Introduction
It is important to note that understanding and analyzing financial statements provides a comprehensive and detailed insight into the current stance of a corporation. The given assessment will focus on the Walt Disney Company, which is one of the largest entertainment organizations in the world. The key points of analysis include cash flow statements, share-based compensation, earnings per share (EPS), profit-sharing plans, income taxes, and investments.
Investments
The Walt Disney Company’s investments on the balance sheets for 2022 and 2021 consist of equity-based investments and other investments. In 2022, equity basis investments accounted for $2,678 million, up from $2,638 million in 2021 (The Walt Disney Company, 2022). In contrast, other investments decreased from $1,297 million in 2021 to $540 million in 2022. Disney’s equity investments mainly comprise media investments such as A+E, with 50% ownership; CTV Specialty Television, Inc., with 30% ownership; and Tata Play Limited, with 30% ownership (The Walt Disney Company, 2022). The footnotes disclose that the book value of the company’s equity method investments exceeded Disney’s share of the book value of the investees’ underlying net assets by approximately $0.8 billion (The Walt Disney Company, 2022). The given difference represents amortizable intangible assets and goodwill arising from acquisitions.
For other investments, the footnotes reveal that Disney had securities. They are recorded at a fair value of $0.3 billion and $1.0 billion for 2022 and 2021, respectively (The Walt Disney Company, 2022). Disney had securities recorded at book value related to non-publicly traded securities without a readily determinable fair value of $0.2 billion in 2022 and $0.3 billion in 2021 (The Walt Disney Company, 2022). The company reports gains, losses, and impairments on securities under the heading ‘Interest expense, net’ in the Consolidated Statements of Operations. The given amounts are immaterial for the last three fiscal years.
The report contains unrealized and realized losses and gains on securities. They are recorded in ‘Other income (expense), net’ in the Consolidated Statements of Operations as per Note 4 (The Walt Disney Company, 2022). In addition, the company recognized a non-cash loss of $663 million in 2022 and $111 million in 2021 from the adjustment of its investment in DraftKings, Inc. to fair value. Disney recognized a $973 million gain in fiscal 2020 related to its investment in DraftKings, Inc. (The Walt Disney Company, 2022). Thus, the Walt Disney Company’s three types of investments include equity investments in media companies, securities recorded at fair value, and non-publicly traded securities recorded at book value.
Income Taxes
Deferred taxes arise from temporary differences between the book value of assets and liabilities and their tax value. The Walt Disney Company reported net deferred tax liabilities of $7,727 million in 2022 and $6,560 million in 2021 (The Walt Disney Company, 2022). Footnotes note that there are details about the components of deferred tax assets and liabilities, changes in valuation allowance, and other information on deferred taxes (The Walt Disney Company, 2022). A deferred tax asset represents an amount that a company has overpaid on its current taxes, and it is expected to reduce future tax payments. However, a deferred tax liability represents an amount that the company will have to pay in future taxes due to transactions that have already occurred.
The company’s footnotes disclose temporary differences from net operating losses, tax credit carryforwards, accrued liabilities, and lease liabilities for deferred tax assets. For deferred tax liabilities, temporary differences arise from depreciable, amortizable, and other property, investments in U.S. and foreign entities, and right-of-use assets (The Walt Disney Company, 2022). Permanent differences might include items that are non-taxable or non-deductible, such as life insurance proceeds or fines and penalties. The company’s income tax provision for the two most recent years amounted to $1,718 million in 2022 and $16 million in 2021 (The Walt Disney Company, 2022).
The footnotes provide details on the reconciliation of the effective income tax rate to the federal rate, unrecognized tax benefits, and other tax-related matters. The Walt Disney Company discloses net operating losses and tax credit carryforwards of $3,527 million in 2022 and $3,944 million in 2021 (The Walt Disney Company, 2022). A large part of the latter is international theme park net operating losses.
Profit Sharing Plans
The company maintains both defined benefit and defined contribution plans. Defined benefit plans cover employees hired prior to January 1, 2012, with benefits based on years of service and/or compensation, requiring a minimum of 3 years of vesting service (The Walt Disney Company, 2022). However, employees hired after this date participate in a defined contribution plan. The firm measured the actuarial value of its benefit obligations and planned assets for its defined benefit pension and postretirement medical benefit plans on September 30 (The Walt Disney Company, 2022). The company adjusts for any plan contributions or significant events.
