting relationships 74 (17) 57 0.03
Benefit from the Tax Act - 34 34 0.02
Amortization of TFCF and Hulu intangible
assets and fair value step-up on film and
television costs(3) (1,595) 355 (1,240) (0.74)
Restructuring and impairment charges (1,183) 273 (910) (0.55)
Impairment of equity investments (538) 123 (415) (0.25)
Charge for the extinguishment of debt (511) 118 (393) (0.24)
Total $ 1,041 $ (217) $ 824 $ 0.50
(1)Tax benefit/expense adjustments are determined using the tax rate applicable
to the individual item affecting comparability.
(2)EPS is net of noncontrolling interest share, where applicable. Total may not
equal the sum of the column due to rounding.
(3)Includes amortization of intangibles related to TFCF equity investees.
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BUSINESS SEGMENT RESULTS - 2020 vs. 2019
Below is a discussion of the major revenue and expense categories for our
business segments. Costs and expenses for each segment consist of operating
expenses, selling, general, administrative and other costs, and depreciation and
amortization. Selling, general, administrative and other costs include
third-party and internal marketing expenses.
Our Media Networks segment primarily generates revenue from affiliate fees,
advertising (excluding addressable ad sales) and the sale and distribution of
television programs in TV/SVOD markets. Significant expenses include
amortization of programming and production costs, participations and residuals
expense, technical support costs, operating labor and distribution costs.
Our Parks, Experiences and Products segment primarily generates revenue from the
sale of admissions to theme parks, the sale of food, beverage and merchandise at
our theme parks and resorts, charges for room nights at hotels, sales of cruise
vacations, sales and rentals of vacation club properties, royalties from
licensing intellectual properties and the sale of branded merchandise. Revenues
are also generated from sponsorships and co-branding opportunities, real estate
rent and sales, and royalties from Tokyo Disney Resort . Significant expenses
include operating labor, costs of goods sold, infrastructure costs, depreciation
and other operating expenses. Infrastructure costs include information systems
expense, repairs and maintenance, utilities and fuel, property taxes, retail
occupancy costs, insurance and transportation. Other operating expenses include
costs for such items as supplies, commissions and entertainment offerings.
Our Studio Entertainment segment primarily generates revenue from the
distribution of films in the theatrical, home entertainment and TV/SVOD markets,
stage play ticket sales and licensing of our intellectual properties for use in
live entertainment productions. Significant expenses include amortization of
production, participations and residuals costs, marketing and sales costs,
distribution expenses and costs of sales.
Our Direct-to-Consumer & International segment primarily generates revenue from
subscription fees for our DTC streaming services, affiliate fees and advertising
sales (including addressable ad sales). Significant expenses include operating
expenses, selling general and administrative costs and depreciation and
amortization. Operating expenses include programming and production costs
(including programming, production and branded digital content obtained from
other Company segments), technology support costs, operating labor and
distribution costs.
The Company evaluates the performance of its operating segments based on segment
operating income, and management uses total segment operating income as a
measure of the overall performance of the operating businesses. Total segment
operating income is not a financial measure defined by GAAP, should be reviewed
in conjunction with the relevant GAAP financial measure and may not be
comparable to similarly titled measures reported by other companies. The Company
believes that information about total segment operating income assists investors
by allowing them to evaluate changes in the operating results of the Company's
portfolio of businesses separate from factors other than business operations
that affect net income.
The following table reconciles income (loss) from continuing operations before
income taxes to total segment operating income:
% Change
(in millions) 2020 2019 Better (Worse)
Income (loss) from continuing operations before
income taxes $ (1,743) $ 13,923 nm
Add/(subtract):
Corporate and unallocated shared expenses 817 987 17 % Restructuring and impairment charges 5,735 1,183 >(100) % Other income, net (1,038) (4,357) (76) % Interest expense, net 1,491 978 (52) %
Amortization of
1,595 (78) %
Impairment of equity investments - 538 100 %
Total segment operating income $ 8,108 $ 14,847 (45) %
(1)Includes amortization of intangibles related to
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The following is a summary of segment revenue and operating income:
% Change
(in millions) 2020 2019 Better (Worse)
Revenues:
Media Networks $ 28,393 $ 24,827 14 %
Parks, Experiences and Products 16,502 26,225 (37) %
Studio Entertainment 9,636 11,127 (13) %
Direct-to-Consumer & International 16,967 9,386 81 %
Eliminations (6,110) (1,958) >(100) %
$ 65,388 $ 69,607 (6) %
Segment operating income (loss):
Media Networks $ 9,022 $ 7,479 21 %
Parks, Experiences and Products (81) 6,758 nm
Studio Entertainment 2,501 2,686 (7) %
Direct-to-Consumer & International (2,806) (1,835) (53) %
Eliminations (528) (241) >(100) %
$ 8,108 $ 14,847 (45) %
Media Networks
Operating results for the Media Networks segment are as follows:
Year Ended % Change
Better
(in millions) October 3, 2020 September 28, 2019 (Worse)
Revenues
Affiliate fees $ 15,018 $ 13,433 12 %
Advertising 6,374 6,965 (8) %
TV/SVOD distribution and other 7,001 4,429 58 %
Total revenues 28,393 24,827 14 %
Operating expenses (17,387) (15,499) (12) %
Selling, general, administrative and other (2,514) (2,361) (6) %
Depreciation and amortization (207) (191) (8) %
Equity in the income of investees 737 703 5 %
Operating Income $ 9,022 $ 7,479 21 %
Revenues
The increase in affiliate fees was due to increases of 8% from higher
contractual rates, 6% from the consolidation of TFCF and 2% from the benefit of
an additional week in the current year, partially offset by a decrease of 4%
from fewer subscribers. The subscriber decline was net of a benefit from the ACC
Network which launched in August 2019 .
The decline in advertising revenues was due to decreases of $392 million at
Cable Networks, from $3,503 million to $3,111 million and $199 million at
Broadcasting, from $3,462 million to $3,263 million . Cable Networks advertising
revenue reflected a decrease of 22% from lower impressions reflecting lower
average viewership due to the impact COVID-19 had on live sports events. This
decrease was partially offset by increases of 7% from the consolidation of TFCF ,
4% from the benefit of an additional week of operations, which included MLB and
NBA events, and 2% from higher rates. Broadcasting advertising revenue reflected
decreases of 9% from lower network impressions reflecting lower average
viewership and 3% from the owned television stations. These decreases were
partially offset by increases of 3% from higher network rates, 2% from the
benefit of an additional week of operations and 2% from the consolidation of
TFCF .
The increase in TV/SVOD distribution and other revenue of $2,572 million was due
to the consolidation of TFCF , which consisted primarily of program sales, and
higher program sales at Disney Television Studios , Disney Channel and FX. The
increase in Disney Television Studios was primarily due to sales of original
titles to Hulu and library titles to Hulu and
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Disney+. The increases at Disney Channel and FX were due to program sales to
Disney+ and Hulu, respectively. These increases were partially offset by lower
sales to third parties.
