The Walt Disney Company Reports Second Quarter and Six Months Earnings for Fiscal 2019

BURBANK, Calif.–(BUSINESS WIRE)–The Walt Disney Company (NYSE: DIS) today reported quarterly earnings
for its second fiscal quarter ended March 30, 2019. Diluted earnings per
share (EPS) from continuing operations for the quarter increased 81% to
$3.53 from $1.95 in the prior-year quarter. Excluding certain items
affecting comparability(1), EPS for the quarter decreased 13%
to $1.61 from $1.84 in the prior-year quarter. EPS from continuing
operations for the six months ended March 30, 2019 increased to $5.42
from $4.86 in the prior-year period. Excluding certain items affecting
comparability(1), EPS for the six months decreased 8% to
$3.45 from $3.73 in the prior-year period.

“We’re very pleased with our Q2 results and thrilled with the
record-breaking success of Avengers: Endgame, which is now the
second-highest grossing film of all time and will stream exclusively on
Disney+ starting December 11th,” said Robert A. Iger, Chairman and Chief
Executive Officer, The Walt Disney Company. “The positive response to
our direct-to-consumer strategy has been gratifying, and the integration
of the businesses we acquired from 21st Century Fox only increases our
confidence in our ability to leverage decades of iconic storytelling and
the powerful creative engines across the entire company to deliver an
extraordinary value proposition to consumers.”

On March 20, 2019, the Company acquired Twenty-First Century Fox (21CF)
for cash and the issuance of 307 million shares. Results for the current
quarter and six months reflect the consolidation of 11 days of 21CF and
Hulu LLC (Hulu) activities. Revenue for 21CF for the 11 days totaled
$373 million and operating income was $25 million.

The following table summarizes the second quarter and six-month results
for fiscal 2019 and 2018 (in millions, except per share amounts):

  Quarter Ended     Six Months Ended  
March 30,
2019
  March 31,
2018
Change March 30,
2019
  March 31,
2018
Change
Revenues $ 14,922 $ 14,548 3 % $ 30,225 $ 29,899 1 %
Segment operating income (1) $ 3,816 $ 4,237 (10 )% $ 7,471 $ 8,223 (9 )%
Net income from continuing operations (2) $ 5,431 $ 2,937 85 % $ 8,219 $ 7,360 12 %
Diluted EPS from continuing operations (2) $ 3.53 $ 1.95 81 % $ 5.42 $ 4.86 12 %
EPS excluding certain items affecting comparability (1) $ 1.61 $ 1.84 (13 )% $ 3.45 $ 3.73 (8 )%
Cash provided by continuing operations $ 3,915 $ 4,526 (13 )% $ 6,014 $ 6,763 (11 )%
Free cash flow (1) $ 2,720 $ 3,463 (21 )% $ 3,624 $ 4,719 (23 )%
 
(1)     EPS excluding certain items affecting comparability, segment
operating income and free cash flow are non-GAAP financial measures.
See the discussion on pages 9 through 12. The most significant item
affecting comparability for the current quarter and six-months
period was a non-cash gain recognized in connection with the
acquisition of a controlling interest in Hulu (Hulu gain), see page
10. The most significant item affecting comparability for the
prior-year quarter and six-months period was a net benefit from new
U.S. federal income tax legislation (Tax Act).
(2) Reflects amounts attributable to shareholders of The Walt Disney
Company, i.e. after deduction of noncontrolling interests.
 