In terms of balance sheet implications, the company recognizes non-current assets, current liabilities, and non-current liabilities related to its defined benefit plans. As of October 1, 2022, non-current assets were $913 million, current liabilities were $66 million, and non-current liabilities were $1.154 billion for the pension plans (The Walt Disney Company, 2022). Defined benefit plans are those where the employer guarantees a specific retirement benefit amount. Defined contribution plans are those where employees and, at times, employers contribute to individual accounts, but the final payout depends on the investment performance.
The company’s defined contribution retirement plans cater to domestic employees. They apply to workers who began service after December 31, 2011, since they are not eligible to participate in the defined benefit pension plans. The company contributes between 4% to 10% of an employee’s compensation depending on the employee’s age and years of service (The Walt Disney Company, 2022). Employees can contribute up to 50% of their salary through payroll deductions (The Walt Disney Company, 2022). The company matches 50% of the employee’s contribution up to plan limits (The Walt Disney Company, 2022). In fiscal years 2022, 2021, and 2020, the costs of the company’s domestic and international defined contribution plans were $325 million, $254 million, and $242 million, respectively (The Walt Disney Company, 2022). In addition, the company maintains a postretirement medical benefit plan, although employees hired after certain dates are not eligible for these benefits.
Earnings per Share
The statement does not provide explicit basic and diluted earnings per share for the most recent year. As a result, one would need to calculate these figures by dividing the net income by the number of shares. In the footnotes, equity-based awards, a type of dilutive security, are discussed as having an effect on the diluted earnings per share calculation (The Walt Disney Company, 2022). Equity-based awards are common examples of dilutive securities that may also include convertible bonds, convertible preferred shares, and share warrants. When companies issue such dilutive securities, it potentially increases the number of outstanding shares, thereby reducing earnings per share if these securities are converted into common shares.
Anti-dilutive securities, such as certain stock options, are those for which the exercise price is higher than the market price. They are excluded from the diluted EPS calculation as their conversion would not decrease earnings per share (The Walt Disney Company, 2022). Therefore, the presence of dilutive securities influences the calculation of earnings per share by adding common equivalent shares to the total count of outstanding shares. The latter can reduce the EPS when income is divided over a larger number of shares.
Share-Based Compensation
The company employs share-based compensation in the form of stock options and restricted stock units (RSUs). The latter includes stocks tied to market or performance conditions as a long-term incentive strategy for executives, management, and creative personnel. In the last two fiscal years, the company’s compensation expenses were $977 million and $600 million, respectively (The Walt Disney Company, 2022).
Key elements of the company’s plan include the grant of stock options generally with a 10-year term, the ability for the Compensation Committee to extend these options up to 15 years, and the usage of RSUs that typically vest over three or four years (The Walt Disney Company, 2022). Aside from stock options and RSUs, other types of share-based compensation can include employee stock purchase plans and performance share plans. Employee stock purchase plans allow employees to purchase company stock at a discounted price, while performance share plans award shares based on the achievement of performance objectives.
Cash Flow Statement
The company presents its cash flow statement using indirect methods. The difference between the two methods lies in the operating activities section, where the indirect method starts with net income and makes adjustments for non-cash transactions. However, the direct method lists all the actual cash receipts and payments. The cash flow statement ties together the income statement and balance sheet by showing how changes in assets, liabilities, and equity accounts affect cash. Investing activities in the company include investments in parks, resorts, and other property, while financing activities encompass borrowings, reduction of borrowings, proceeds from the exercise of stock options, and the acquisition of redeemable non-controlling interests (The Walt Disney Company, 2022).
Alternative examples of investing activities could be the purchase of plant and machinery or investments in other companies, while examples of financing activities could be the issue of shares or bonds and the payment of dividends. Non-cash transactions in the company’s cash flow statement include depreciation, amortization, and equity-based compensation (The Walt Disney Company, 2022). Other examples of non-cash transactions include stock-based compensation, deferred tax, and changes in working capital items such as receivables and payables.
Conclusion
In conclusion, the given analysis assessed and evaluated the Walt Disney Company’s key financial metrics and disclosures. One of the latest investments by the corporation includes DraftKings, Inc. The company primarily utilizes indirect methods to present its cash flows. The company utilizes share-based compensation through stock options and restricted stock units. Equity-based awards, classified as dilutive securities, impact diluted earnings per share. In its footnotes, the company reports temporary differences related to net operating losses, tax credit carryforwards, accrued and lease liabilities as part of its deferred tax assets.
References
The Walt Disney Company. (2022). Fiscal year 2022 annual financial report [PDF document]. Web.