Costs and Expenses
Operating expenses include programming and production costs, which increased
$1,857 million from $14,697 million to $16,554 million . At Cable Networks,
programming and production costs increased $435 million due to the consolidation
of TFCF , contractual increases for college football, NFL and NBA programming,
higher program sales and costs for the ACC Network. These increases were
partially offset by the deferral of costs for NBA, MLB and college football to
fiscal 2021 when these events occurred or are scheduled to occur. At
Broadcasting, programming and production costs increased $1,422 million due to
the consolidation of TFCF and higher program sales at Disney Television Studios ,
partially offset by lower costs driven by production shutdowns and delays as a
result of COVID-19.
Selling, general, administrative and other costs increased $153 million from
$2,361 million to $2,514 million due to the consolidation of TFCF , partially
offset by lower marketing costs at the ABC Television Network, FX Networks and
ESPN due to the impact of COVID-19.
Equity in the Income of Investees
Income from equity investees increased $34 million , from $703 million to $737
million , driven by higher income from A+E Television Networks due to lower
programming costs and higher program sales, partially offset by lower
advertising revenue.
Segment Operating Income
Segment operating income increased 21%, or $1,543 million , to $9,022 million due
to the consolidation of TFCF and increases at ESPN , the FX Networks , Disney
Television Studios and the ABC Television Network.
The following table provides supplemental revenue and operating income detail
for the Media Networks segment:
Year Ended % Change
Better
(in millions) October 3, 2020 September 28, 2019 (Worse)
Supplemental revenue detail
Cable Networks $ 17,966 $ 16,486 9 %
Broadcasting 10,427 8,341 25 %
$ 28,393 $ 24,827 14 %
Supplemental operating income detail
Cable Networks $ 6,283 $ 5,425 16 %
Broadcasting 2,002 1,351 48 %
Equity in the income of investees 737 703 5 %
$ 9,022 $ 7,479 21 %
Items Excluded from Segment Operating Income Related to Media Networks The following table presents supplemental information for items related to the Media Network segment that are excluded from segment operating income:
Year Ended % Change
October 3, September 28, Better
(in millions) 2020 2019 (Worse)
Amortization of TFCF intangible assets and fair
value step-up on film and television costs(1) $ (1,305) $ (684) (91) %
Restructuring and impairment charges (51) (105) 51 %
Impairment of equity investments - (184) - %
(1)In the current year, amortization of step-up on film and television costs was
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Parks, Experiences and Products
Operating results for the Parks, Experiences and Products segment are as
follows:
Year Ended % Change
Better
(in millions) October 3, 2020 September 28, 2019 (Worse)
Revenues
Theme park admissions $ 4,038 $ 7,540 (46) %
Parks & Experiences merchandise, food and beverage 3,441 5,963 (42) %
Resorts and vacations 3,402 6,266 (46) %
Merchandise licensing and retail 4,185 4,519 (7) %
Parks licensing and other 1,436 1,937 (26) %
Total revenues 16,502 26,225 (37) %
Operating expenses (11,485) (14,015) 18 %
Selling, general, administrative and other (2,642) (3,133) 16 %
Depreciation and amortization (2,437) (2,306) (6) %
Equity in the loss of investees (19) (13) (46) %
Operating Income $ (81) $ 6,758 nm
Revenues
The decrease in theme park admissions revenue was due to a decrease of 49% from
lower attendance, partially offset by an increase of 3% from higher average
ticket prices. Our parks were closed for a significant portion of the fiscal
year due to COVID-19, and those that reopened were operating at significantly
reduced capacity.
Parks & Experiences merchandise, food and beverage revenue was lower compared to
the prior year due to a decrease of 48% from lower volumes, partially offset by
an increase of 4% from higher average guest spending.
The decrease in resorts and vacations revenue was due to decreases of 22% from
lower occupied room nights and 15% from fewer passenger cruise days driven by
the suspension of cruise ship sailings.
Merchandise licensing and retail revenue was lower due to decreases of 4% from
retail and 3% from merchandise licensing. The decrease in revenues at retail was
driven by the closure of our retail stores for a significant portion of the
fiscal year as a result of COVID-19 and the prior-year sale of rights to a video
game, partially offset by higher online sales. The decrease at merchandise
licensing was primarily due to lower minimum guarantee shortfall recognition and
a decrease in sales of merchandise based on Toy Story, Avengers and Disney
Classics, partially offset by higher sales of Frozen merchandise. Merchandise
licensing revenues for the current year were adversely impacted by COVID-19.
The decrease in parks licensing and other revenue was primarily due to lower
sponsorship revenue and a decrease in royalties from Tokyo Disney Resort , which
was closed or operating at reduced capacity for a significant portion of the
fiscal year.
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The following table presents supplemental park and hotel statistics:
Domestic International(1) Total
Fiscal 2020 Fiscal 2019 Fiscal 2020 Fiscal 2019 Fiscal 2020 Fiscal 2019
Parks
Increase (decrease)
Attendance(2) (47) % - % (53) % (7) % (49) % (2) %
Per Capita Guest Spending(3) 8 % 7 % (3) % 13 % 7 % 8 %
Hotels
Occupancy(4) 43 % 90 % 35 % 81 % 41 % 88 %
Available Room Nights (in
thousands)(5) 11,114 10,030 3,207 3,182 14,321 13,212
Per Room Guest Spending(6) $367 $353 $312 $316 $356 $345
(1)Per capita guest spending growth rate is stated on a constant currency basis.
Per room guest spending is stated at the average foreign exchange rate for the
same period in the prior year.
(2)Attendance is used to analyze volume trends at our theme parks and is based
on the number of unique daily entries, i.e. a person visiting multiple theme
parks in a single day is counted only once. Our attendance count includes
complimentary entries but excludes entries by children under the age of three.
(3)Per capita guest spending is used to analyze guest spending trends and is
defined as total revenue from ticket sales and sales of food, beverage and
merchandise in our theme parks, divided by total theme park attendance.
(4)Occupancy is used to analyze the usage of available capacity at hotels and is
defined as the number of room nights occupied by guests as a percentage of
available hotel room nights.
(5)Available hotel room nights are defined as the total number of room nights
that are available at our hotels and at 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 include operating labor, which decreased $1,304 million from
$6,174 million to $4,870 million , cost of sales and distribution costs, which
decreased $716 million from $2,918 million to $2,202 million , and infrastructure
costs, which decreased $47 million from $2,469 million to $2,422 million . The
decrease in operating labor was due to furloughs in response to lower volumes
and the benefit of government credits for certain employee costs, partially
offset by inflation and new guest offerings. Lower cost of goods sold and
distribution costs were due to lower volumes. The decrease in infrastructure
costs was due to lower operations support costs reflecting reduced volumes,
partially offset by the write-down of assets at our retail stores and higher
costs for new guest offerings. Other operating expenses, which include costs for
such items as supplies, commissions/fees and entertainment offerings, decreased
$463 million , from $2,454 million to $1,991 million , due to lower volumes,
partially offset by higher charges for capital project abandonments.