SEGMENT RESULTS

The following table summarizes the second quarter and six-month segment
operating results for fiscal 2019 and 2018 (in millions). 21CF operating
results for the current period are not included in our historical
segments. Hulu operating results, including the 11 day period of
consolidation and the periods Hulu was accounted for as an equity method
investment, are reported in our Direct-to-Consumer & International
segment:

  Quarter Ended     Six Months Ended  
March 30,
2019
  March 31,
2018
Change March 30,
2019
  March 31,
2018
Change
Revenues:
Media Networks $ 5,525 $ 5,508

% $ 11,446 $ 11,063 3 %
Parks, Experiences and Products 6,169 5,903 5 % 12,993 12,430 5 %
Studio Entertainment 2,134 2,499 (15 )% 3,958 5,008 (21 )%
Direct-to-Consumer & International 955 831 15 % 1,873 1,762 6 %
21CF 373

nm 373 nm
Eliminations (234 ) (193 ) (21 )% (418 ) (364 ) (15 )%
$ 14,922   $ 14,548   3 % $ 30,225   $ 29,899   1 %
Segment operating income/(loss):
Media Networks $ 2,185 $ 2,258 (3 )% $ 3,515 $ 3,501

%
Parks, Experiences and Products 1,506 1,309 15 % 3,658 3,263 12 %
Studio Entertainment 534 874 (39 )% 843 1,699 (50 )%
Direct-to-Consumer & International (393 ) (188 ) >(100)% (529 ) (230 ) >(100)%
21CF 25 nm 25 nm
Eliminations (41 ) (16 ) >(100)% (41 ) (10 ) >(100)%
$ 3,816   $ 4,237   (10 )% $ 7,471   $ 8,223   (9 )%
 

Media Networks

Media Networks revenues for the quarter were comparable to the
prior-year quarter at $5.5 billion and segment operating income
decreased 3% to $2.2 billion.

The following table provides further detail of the Media Networks
results (in millions):

  Quarter Ended     Six Months Ended  
March 30,
2019
  March 31,
2018
Change March 30,
2019
  March 31,
2018
Change
Supplemental revenue detail:  
Cable Networks $ 3,708 $ 3,653 2 % $ 7,694 $ 7,486 3 %
Broadcasting 1,817   1,855   (2 )% 3,752   3,577   5 %
$ 5,525   $ 5,508  

%

$ 11,446   $ 11,063   3 %
Supplemental operating income detail:
Cable Networks $ 1,756 $ 1,728 2 % $ 2,499 $ 2,521 (1 )%
Broadcasting 247 348 (29 )% 655 639 3 %
Equity in the income of investees 182   182  

%

361   341   6 %
$ 2,185   $ 2,258   (3 )% $ 3,515   $ 3,501  

%

 

Cable Networks

Cable Networks revenues for the quarter increased 2% to $3.7 billion and
operating income increased 2% to $1.8 billion. Higher operating income
was due to an increase at ESPN.

The increase at ESPN was due to higher affiliate revenue, partially
offset by an increase in programming and production costs and a decrease
in advertising revenue. Affiliate revenue growth reflected contractual
rate increases, partially offset by a decline in subscribers. The
increase in programming and production costs was due to contractual rate
and production cost increases, partially offset by the benefit of a
shift in the mix of College Football Playoff (CFP) games. Three host
games aired in the current quarter, whereas two semi-final games and one
host game aired in the prior-year quarter. Host games generally have a
lower cost than semi-final games. Lower advertising revenue was due to a
decrease in rates, partially offset by higher impressions. Impressions
reflected an increase in units delivered, partially offset by lower
average viewership. Advertising revenue was negatively impacted by the
shift in mix of CFP games.

Broadcasting

Broadcasting revenues for the quarter decreased 2% to $1.8 billion and
operating income decreased 29% to $247 million. The decrease in
operating income was due to higher programming costs, lower program
sales and a decrease in advertising revenue, partially offset by higher
affiliate revenue from contractual rate increases.

Higher programming costs were due to an increase in production cost
write-downs and in the average cost of network programming. The decrease
in program sales included lower sales of Greys Anatomy
and Criminal Minds, partially offset by higher sales of How to
Get Away with Murder
. Lower advertising revenue reflected lower
average network viewership, partially offset by higher network rates.

