Accounting: 10Q Very Much

from Disney specifically because they're ten Queues are in fact

the happiest financial reporting on Earth And at least when

they're businesses happily minting cash Note that this report scrolls

for a long time It includes details on divisions inside

the company like sub segments the theme parks or different

from their movies segments inside of divisions and the requisite

income statement balance sheets and cash flow statements Yet all

of these So here we go We got assets and

current and notice All this is in millions so three

thousand Whatever million is three point eight billion dollars there

in cash They got a whole bunch of dough owed

to them and note how it changed from April to

October They're so cash went up a whole lot Wow

that's nice And we got film and television the costs

and so understanding That's an asset in the parks In

the theme parks thinking there is a lot of depreciation

associated with the theme parks So they spent fifty billion

dollars there Slowly appreciating them isn't gonna upgrade the magic

Matterhorn There were a bunch of land in there as

well Yeah Intangible That's got to be all those theme

park characters only other craft they bought All right moving

on liabilities and angry All right well they owe some

dough a billion dollars there in accounts payable All right

Honored royalties Yeah They licensed there things out to motel

and on their toy makers and even coach luggage now

pays Doesn't go crazy that alright They've borrowed some money

You got that They're sixteen billion dollars in debt And

I got some deferred taxes there Yeah because income tax

there Always a thing when you're this profitable all right

And they got a whole lot of retain earnings Wow

Seventy billion dollars Almost there It's a lot of dough

And then we got Treasury Stock Means they bought back

stock and they've got some other things non controlling interest

All right That must be partnerships And they're like China

theme park of the one in France All right then

We got the cash flow statements here got net income

and five billion dollars Then we're adding back depreciation amortization

right Because those were phantom cost billion there And then

we get deferred tax and then cash distribution see from

equity investments and partnerships and movie things Maybe got sold

equity based investment receivables and towards all this crap and

cash by operations Wow Operations generate four point seven and

five point nine billion dollars That's pretty darn good All

right And then we got investing activities Yeah So the

investment of theme parks and all And some training thing

and then financing activities Yeah commercial paper and borrowing dividends

They paid out And you know they fought back from

stock and do a lot of three billion four billion

dollars of buyback They must think they're stock's cheap Alright

then Everything footsie at Disney has really good accountant Well

there's also what lengthy written description about the company all

this lawyer sounding crap over here which covers one off

events You keep scrolling through their filings and then that

describes special treatment of Harry terms like inter segment transfer

pricing So like what Is that All right Well just

one example here to illustrate well when ABC Television Network

owned one hundred percent by Disney spends money advertising on

ESPN cable networks also one hundred percent owned by Disney

The overall company doesn't get to count the movement of

that money twice To ABC the dough is an expense

right there Buying ads Teo ESPN its revenues They're selling

ads and all of it has to be accounted for

properly and disclosed Well you can imagine how much chicken

ary could happen if a ne'er do well Okay Mountain

really tried the monkey with the numbers here they could

make the company look a whole lot more or less

profitable than it really is Digesting a ten Q is

like eating Brussels sprouts but ones that are covered with

brown sugar fatty bacon in Jack in the box special

sauce don't ask Well they're difficult to digest in the

beginning but over time the sweetness grabs you And sometimes

yes there are aftereffects So why ten queues like Why

do they have to be so formal While ten queues

served the vital function of allowing one company to compare

itself with another and to allow invest or to do

the same And you know from a public investor perspective

they're vital investors Generally speaking really don't care whether a

company is selling little painted Chinese dragons nuclear warheads whoopee

cushions or iPhone app So they just care about earnings

growth more or less at least over the long run

So the ten Q format puts all public companies on

the same footing for investors or at least tries to

and for the most part these air professional investors people

like mutual fund managers hedge fund managers and investment bankers

They all live and die based on how well or

poorly a given company they're backing or shorting In the

case of a hedge fund manager betting it's going to

go the wrong direction well it's all a bad on

you know how they're doing The ten Q forces companies

to disclose ah lot about their inner workings whether they

like it or not And it is because of this

force disclosure that so many companies these days simply choose

to remain private or at least for a long as

they can Okay So the first step in reading a

ten Q is TIO actually read the ten Q in

this report Disney clearly states its earnings per share our

E P s that it increased from a dollar thirty

a share to a dollar fifty a share in the

period and see the diluted GPS line there Yet then

there's always a quotation from the CEO about how awesome

the company is and how great their prospects are And

then they're a bunch of numbers All right let's digest

keyword footnotes They matter there disclosures count legally just as

much as if they were huge haunted headlines So they're

worth actually reading Pretty much everyone knows what revenues are

albeit with variability and how you define them and recognize

them and accept them But what is segment operating income