Selling, general, administrative and other costs decreased $491 million from
$3,133 million to $2,642 million due to marketing and general and administrative
cost reduction initiatives to mitigate the impacts of COVID-19.
Depreciation and amortization increased $131 million from $2,306 million to
$2,437 million , primarily due to new attractions at our domestic parks and
resorts.
Segment Operating Income
Segment operating income decreased $6,839 million , to a loss of $81 million due
to decreases at our domestic and international parks and experiences and, to a
lesser extent, our retail and merchandise licensing businesses.
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The following table presents supplemental revenue and operating income detail
for the Parks, Experiences and Products segment:
Year Ended % Change
October 3, September 28, Better
(in millions) 2020 2019 (Worse)
Supplemental revenue detail
Parks & Experiences
Domestic $ 10,226 $ 17,369 (41) %
International 2,020 4,223 (52) %
Consumer Products 4,256 4,633 (8) %
$ 16,502 $ 26,225 (37) %
Supplemental operating income detail
Parks & Experiences
Domestic $ (623) $ 4,412 nm
International (1,073) 507 nm
Consumer Products 1,615 1,839 (12) %
$ (81) $ 6,758 nm
Items Excluded from Segment Operating Income Related to Parks, Experiences and
Products
The following table presents supplemental information for items related to the
Parks, Experiences and Products segment that are excluded from segment operating
income:
Year Ended % Change
October 3, September 28, Better
(in millions) 2020 2019 (Worse)
Restructuring and impairment charges
>(100) % Amortization of TFCF intangible assets (8) (4) (100) % Studio Entertainment Operating results for theStudio Entertainment segment are as follows: Year Ended % Change Better (in millions) October 3, 2020 September 28, 2019 (Worse) Revenues Theatrical distribution$ 2,134 $ 4,726 (55) % Home entertainment 1,528 1,734 (12) % TV/SVOD distribution and other 5,974 4,667 28 % Total revenues 9,636 11,127 (13) % Operating expenses (4,619) (5,187) 11 % Selling, general, administrative and other (2,369) (3,119) 24 % Depreciation and amortization (146) (135) (8) % Equity in the loss of investees (1) - nm Operating Income$ 2,501 $ 2,686 (7) % Revenues The decrease in theatrical distribution revenue was due to fewer significant releases, which included the impact of theater closures as a result of COVID-19, partially offset by the consolidation ofTFCF . Significant titles in the current year included Frozen II, Star Wars: The Rise of Skywalker and Maleficent: Mistress Of Evil. Significant titles in the prior year included Avengers: Endgame, The Lion King,Captain Marvel , Toy Story 4, Aladdin, Ralph Breaks the Internet, Mary Poppins Returns and Dumbo. 45 -------------------------------------------------------------------------------- TABL E OF CONTENTS Lower home entertainment revenue was due to decreases of 21% from lower unit sales of both new releases and catalog titles and 4% from lower average net effective pricing, partially offset by an increase of 14% from the consolidation ofTFCF . New release titles in the current year included Frozen II, Star Wars: The Rise Of Skywalker, The Lion King and Toy Story 4, whereas the prior year included Avengers: Endgame, Incredibles 2,Captain Marvel , Ant-Man And The Wasp, Ralph Breaks The Internet, Avengers: Infinity War, Bohemian Rhapsody and Aladdin. The decrease in average net effective pricing was primarily due to a lower mix of new release titles. Higher TV/SVOD distribution and other revenue was due to increases of 21% from TV/SVOD distribution and 14% from the consolidation ofTFCF , partially offset by a decrease of 8% from stage plays reflecting the impact of theater closures in response to COVID-19. The increase in TV/SVOD distribution was due to sales of content to Disney+, partially offset by lower sales to third parties in the pay and free television windows. Costs and Expenses Operating expenses include amortization of production, participation and residual costs, which decreased$119 million , from$3,762 million to$3,643 million , primarily due to lower theatrical distribution and home entertainment revenue, partially offset by higher TV/SVOD distribution revenue and the consolidation ofTFCF . Operating expenses also include cost of goods sold and distribution costs, which decreased$449 million , from$1,425 million to$976 million . Lower cost of goods sold and distribution costs were primarily due to decreases in theatrical and stage play distribution costs due to fewer theatrical releases and stage play performances, partially offset by the consolidation ofTFCF . Selling, general, administrative and other costs decreased$750 million from$3,119 million to$2,369 million due to lower theatrical and home entertainment marketing costs, partially offset by the consolidation ofTFCF . The increase in depreciation and amortization was due to the consolidation ofTFCF . Segment Operating Income Segment operating income decreased 7%, or$185 million to$2,501 million due to lower theatrical and stage play results, partially offset by an increase in TV/SVOD distribution results. Items Excluded from Segment Operating Income Related toStudio Entertainment The following table presents supplemental information for items related to theStudio Entertainment segment that are excluded from segment operating income: Year Ended % Change October 3, September 28, Better (in millions) 2020 2019 (Worse) Amortization ofTFCF intangible assets and fair value step-up on film and television costs(1)$ (291) $ (206) (41) % Restructuring and impairment charges (114) (219) 48 %
(1)In the current year, amortization of step-up on film and television costs was
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Direct-to-Consumer & International
Operating results for the Direct-to-Consumer & International segment are as
follows:
Year Ended % Change
Better
(in millions) October 3, 2020 September 28, 2019 (Worse)
Revenues
Subscription fees $ 7,645 $ 2,115 >100 %
Affiliate fees 3,673 2,768 33 %
Advertising 4,477 3,542 26 %
TV/SVOD distribution and other 1,172 961 22 %
Total revenues 16,967 9,386 81 %
Operating expenses (15,072) (8,540) (76) %
Selling, general, administrative and other (4,201) (2,116) (99) %
Depreciation and amortization (460) (325) (42) %
Equity in the loss of investees (40) (240) 83 %
Operating Loss $ (2,806) $ (1,835) (53) %
Revenues
The increase in subscription fees was due to the launch of Disney+ starting in
November 2019 , the consolidation of Hulu, subscriber growth at Hulu, and to a
lesser extent, increased subscribers at ESPN+.
The increase in affiliate fees was due to an increase of 44% from the
consolidation of TFCF , partially offset by decreases of 9% from fewer
subscribers driven by the expiration of certain carriage agreements and channel
closures, both primarily in Europe , and 3% from an unfavorable foreign exchange
impact.