Parks, Experiences and Products

Parks, Experiences and Products revenues for the quarter increased 5% to
$6.2 billion and segment operating income increased 15% to $1.5 billion.
Operating income growth for the quarter was due to growth at our
domestic theme parks and resorts, increases at our consumer products
business and cruise line and higher attendance and occupied room nights
at Hong Kong Disneyland Resort. Results included an adverse impact from
a shift in the timing of the Easter holiday. In the current year, the
entire Easter holiday falls in the third quarter, while the second
quarter of the prior year included one week of the Easter holiday.

Operating income growth at our domestic theme parks and resorts was due
to increased guest spending and higher attendance and occupied room
nights at Walt Disney World Resort, partially offset by higher costs.
Guest spending growth was primarily due to increases in average ticket
prices and food, beverage and merchandise spending. Higher costs were
due to labor and other cost inflation and costs for new guest offerings.

The increase at our consumer products business was driven by growth at
our games business, partially offset by a decrease at our merchandise
licensing business. Operating income growth at our games business was
due to the sale of rights to a video game and royalties from the
licensed title Kingdom Hearts III, which was released in the
current quarter. The decrease at our merchandise licensing
business was driven by lower minimum guarantee shortfall recognition due
to the adoption of ASC 606 (see page 5), partially offset by a favorable
foreign currency impact.

The increase in operating income at our cruise line reflected the impact
of the dry-dock of the Disney Magic in the prior-year quarter and
higher average ticket prices.

Results at Shanghai Disney Resort were comparable to the prior-year
quarter as an increase from higher average ticket prices was largely
offset by lower attendance.

Studio Entertainment

Studio Entertainment revenues for the quarter decreased 15% to $2.1
billion and segment operating income decreased 39% to $534 million.
Lower operating income was due to a decrease in theatrical and home
entertainment distribution results, partially offset by an increase in
TV/SVOD distribution.

The decrease in theatrical distribution results was due to the success
of Black Panther and the continued performance of Star Wars:
The Last Jedi
in the prior-year quarter compared to Captain Marvel
and no comparable Star Wars title in the current quarter.

The decrease in home entertainment results was due to lower unit sales
reflecting the performance of Thor: Ragnarok and Star Wars:
The Last Jedi
in the prior-year quarter compared to no comparable
Marvel or Star Wars titles in the current quarter. Other significant
titles included Ralph Breaks the Internet in the current quarter
and Coco in the prior-year quarter.

Growth in TV/SVOD distribution results was due to a benefit from the
adoption of new revenue accounting guidance (see page 5) and increases
in domestic pay television title availabilities and rates, partially
offset by lower free television sales in part in anticipation of the
launch support of Disney+.

Direct-to-Consumer & International

Direct-to-Consumer & International revenues for the quarter increased
15% to $955 million and segment operating loss increased from $188
million to $393 million. The increase in operating loss was due to our
ongoing investment in ESPN+, which was launched in April 2018, costs
associated with the upcoming launch of Disney+, a loss from the
consolidation of Hulu and higher losses from streaming technology
services, partially offset by an increase at our International Channels.

In the current quarter, 100% of Hulu’s operating results from March 20,
2019 to March 30, 2019 are included in the Direct-to-Consumer &
International segment as a result of our acquisition of a controlling
interest in Hulu. Prior to March 20, 2019, the Company’s ownership share
of Hulu results was reported as equity in the loss of investees.

The increase at our International Channels was due to higher affiliate
rates and lower sports programming costs.

ADOPTION OF NEW REVENUE RECOGNITION ACCOUNTING GUIDANCE

At the beginning of fiscal 2019, the Company adopted new revenue
recognition accounting guidance (ASC 606). Results for fiscal 2019 are
presented under ASC 606, while prior period amounts continue to be
reported in accordance with our historical accounting.

The current quarter includes a $27 million unfavorable impact on segment
operating income from the ASC 606 adoption. The most significant impacts
were reductions of $63 million at Parks, Experiences and Products and
$30 million at Media Networks, both of which reflected a change in
timing of revenue recognition on contracts with minimum guarantees.
These impacts were partially offset by a $71 million benefit at Studio
Entertainment, which reflected a change in the timing of revenue
recognition at our TV/SVOD distribution business.