The increase in advertising revenues was due to an increase of 30% from higher
addressable advertising sales, partially offset by a decrease of 4% from our
International Channels. Higher addressable advertising sales were due to the
consolidation of Hulu and, to a lesser extent, TFCF and higher impressions,
partially offset by lower rates. The increase in impressions was due to growth
at Hulu, partially offset by the timing of cricket programming and the impact of
lower impressions at our other digital platforms. The decrease in rates was
primarily due to lower rates at Hulu. The decrease in advertising revenues at
our International Channels was driven by lower impressions, partially offset by
the consolidation of TFCF . The decrease in impressions reflected the impact of
COVID-19, including a shift in the timing of Indian Premier League (IPL) cricket
matches to fiscal 2021, and the comparison to the prior-year broadcast of
International Cricket Council World Cup (ICC WC) matches. The ICC WC is held
every four years.
Growth in TV/SVOD distribution and other revenue was due to higher Ultimate
Fighting Championship (UFC) pay-per-view fees, the consolidation of TFCF and, to
a lesser extent, Hulu and Disney+ Premier Access revenues from Mulan. These
increases were partially offset by the comparison to the sub-licensing of ICC WC
rights to third-party broadcasters in the prior year and lower revenue from
streaming technology services.
The following table presents the number of paid subscribers(1) (in millions) for
Disney+, ESPN+ and Hulu as of:
% Change
October 3, September 28, Better
2020 2019 (Worse)
Disney+(3) 73.7 - nm
ESPN+ 10.3 3.5 >100 %
Hulu
SVOD Only 32.5 25.6 27 %
Live TV + SVOD 4.1 2.9 41 %
Total Hulu 36.6 28.5 28 %
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TABL E OF CONTENTS
The following table presents the average monthly revenue per paid subscriber(2)
for the fiscal year ended:
% Change
October 3, September 28, Better
2020 2019 (Worse)
Disney+(3) (4) $ 4.80 $ - nm
ESPN+(5) $ 4.35 $ 5.12 (15) %
Hulu(6)
SVOD Only $ 12.24 $ 13.09 (6) %
Live TV + SVOD $ 67.24 $ 55.98 20 %
(1)A subscriber for which we recognized subscription revenue. A subscriber
ceases to be a paid subscriber as of their effective cancellation date or as a
result of a failed payment method. A subscription bundle is considered a paid
subscriber for each service included in the bundle. Subscribers include those
who receive the service through wholesale arrangements in which we receive a fee
for the distribution of Disney+ to each subscriber to an existing content
distribution tier. When we aggregate the total number of paid subscribers across
our DTC services, whether acquired individually, through a wholesale arrangement
or via the bundle, we refer to them as paid subscriptions.
(2)Revenue per paid subscriber is calculated based upon 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 for the fiscal year ended October 3, 2020 is
calculated using a daily average of paid subscribers for the period beginning at
launch and ending on the last day of the period. The average revenue per
subscriber is net of discounts provided to both wholesale and bundled
subscribers, annual subscriptions and other limited term promotional offers. The
bundled discount is allocated to each service based on the relative retail price
of each service on a standalone basis. In general, wholesale arrangements have a
lower average monthly revenue per paid subscriber than subscribers that we
acquire directly or through third party platforms like Apple.
(3)Disney+ Hotstar launched on April 3, 2020 in India (as a conversion of the
preexisting Hotstar service) and on September 5, 2020 in Indonesia , and is
included in the number of paid subscribers and average monthly revenue per paid
subscriber. The average monthly revenue per paid subscriber for Disney+ Hotstar
in India and Indonesia is significantly lower than the average monthly revenue
per paid subscriber in North America and Europe .
(4)Excludes Disney+ Premier Access revenue.
(5)Excludes Pay-Per-View revenue.
(6)Hulu's average monthly revenue per paid subscriber for the period September
30, 2018 to March 19, 2019 is not reflected in the Company's prior-year
revenues, but is included in the average monthly revenue per paid subscriber
reported in the table. Includes advertising revenue (including amounts generated
during free trial subscription periods).
The average monthly revenue per paid subscriber for ESPN+ decreased from $5.12
to $4.35 due to the introduction of a bundled subscription package offering of
Disney+, ESPN+ and Hulu beginning in November 2019 and lower per-subscriber
advertising revenue, partially offset by an increase in retail pricing in August
2020 . The bundled offering has a lower retail price than the aggregate
standalone retail prices of the individual services.
The average monthly revenue per paid subscriber for the Hulu SVOD Only service
decreased from $13.09 to $12.24 driven by a decrease in retail pricing, lower
per-subscriber advertising revenue and the introduction of the bundled offering,
partially offset by a lower mix of promotional and wholesale subscribers. The
average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service
increased from $55.98 to $67.24 due to an increase in retail pricing in December
2019 and higher per-subscriber Live TV advertising and premium add-on revenue,
partially offset by the introduction of the bundled offering.
Costs and Expenses
Operating expenses include a $5,381 million increase in programming and
production costs, from $6,925 million to $12,306 million , and a $1,151 million
increase in other operating expenses, from $1,615 million to $2,766 million .
Programming and production costs include the costs of content provided by other
segments. The increase in programming and production costs was due to the
consolidation of Hulu and TFCF , the launch of Disney+ and higher costs at Hulu,
partially offset by lower costs for sports programming. The increase in costs at
Hulu was driven by higher subscriber-based fees for programming on the Live TV
service. Lower costs for sports programming were primarily due to the comparison
to the ICC WC in the prior year and the shift in the timing of IPL, partially
offset by higher costs for UFC programming rights. Other operating expenses,
which include technical support and distribution costs, increased due to the
launch of Disney+ and the consolidation of Hulu and TFCF .
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Selling, general, administrative and other costs increased $2,085 million , from
$2,116 million to $4,201 million , due to the launch of Disney+ and the
consolidation of Hulu and TFCF .
Depreciation and amortization increased $135 million , from $325 million to $460
million , due to the consolidation of Hulu and TFCF and the launch of Disney+.
Equity in the Loss of Investees
Loss from equity investees in the prior year of $240 million improved by $200
million to a loss of $40 million , due to the consolidation of Hulu. In the
current year, Hulu's results are reported in revenues and expenses. In the prior
year, prior to March 20, 2019 , the Company recognized its ownership share of
Hulu's results in equity in the loss of investees.
Segment Operating Loss
Segment operating loss increased from $1,835 million to $2,806 million , due to
costs associated with the launch of Disney+, the consolidation of Hulu and a
decrease at our International Channels. These decreases were partially offset by
the consolidation of TFCF and improved results at ESPN+ and Hulu.