OTHER FINANCIAL INFORMATION

Corporate and Unallocated Shared Expenses

Corporate and unallocated shared expenses increased $85 million to $279
million in the current quarter due to costs incurred in connection with
the 21CF acquisition.

Restructuring Charges

During the quarter, the Company recorded charges totaling $662 million
in connection with the acquisition and integration of 21CF. The charges
consisted of $403 million of severance and related costs and $259
million for equity based compensation, primarily for 21CF awards that
vested upon closing of the acquisition. These charges are recorded in
“Restructuring and impairment charges” in the Condensed Consolidated
Statements of Income.

Other income

Other income was as follows (in millions):

  Quarter Ended  
March 30,
2019
  March 31,
2018
Change
Hulu Gain $ 4,917 $

nm
Insurance recoveries related to legal matters 46 38 21 %
Other   3  

%

Other income $ 4,963   $ 41   >100 %
 

The Company acquired 21CF’s 30% interest in Hulu as part of the 21CF
acquisition. As a result, upon the closing of the 21CF transaction, the
Company owned a 60% interest in Hulu, began consolidating Hulu and
recorded a one-time gain of $4.9 billion as a result of remeasuring our
initial 30% interest in Hulu to fair value.

Interest expense, net

Interest expense, net was as follows (in millions):

  Quarter Ended  
March 30,
2019
  March 31,
2018
Change
Interest expense $ (198 ) $ (172 ) (15 )%
Interest income, investment income and other 55   29   90 %
Interest expense, net $ (143 ) $ (143 )

%

 

The increase in interest expense was due to higher average interest
rates and financing costs related to the 21CF acquisition, partially
offset by higher capitalized interest and market value adjustments on
pay-floating interest rate swap options.

The increase in interest income, investment income and other was due to
the inclusion of a $22 million benefit related to pension and
postretirement plan costs, other than service cost. The Company adopted
new accounting guidance in fiscal 2019 and now presents the elements of
pension and postretirement plan costs other than service cost in
“Interest expense, net.” The comparable net benefit of $6 million in the
prior-year quarter was reported in “Costs and expenses.” The benefit in
the current quarter was due to the expected return on plan assets
exceeding interest expense on plan liabilities and amortization of prior
net actuarial losses.

Equity in the Income (Loss) of Investees, net

Equity in the income (loss) of investees was as follows (in millions):

  Quarter Ended  
March 30,
2019
  March 31,
2018
Change
Amounts included in segment results:
Media Networks $ 182 $ 182

%

Parks, Experiences and Products (7 ) nm
Direct-to-Consumer & International (141 ) (169 ) 17 %
Vice Impairment (353 )   nm
Equity in the income / (loss) of investees, net $ (312 ) $ 6   nm
 

Equity in the income / (loss) of investees decreased $318 million to a
loss of $312 million for the quarter due to an impairment of our
investment in Vice (Vice Impairment), partially offset by an impact from
consolidating Hulu. In the current quarter, 11 days of Hulu’s results
are reported in revenues and expenses, whereas in the prior year, the
Company recognized its share of Hulu’s results as equity in the loss of
investees for the entire quarter.

Income Taxes

The effective income tax rate was as follows:

  Quarter Ended  
March 30,
2019
  March 31,
2018
Change
Effective income tax rate 22.8 % 20.7 % (2.1 ) ppt
 

The increase in the effective income tax rate was due to the comparison
to a $0.1 billion net tax benefit related to the Tax Act that was
recognized in the prior-year quarter and an unfavorable impact in the
current quarter from a change in our full year effective tax rate. The
estimated full year effective rate is used to determine the quarterly
income tax provision and is adjusted each quarter based on information
available at the end of that quarter. These increases were partially
offset by a reduction in the Company’s U.S. statutory federal income tax
rate to 21.0% in fiscal 2019 from 24.5% in fiscal 2018.