The following table presents supplemental revenue and operating income (loss)
detail for the Direct-to-Consumer & International segment:
Year Ended % Change
October 3, September 28, Better
(in millions) 2020 2019 (Worse)
Supplemental revenue detail
Direct-to-Consumer services $ 10,444 $ 3,347 >100 %
International Channels 5,413 4,727 15 %
Other(1) 1,110 1,312 (15) %
$ 16,967 $ 9,386 81 %Supplemental operating income (loss) detail
Direct-to-Consumer services (3,294) (1,849) (78) %
International Channels 872 649 34 %
Other(1) (344) (395) 13 %
Equity in the loss of investees (40) (240) 83 %
$ (2,806) $ (1,835) (53) %
(1)Primarily addressable ad sales related to domestic Media Networks branded
properties (addressable ad sales related to our Direct-to-Consumer services,
principally Hulu, are reflected in "Direct-to-Consumer services")
Items Excluded from Segment Operating Loss Related to Direct-to-Consumer &
International
The following table presents supplemental information for items related to the
Direct-to-Consumer & International segment that are excluded from segment
operating loss:
Year Ended % Change
October 3, September 28, Better
(in millions) 2020 2019 (Worse)
Amortization of TFCF and Hulu intangible assets
and fair value step-up on film and television
costs(1) $ (1,242) $ (701) (77) %
Hulu Gain - 4,822 (100) %
Restructuring and impairment charges(2) (5,229) (456) >(100) %
Impairment of equity investments - (354) 100 %
(1)In the current year, amortization of intangible assets was $1,196 million ,
amortization of intangible assets related to TFCF equity investees was $26
million and amortization of step-up on film and television costs was $20
million . In the prior year, amortization of intangible assets was $687 million
and amortization of intangible assets related to TFCF equity investees was $15
million .
(2)The current year includes goodwill and intangible asset impairments at our
International Channels business ($4,953 million ).
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Eliminations
Intersegment content transactions are as follows:
Year Ended % Change
October 3, September 28, Better
(in millions) 2020 2019 (Worse)
Revenues
Studio Entertainment :
Content transactions with Media Networks $ (188) $ (106) (77) %
Content transactions with Direct-to-Consumer &
International (2,108) (272) >(100) %
Media Networks:
Content transactions with Direct-to-Consumer &
International (3,814) (1,580) >(100) %
Total $ (6,110) $ (1,958) >(100) %
Operating income
Studio Entertainment :
Content transactions with Media Networks $ 3 $ (19) nm
Content transactions with Direct-to-Consumer &
International (158) (80) (98) %
Media Networks:
Content transactions with Direct-to-Consumer &
International (373) (142) >(100) %
Total $ (528) $ (241) >(100) %
Revenues
The increase in revenue eliminations was due to sales of Media Networks content
to Hulu and Disney+ and sales of Studio Entertainment content to Disney+. The
increase in Media Networks sales to Hulu was due to higher sales of original
titles, driven by Little Fires Everywhere and Mrs. America , and library titles.
Higher Media Networks sales also included an increase in affiliate fees received
from Hulu for networks in the Hulu Live TV + SVOD service. Media Networks sales
to Disney+ were due to sales of library series, including The Simpsons and
Disney Channel titles, and original series. Studio Entertainment content sold to
Disney+ included original titles Noelle, Lady and the Tramp, and Artemis Fowl
and theatrically released titles Frozen II, The Lion King, Toy Story 4 and Star
Wars: The Rise of Skywalker.
Operating Income
The increase in the impact from eliminations was due to sales of Media Networks
content to Hulu and Disney+ and sales of Studio Entertainment content to
Disney+.
CORPORATE AND UNALLOCATED SHARED EXPENSES
Corporate and unallocated shared expenses are as follows:
% Change
(in millions) 2020 2019 Better (Worse)
Corporate and unallocated shared expenses
17%
The decrease in corporate and unallocated shared expenses was due to lower costs
related to TFCF and lower compensation costs, partially offset by the absence of
a benefit from amortization of a deferred gain on a sale leaseback due to the
adoption of new lease accounting guidance. The decrease in costs related to TFCF
was due to lower acquisition and integration costs, partially offset by the
consolidation of TFCF .
RESTRUCTURING ACTIVITIES
See Note 19 to the Consolidated Financial Statements for information regarding
the Company's restructuring activities in connection with the acquisition of
TFCF and from a workforce reduction plan, primarily at the Parks, Experiences
and Products segment.
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TABL E OF CONTENTS
LIQUIDITY AND CAPITAL RESOURCES
The change in cash, cash equivalents and restricted cash is as follows:
(in millions) 2020 2019
Cash provided by operations - continuing operations $ 7,616 $ 5,984
Cash used in investing activities - continuing operations (3,850) (15,096)
Cash provided by (used in) financing activities - continuing operations
8,480 (464)
Cash provided by operations - discontinued operations 2 622
Cash provided by investing activities - discontinued operations
213 10,978
Cash used in financing activities - discontinued operations - (626)
Impact of exchange rates on cash, cash equivalents and restricted cash
38 (98)
Change in cash, cash equivalents and restricted cash $ 12,499 $ 1,300
Operating Activities
Continuing operations
Cash provided by operating activities for fiscal 2020 increased 27% or $1.6
billion to $7.6 billion , due to lower tax payments, driven by the payment of
approximately $7.6 billion of tax obligations that arose from the spin-off of
Fox Corporation in connection with the TFCF acquisition and the sale of the RSNs
acquired with TFCF in the prior year, and higher current year operating cash
flow at Media Networks. These increases were partially offset by lower operating
cash flow at Parks, Experiences and Products and Direct-to-Consumer &
International. The increase at Media Networks was due to higher operating cash
receipts driven by an increase in revenue. Lower operating cash flows at Parks,
Experiences and Products were due to lower cash receipts driven by decreased
revenues, partially offset by lower cash disbursements. Lower cash disbursements
were due to lower operating expenses. The decrease at Direct-to-Consumer &
International was due to higher film and television spending and an increase in
operating cash disbursements due to higher operating expenses, partially offset
by higher operating cash receipts driven by revenues from the consolidation of
TFCF and Hulu and the launch of Disney+.
Depreciation expense is as follows:
(in millions) 2020 2019
Media Networks
Cable Networks $ 120 $ 107
Broadcasting 83 84
Total Media Networks 203 191
Parks, Experiences and Products
Domestic 1,634 1,474
International 694 724
Total Parks, Experiences and Products 2,328 2,198
Studio Entertainment 87 74
Direct-to-Consumer & International 348 214
Corporate 174 167
Total depreciation expense $ 3,140 $ 2,844
Amortization of intangible assets is as follows:
(in millions) 2020 2019
Media Networks $ 4 $ -
Parks, Experiences and Products 109 108
Studio Entertainment 59 61
Direct-to-Consumer & International 112 111
TFCF and Hulu 1,921 1,043
Total amortization of intangible assets
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Produced and licensed content costs
The Company's Studio Entertainment , Media Networks and Direct-to-Consumer &
International segments incur costs to license and produce film and television
programming. Film and television production costs include all internally
produced content such as live-action and animated films, animated
direct-to-video programming, television series, television specials, theatrical
stage plays or other similar product. Programming costs include film or
television product licensed for a specific period from third parties for airing
on the Company's broadcast and cable networks, television stations and DTC
services. Programming assets are generally recorded when the programming becomes
available to us with a corresponding increase in programming liabilities.
Accordingly, we analyze our programming assets net of the related liability.
The Company's film and television production and programming activity for fiscal
2020 and 2019 are as follows:
(in millions) 2020 2019
Beginning balances:
Production and programming assets $ 27,407 $ 9,202
Programming liabilities (4,061) (1,178)
23,346 8,024
Spending:
Television program licenses and rights 12,077 10,517
Film and television production 8,104 7,104
20,181 17,621
Amortization:
Television program licenses and rights (11,241) (10,608)
Film and television production (9,337) (6,471)
(20,578) (17,079)
Change in film and television production and
programming costs (397) 542
Film and television production costs from the TFCF
acquisition and consolidation of Hulu, net of programming
liabilities assumed - 14,769
Other non-cash activity 145 11
Ending balances:
Production and programming assets 27,193 27,407
Programming liabilities (4,099) (4,061)
$ 23,094 $ 23,346
Discontinued operations
Cash provided by operating activities for discontinued operations in fiscal 2019
reflected the operations of the RSNs.
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Investing Activities
Continuing operations
Investing activities consist principally of investments in parks, resorts and
other property and acquisition and divestiture activity. The Company's
investments in parks, resorts and other property for fiscal 2020 and 2019 are as
follows:
(in millions) 2020 2019
Media Networks
Cable Networks $ 61 $ 93
Broadcasting 51 81
Parks, Experiences and Products
Domestic 2,145 3,294
International 759 852
Studio Entertainment 77 88
Direct-to-Consumer & International 594 258
Corporate 335 210
$ 4,022 $ 4,876
Capital expenditures at Media Networks primarily reflect investments in
facilities and equipment for expanding and upgrading broadcast centers,
production facilities and television station facilities.
Capital expenditures for the Parks, Experiences and Products segment are
principally for theme park and resort expansion, new attractions, cruise ships,
capital improvements and systems infrastructure. The decrease in capital
expenditures at our domestic parks and resorts in fiscal 2020 compared to fiscal
2019 was primarily due to lower spend on Star Wars: Galaxy's Edge at both the
Walt Disney World and Disneyland resorts. Capital spending in fiscal 2020 also
reflected the suspension of certain capital projects as a result of COVID-19.
Capital expenditures at Direct-to-Consumer & International primarily reflect
investments in technology. The increase in fiscal 2020 compared to fiscal 2019
was due to spending on technology to support our streaming services.
Capital expenditures at Corporate primarily reflect investments in facilities,
information technology infrastructure and equipment. The increase in fiscal 2020
compared to fiscal 2019 was due to higher spending on facilities.
The Company currently expects its fiscal 2021 capital expenditures will be
approximately $0.6 billion higher than fiscal 2020 capital expenditures of $4.0
billion due to increased spending on facilities at Corporate and spending on
technology at Direct-to-Consumer & International, partially offset by lower
investments at our domestic parks and resorts, in part reflecting a reduction in
spending in response to COVID-19.
Other Investing Activities
The fiscal 2019 spending of $9.9 billion on acquisitions reflects $35.7 billion
of cash paid to acquire TFCF less $25.7 billion of cash acquired in the
transaction (See Note 4 to the Consolidated Financial Statements). Cash provided
by other investing activities of $172 million in fiscal 2020 reflects the
proceeds from the sale of an investment while cash used in other investing
activities of $319 million in fiscal 2019 reflects contributions of $347 million
to Hulu prior to the consolidation of Hulu.
Discontinued operations
Cash provided by investing activities from discontinued operations in fiscal
2019 reflects the sale of the RSNs.
Financing Activities
Continuing operations
Cash provided by financing activities was $8.5 billion in fiscal 2020 compared
to cash used in financing activities of $0.5 billion in fiscal 2019. Cash
provided by financing activities in fiscal 2020 was due to borrowings, partially
offset by dividend payments and settlement of acquisition related obligations.
The increase in cash provided by financing activities in fiscal 2020 compared to
fiscal 2019 was from higher cash proceeds from net borrowings ($11.2 billion in
fiscal 2020 compared to $3.7 billion in fiscal 2019).
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Discontinued operations
Cash used in financing activities by discontinued operations in fiscal 2019 was
due to redemption of noncontrolling interests of the RSNs.
Borrowings activities and other
During the year ended October 3, 2020 , the Company's borrowing activity was as
follows:
September 28, Other
(in millions) 2019 Borrowings Payments Activity October 3, 2020
Commercial paper with original
maturities less than three
months(1) $ 1,934 $ - $ (1,961) $ 27 $ -
Commercial paper with original
maturities greater than three
months 3,408 11,500 (12,893) 8 2,023
U.S. dollar denominated notes(2) 39,424 16,968 (3,405) (251) 52,736
Asia Theme Parks borrowings 1,114 175 (88) 102 1,303
Foreign currency denominated debt
and other(3) 1,106 977 (40) 523 2,566
$ 46,986 $ 29,620 $ (18,387) $ 409 $ 58,628
(1)Borrowings and reductions of borrowings are reported net.
(2)The other activity is primarily due to the amortization of purchase price
adjustments on debt assumed in the TFCF acquisition and debt issuance fees.
(3)The other activity is due to market value adjustments for debt with
qualifying hedges.
See Note 9 to the Consolidated Financial Statements for information regarding
the Company's bank facilities. The Company may use commercial paper borrowings
up to the amount of its unused $12.25 billion bank facilities maturing in March
2021 , March 2023 and March 2025 , unused availability under the $5.0 billion bank
facility maturing in April 2021 , incremental term debt issuances and operating
cash flows, to retire or refinance other borrowings before or as they come due.
See Note 12 to the Consolidated Financial Statements for a summary of the
Company's dividends in fiscal 2020 and 2019. The Company did not repurchase any
of its shares in fiscal 2020 or 2019.
The Company's operating cash flow and access to the capital markets can be
impacted by factors outside of its control, including COVID-19, which has
affected our segment operations in a number of ways, and as a result, had an
adverse impact on the Company's operating cash flows. We have taken a number of
measures to mitigate the impact on the Company's financial position. We have
significantly increased the Company's cash balances through the issuance of
senior notes in March and May 2020 . In addition, we entered into an additional
$5.0 billion credit facility in April 2020 , bringing the total capacity of our
bank facilities to $17.25 billion . See Significant Developments for the impact
COVID-19 had on our operations and mitigating measures.