Noncontrolling Interests

Net (income) loss attributable to noncontrolling interests was as
follows (in millions):

  Quarter Ended  
March 30,
2019
  March 31,
2018
Change
Net income attributable to noncontrolling interests $ (159 ) $ (178 ) 11 %
 

The decrease in net income attributable to noncontrolling interests was
due to a higher loss from our direct-to-consumer sports business and the
consolidation of a loss at Hulu, partially offset by growth at ESPN and
Hong Kong Disneyland Resort.

Net income attributable to noncontrolling interests is determined on
income after royalties and management fees, financing costs and income
taxes, as applicable.

Cash Flow

Cash provided by operations from continuing operations and free cash
flow were as follows (in millions):

  Six Months Ended  
March 30,
2019
  March 31,
2018
Change
Cash provided by operations – continuing operations $ 6,014 $ 6,763 $ (749 )
Investments in parks, resorts and other property (2,390 ) (2,044 ) (346 )
Free cash flow (1) $ 3,624   $ 4,719   $ (1,095 )
 
(1)     Free cash flow is not a financial measure defined by GAAP. See the
discussion on pages 9 through 12.
 

Cash provided by operations for the first six months of fiscal 2019
decreased by $0.7 billion from $6.8 billion in the prior-year six months
to $6.0 billion in the current six months. The decrease was driven by
lower segment operating results and higher payments for interest and
income taxes.

Capital Expenditures and Depreciation Expense

Investments in parks, resorts and other property were as follows (in
millions):

  Six Months Ended
March 30,
2019
  March 31,
2018
Media Networks
Cable Networks $ 41 $ 63
Broadcasting 55   45
Total Media Networks 96   108
Parks, Experiences and Products
Domestic 1,678 1,419
International 415   310
Total Parks, Experiences and Products 2,093   1,729
Studio Entertainment 39 52
Direct-to-Consumer & International 83 81
21CF 5
Corporate 74   74
Total investments in parks, resorts and other property $ 2,390   $ 2,044
 

Capital expenditures increased by $346 million to $2.4 billion driven by
higher spending on new attractions at our domestic theme parks and
resorts.

Depreciation expense was as follows (in millions):

  Six Months Ended
March 30,
2019
  March 31,
2018
Media Networks
Cable Networks $ 49 $ 57
Broadcasting 40   46

Total Media Networks

89   103
Parks, Experiences and Products
Domestic 719 727
International 368   367
Total Parks, Experiences and Products 1,087   1,094
Studio Entertainment 30 27
Direct-to-Consumer & International 67 49
21CF 4
Corporate 81   91
Total depreciation expense $ 1,358   $ 1,364
 

Non-GAAP Financial Measures

This earnings release presents EPS excluding the impact of certain items
affecting comparability, free cash flow and aggregate segment operating
income, all of which are important financial measures for the Company,
but are not financial measures defined by GAAP.

These measures should be reviewed in conjunction with the relevant GAAP
financial measures and are not presented as alternative measures of EPS,
cash flow or net income as determined in accordance with GAAP. EPS
excluding certain items affecting comparability, free cash flow and
aggregate segment operating income as we have calculated them may not be
comparable to similarly titled measures reported by other companies.

EPS excluding certain items affecting comparability
– The Company uses EPS excluding certain items to evaluate the
performance of the Company’s operations exclusive of certain items
affecting comparability of results from period to period. The Company
believes that information about EPS exclusive of these items is useful
to investors, particularly where the impact of the excluded items is
significant in relation to reported earnings, because the measure allows
for comparability between periods of the operating performance of the
Company’s business and allows investors to evaluate the impact of these
items separately from the impact of the operations of the business.

The following table reconciles reported EPS from continuing operations
to EPS excluding certain items affecting comparability for the quarter.