Despite the impact of COVID-19, we believe that the Company's financial
condition remains strong and that its cash balances, other liquid assets,
operating cash flows, access to debt and equity capital markets and borrowing
capacity under current bank facilities, taken together, provide adequate
resources to fund ongoing operating requirements and upcoming debt maturities as
well as future capital expenditures related to the expansion of existing
businesses and development of new projects, although certain of these activities
have been scaled back or suspended in light of COVID-19. In addition to measures
the Company has already taken in response to COVID-19, there are a number of
additional mitigating actions the Company may take in the future such as not
declaring dividends (which the Board of Directors did not declare with respect
to fiscal 2020 operations); reducing, or not making certain payments, such as
some contributions to our pension and postretirement medical plans; raising
additional financing; further suspending capital spending; reducing film and
television content investments; or implementing additional 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 October 3, 2020 ,
Moody's Investors Service's long- and short-term debt ratings for the Company
were A2 and P-1, respectively, Standard and Poor's long- and short-term debt
ratings for the Company were A- and A-2, respectively, and Fitch's long- and
short-term debt ratings for the Company were A- and F2, respectively. In
addition, Fitch has placed the Company's long-term debt rating on Negative
Outlook. On November 18, 2020 , Standard and Poor's lowered the Company's
long-term rating to BBB+ and placed the Company's long-term ratings on Negative
Outlook. The Company's bank facilities contain only one financial covenant,
relating to interest coverage, which the Company met on October 3, 2020 , 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.
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The duration of business closures and other impacts related to COVID-19, and the
corresponding duration of the impacts to our operating cash flows, are subject
to substantial uncertainty. These impacts to our operating cash flows may
require us to rely more heavily on external funding sources, such as debt and
other types of financing.
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 October 3, 2020
was as follows:
TWDC Legacy Disney
(in millions) Par Value Carrying Value Par Value Carrying Value
Registered debt with unconditional
guarantee $ 38,646 $ 41,077 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, theObligor 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 theObligor Group , whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities have a direct claim only against theObligor Group . Set forth below are summarized financial information for theObligor 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 ofGuaranteed Securities " and is not intended to present the financial position or results of operations of theObligor Group in accordance withU.S. GAAP. Fiscal Year Ended October 3, Results of operations (in millions) 2020 Revenues $ - Costs and expenses - Net income (loss) from continuing operations
(1,158)
Net income (loss)
(1,158)
Net income (loss) attributable to TWDC shareholders (1,158)
55-------------------------------------------------------------------------------- TABL E OF CONTENTS Balance Sheet (in millions) October 3, 2020 September 28, 2019 Current assets$ 12,899 $ 1,145 Noncurrent assets 2,076 1,398 Current liabilities 6,155 9,405 Noncurrent liabilities (excluding intercompany to non-Guarantors) 57,809 41,728 Intercompany payables to non-Guarantors 146,748 143,574 CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTSThe Company has various contractual obligations, which are recorded as liabilities in our consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. For example, the Company is contractually committed to acquire broadcast programming and make certain minimum lease payments for the use of property under operating lease agreements. The following table summarizes our significant contractual obligations and commitments on an undiscounted basis atOctober 3, 2020 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding borrowings based on their contractual maturities. Additional details regarding these obligations are provided in the Notes to the Consolidated Financial Statements, as referenced in the table: Payments Due by Period Less than 1-3 4-5 More than (in millions) Total 1 Year Years Years 5 Years Borrowings (Note 9)(1)$ 87,273 $ 7,718 $ 8,743 $ 10,064 $ 60,748 Operating lease commitments (Note 16) 4,211 840 1,129 677 1,565 Finance lease obligations (Note 16) 720 56 107 75 482 Sports programming commitments (Note 15) 40,578 9,492 12,649 9,271 9,166 Broadcast programming commitments (Note 15) 5,800 2,551 2,013 759 477 Total programming commitments 46,378 12,043 14,662 10,030 9,643 Other(2) 12,390 3,051 3,279 2,323 3,737 Total contractual obligations(3)$ 150,972 $
23,708 $ 27,920 $ 23,169 $
76,175
(1)Excludes market value adjustments, which increased borrowings by$509 million . Includes interest payments based on contractual terms for fixed rate debt and on current interest rates for variable rate debt. In 2023, the Company has the ability to call a debt instrument prior to its scheduled maturity, which if exercised by the Company would reduce future interest payments by$1.0 billion . (2)Primarily contracts for the construction of three new cruise ships, creative talent and employment agreements and unrecognized tax benefits. Creative talent and employment agreements include obligations to actors, producers, sports, television and radio personalities and executives. (3)Contractual commitments include the following: Liabilities recorded on the balance sheet$ 65,524 Commitments not recorded on the balance sheet 85,448$ 150,972 The Company also has obligations with respect to its pension and postretirement medical benefit plans. See Note 11 to the Consolidated Financial Statements. Contingent Commitments and Contractual Guarantees See Notes 4, 7 and 15 to the Consolidated Financial Statements for information regarding the Company's contingent commitments and contractual guarantees. Legal and Tax Matters As disclosed in Notes 10 and 15 to the Consolidated Financial Statements, the Company has exposure for certain tax and legal matters. 56 -------------------------------------------------------------------------------- TABL E OF CONTENTS CRITICAL ACCOUNTING POLICIES AND ESTIMATES We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements. Produced and Acquired/Licensed Content Costs At the beginning of fiscal 2020, the Company adopted on a prospective basis, newFinancial Accounting Standards Board (FASB) guidance that updates the accounting for film and television content costs. Under that new guidance, we amortize and test for impairment capitalized film and television production costs based on whether the content is predominantly monetized individually or as a group. See Note 8 to the 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, including intersegment content transactions, and markets 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 factors affecting estimates of Ultimate Revenues are program ratings of the content on our licensees' platforms. Program ratings, which are an indication of market acceptance, directly affect the program's ability to generate advertising and subscriber revenues and are correlated with the license fees we can charge for the content in subsequent windows and for subsequent seasons. Ultimate Revenues are reassessed each reporting period and the impact of any changes on amortization of production cost is accounted for as if the change occurred at the beginning of the current fiscal year. If our estimate of Ultimate Revenues decreases, amortization of costs may be accelerated or result in an impairment. Conversely, if our estimate of Ultimate Revenues increases, cost amortization may be slowed. Produced content costs that are part of a group and acquired/licensed content costs are amortized based on projected usage typically resulting in an accelerated or straight-line amortization pattern. The determination of projected usage requires judgement and is reviewed periodically for changes. If projected usage changes we may need to accelerate or slow the recognition of amortization expense. The amortization of multi-year sports rights is based on our projections of revenues over the contract period, which include advertising revenue and an allocation of affiliate revenue (relative value). If the annual contractual payments related to each season approximate each season's estimated relative value, we expense the related contractual payments during the applicable season. If estimated relative values by year were to change significantly, amortization of our sports rights costs may be accelerated or slowed. Revenue Recognition The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. Refer to Note 2 to the Consolidated Financial Statements for our revenue recognition policies. Pension and Postretirement Medical Plan Actuarial AssumptionsThe Company's pension and postretirement medical benefit obligations and related costs are calculated using a number of actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement, which we evaluate annually. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase. The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension and postretirement medical expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. We reduced our discount rate to 2.82% at the end of fiscal 2020 from 3.22% at the end of fiscal 2019 to reflect market interest rate conditions at our fiscal 2020 year-end measurement date. The Company's discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans' liability cash flows to the yield curves. A one percentage point decrease in the assumed discount rate would increase total benefit expense for fiscal 2021 by approximately$351 million and would increase the projected benefit obligation atOctober 3, 2020 by approximately$4.0 billion . A one 57 -------------------------------------------------------------------------------- TABL E OF CONTENTS percentage point increase in the assumed discount rate would decrease total benefit expense and the projected benefit obligation by approximately$303 million and$3.4 billion , respectively. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Our expected return on plan assets is 7.00%. A lower expected rate of return on plan assets will increase pension and postretirement medical expense. A one percentage point change in the long-term asset return assumption would impact fiscal 2021 annual expense by approximately$164 million .Goodwill , Other Intangible Assets, Long-Lived Assets and InvestmentsThe Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis.Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. 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. In fiscal 2020, the Company performed a qualitative assessment of goodwill for impairment. 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 projected cash flows of our reporting units reflect intersegment revenues and expenses for the sale and use of intellectual property. 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. 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 consideration of 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 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. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment is 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. 58 -------------------------------------------------------------------------------- TABL E OF CONTENTS The Company has investments in equity securities. For equity securities that do not have a readily determinable fair value, we consider forecasted financial performance of the investee companies, as well as volatility inherit in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded. The Company recorded non-cash impairment charges of$5.2 billion and$0.6 billion in fiscal 2020 and 2019, respectively. The fiscal 2020 impairment charges primarily related to impairments of MVPD agreement intangibles assets ($1.9 billion ) and goodwill ($3.1 billion ) at the International Channels' business as discussed below under "Impacts of COVID-19 on Accounting Policies and Estimates." The fiscal 2019 charges primarily related to impairments of investments accounted for under the equity method of accounting recorded in "Equity in the income (loss) of investees" in the Consolidated Statements of Operations. Allowance for Credit Losses We evaluate our allowance for credit losses and estimate collectability of accounts receivable based on our analysis of historical bad debt experience in conjunction with our assessment of the financial condition of individual companies with which we do business. In times of domestic or global economic turmoil, including COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, costs and expenses may increase in future periods, and if it is too high, costs and expenses may decrease in future periods. 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 15 to the Consolidated Financial Statements for more detailed information on litigation exposure. Income Tax As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in proposed assessments. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized by the Company may differ from those recognized in our future financial statements based on a number of factors, including the Company's decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and the Company's success in supporting its filing positions with taxing authorities. Impacts of COVID-19 on Accounting Policies and Estimates In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. As COVID-19 continues to develop, we may make changes to these estimates and judgments over time, which could result in meaningful impacts to our financial statements in future periods. A more detailed discussion of the impact of COVID-19 on the Accounting Policies and Estimates follows. Produced and Acquired/Licensed Content Costs Certain of our completed or in progress film and television productions have had their initial release dates delayed or canceled. The duration of the delay, market conditions when we release the content, or a change in our release strategy (e.g. bypassing certain distribution windows) could have an impact on Ultimate Revenues, which may accelerate amortization or result in an impairment of capitalized film and television production costs. Given the ongoing uncertainty around the resumption and continuation of live sporting events, the amount and timing of revenues derived from the broadcast of these events may differ from the projections of revenues that support our amortization pattern of the rights costs we pay for these events. Such changes in revenues could result in an acceleration or slowing of the amortization of our sports rights costs. 59 -------------------------------------------------------------------------------- TABL E OF CONTENTS Revenue Recognition Certain of our affiliate contracts contain commitments with respect to the content to be aired on our television networks (e.g. live sports or original content). If there are delays or cancellations of live sporting events or disruptions to film and television content production activities, we may need to assess the impact on our contractual obligations and adjust the revenue that we recognize related to these contracts.Goodwill , Other Intangible Assets, Long-Lived Assets and Investments Given the ongoing impacts of COVID-19 across our businesses, the projected cash flows that we use to assess the fair value of our businesses and assets for purposes of impairment testing are subject to greater uncertainty than normal. If in the future we reduce our estimate of cash flow projections, we may need to impair some of these assets. Our International Channels reporting unit, which is part of the Direct-to-Consumer & International segment, comprises the Company's international television networks. Our international television networks primarily derive revenues from affiliate fees charged to MVPDs for the right to deliver our programming under multi-year licensing agreements and the sales of advertising time/space on the networks. A majority of the operations in this reporting unit were acquired in theTFCF acquisition and therefore the fair value of these businesses approximated the carrying value at the date of the acquisition ofTFCF . The International Channels business has been negatively impacted by the COVID-19 pandemic resulting in decreased viewership and lower advertising revenue related to the availability of content, including the deferral or cancellation of certain live sporting events. The Company's increased focus on DTC distribution in international markets is expected to negatively impact the International Channels business as we shift the primary means of monetizing our film and television content from licensing of linear channels to use on our DTC services because the International Channels reporting unit valuation does not include the value derived from this shift, which is reflected in other reporting units. In addition, the industry shift to DTC, including by us and many of our distributors, who are pursuing their own DTC strategies, has changed the competitive dynamics for the International Channels business and resulted in unfavorable affiliation renewal terms for certain of our distribution agreements. In the third quarter of fiscal 2020, we assessed the International Channels' long-lived assets and goodwill for impairment and recorded impairments of$1.9 billion primarily related to MVPD agreement intangible assets and$3.1 billion related to goodwill. See Note 19 to the Consolidated Financial Statements for discussion of the impairment tests performed in the third quarter of fiscal 2020. Risk Management Contracts The Company employs a variety of financial instruments (derivatives) including interest rate and cross-currency swap agreements and forward and option contracts to manage its exposure to fluctuations in interest rates, foreign currency exchange rates and commodity prices. Changes to our hedged cash flows from a decrease in projected revenues of the Company or reductions of projected usage of commodities as compared to our projections when we entered into hedges may cause us to recognize gains or losses on our hedging instruments in our income statement prior to when the hedged transaction was projected to occur. New Accounting Pronouncements See Note 20 to the Consolidated Financial Statements for information regarding new accounting pronouncements. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for "forward-looking statements" made by or on behalf of the Company. We may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with theSecurities and Exchange Commission and in reports to our shareholders. Such statements may, for example, express expectations, projections, estimates or future impacts; actions that we may take (or not take); or developments beyond our control, including changes in domestic or global economic conditions. All forward-looking statements are made on the basis of management's views and assumptions regarding future events and business performance as of the time the statements are made and the Company does not undertake any obligation to update its disclosure relating to forward-looking matters. Actual results may differ materially from those expressed or implied. Significant factors affecting these expectations are set forth under Item 1A - Risk Factors of this Report on Form 10-K as well as in this Item 7 - Management's Discussion and Analysis and Item 1 - Business. 60
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