(in millions except EPS)   Pre-Tax Income/

Loss

  Tax Benefit/

Expense (1)

  After-Tax Income/

Loss (2)

  EPS (3)  

Change vs.
prior year
period

Quarter Ended March 30, 2019:
As reported $ 7,237 $ (1,647 ) $ 5,590 $ 3.53 81 %
Exclude:
Other income, net (4) (4,963 ) 1,142 (3,821 ) (2.48 )
Restructuring and impairment charges (5) 662 (152 ) 510 0.33
Vice Impairment 353 (81 ) 272 0.18
Amortization of 21CF and Hulu intangible assets and fair value
step-up on film and television costs
105   (24 ) 81   0.05  
Excluding certain items affecting comparability $ 3,394   $ (762 ) $ 2,632   $ 1.61   (13 )%
 
Quarter Ended March 31, 2018:
As reported $ 3,928 $ (813 ) $ 3,115 $ 1.95
Exclude:
One-time net benefit from the Tax Act (134 ) (134 ) (0.09 )
Other income, net (4) (41 ) 11 (30 ) (0.02 )
Restructuring and impairment charges 13   (3 ) 10   0.01  
Excluding certain items affecting comparability $ 3,900   $ (939 ) $ 2,961   $ 1.84  
 
(1)     Tax benefit/expense adjustments are determined using the tax rate
applicable to the individual item affecting comparability.
(2) Before noncontrolling interest share.
(3) Net of noncontrolling interest share, where applicable. Total may
not equal the sum of the column due to rounding.
(4) Other income, net for the current quarter includes a non-cash gain
recognized in connection with the acquisition of a controlling
interest in Hulu ($4.9 billion) and insurance recoveries on a legal
matter ($46 million). Other income in the prior-year quarter
includes insurance recoveries on a legal matter ($38 million).
(5) Reflects severance and equity-based compensation charges related to
the acquisition and integration of 21CF ($662 million).
 

The following table reconciles reported EPS from continuing operations
to EPS excluding certain items affecting comparability for the year.

(in millions except EPS)   Pre-Tax Income/

Loss

  Tax Benefit/

Expense (1)

  After-Tax Income/

Loss (2)

  EPS (3)  

Change vs.
prior year
period

Six Months Ended March 30, 2019:
As reported $ 10,668 $ (2,292 ) $ 8,376 $ 5.42 12 %
Exclude:
Other income, net (4) (4,963 ) 1,142 (3,821 ) (2.52 )
One-time net benefit from the Tax Act (34 ) (34 ) (0.02 )
Restructuring and impairment charges (5) 662 (152 ) 510 0.33
Vice Impairment 353 (81 ) 272 0.18
Amortization of 21CF and Hulu intangible assets and fair value
step-up on film and television costs
105   (24 ) 81   0.05  
Excluding certain items affecting comparability $ 6,825   $ (1,441 ) $ 5,384   $ 3.45   (8 )%
 
Six Months Ended March 31, 2018:
As reported $ 7,673 $ (85 ) $ 7,588 $ 4.86
Exclude:
One-time net benefit from the Tax Act (1,691 ) (1,691 ) (1.10 )
Other income, net (4) (94 ) 23 (71 ) (0.05 )
Restructuring and impairment charges 28   (6 ) 22   0.01  
Excluding certain items affecting comparability $ 7,607   $ (1,759 ) $ 5,848   $ 3.73  
 
(1)     Tax benefit/expense adjustments are determined using the tax rate
applicable to the individual item affecting comparability.
(2) Before noncontrolling interest share.
(3) Net of noncontrolling interest share, where applicable. Total may
not equal the sum of the column due to rounding.
(4) Other income, net for the current six-month period includes a
non-cash gain recognized in connection with the acquisition of a
controlling interest in Hulu ($4.9 billion) and insurance recoveries
on a legal matter ($46 million). Other income in the prior-year
six-month period included a gain from the sale of property rights
($53 million) and insurance recoveries on a legal matter ($38
million).
(5) Reflects severance and equity-based compensation charges related to
the acquisition and integration of 21CF ($662 million).
 

Contacts

Zenia Mucha
Corporate Communications
818-560-5300

Lowell Singer
Investor Relations
818-560-6601

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