or soya swat However you pronounce that note that there's

a footnote Number one which divulges that s O is

not a gap measure meaning that Disney could have just

made up the laws of accounting in defining the way

it And on Lee it wants to report segment operating

income without gap There are no rules and it's pretty

much a financial version of the purge So what is

S O I and hint it's not a sauce And

but you did solution The key word here is segment

Disney for example has highly distinct discreet segments of its

company that it operates generally separately They're all linked with

dotted lines and kind of sort of feed each other

But the people running its theme parks have very little

to do with the people running ESPN Same deal with

the ABC television networks and the movie production business each

distinct business operation is a separate What What's that word

Oh yes segment Each has its operating income reported separately

and this is done for both clarity and for human

management so that bonuses and other reporting can be accurately

tracked Okay moving out of line there's net income which

is also footnoted Yeah Footnote number two right here so

that non controlling interest are deducted aren't What's that None

controlling What on earth does that mean Fifty shades was

not a Disney production So must be something else about

control issues Well if you have a non controlling interest

while usually that means there's an outside investor who say

you had to deal with or you wouldn't get the

deal done Example Shanghai Disneyland Yeah without the Chinese government

Or a provided China friendly business partner Disney would never

have gotten the necessary permits and other rights to build

Shanghai Disneyland in the first place or Disney able to

control one hundred percent of its ownership in that park

Well it certainly would have After all it has the

cash ola But since it needed an outside partner Teo

get parked build well It notes that separately And why

does this matter Well let's say the friendly to China

business partner owns twenty five percent of Shanghai Disneyland and

Shanghai Disneyland earns a billion dollars in a given year

Well then only seven hundred fifty million of those earnings

are really attributable to Disney because it doesn't own one

hundred percent of the park like it does Disneyland and

Disneyworld If Disney controls seventy five percent of the earnings

of that joint venture well then and only keep seventy

five percent of the games fare fare The same would

be true if there were losses And this notion applies

to more than just theme parks But since they're such

a distinct operating entity while they are relatively easy to

dissect financially in theory over the last thirteen weeks Disney

generated roughly two point five billion dollars in cash Did

they do that by selling down a whole lot of

their inventory like taking it from five and a half

billion Now only two and a half No Or did

they do it the old fashioned way from simply selling

ads toe lots of eyeballs on their TV networks and

everywhere else that they make money Alright at this point

the answer is of course no freakin idea because we

have to die further into the ten Q report So

here we go on to page two segment results Disney

is a corporation comprising four basic divisions Media networks of

the broadcast divisions like you know ABC ESPN a few

others Then you have Parks and resorts which are things

like Disneyland Disneyworld Paris Disney Shanghai Disney Studio Entertainment That's

the production part of Disney where they make the product

rather than distributed as they do in the media networks

line And then number four is well everything else has

noted by the title Consumer products and interactive media Think

Disney Princess Dolls disney dot com and a whole bunch

of other stuff with the company then goes on to

detail profits from each of these entities and it's clear

that the dominant cash machine for Disney is its media

networks business But it should be troubling to an investor

that the company's revenues actually declined three percent year over

year Yeah you should be looking at that first change

Colin There we'll both parks and Resorts businesses Yeah and

the studio entertainment division grew a healthy twenty percent plus

and the everything else limped along growing three percent Well

the result was that the overall Cos Segment profitability grew

an anemic five percent to just under four billion dollars

in the quarter So you can fairly ask yourself Well

wait a second Why was free cash flow two point

five billion and segment operating income was almost four billion

What on Earth accounts for the billion and a half

dollars difference Did the company by a new fleet of

G six jets or something But with those questions in

the back of your noodle you scroll further down to

get the details of the media networks business on the

middle of Page two here Well both the cable network

Piece I ESPN Disney premium channels and so on and

the ABC broadcast network grew only about three percent Their

profitability was odd in that the cable networks profitability declined

Well if you're a sports fan you'll note that ESPN

used to charge extremely high rates The cable operators to

carry its ah must have sports related programming Then the

cable operators began to rebel ESPN tried to go quote

over the top by just streaming it sports programming directly

off of it on ESPN hoping people would log on

and paying money for doing that But in doing so

Disney for went the seven dollars a household for month

fees it had been getting from the cable operators you

know and and assume that it could either sell enough

Internet banner and video ads to make up for the

seven dollars Or it could create its own premium content

service streamed over the Web Think like Netflix only Disney

all day long If it's able to make this happen

then ESPN no longer needs Comcast and direct TV in

Cocks and Cablevision and the others And it can just

own its own distribution Well a bunch of other factors

led to a rejiggering of industry dynamics which may be

extremely high profit margins of ESPN very likely a thing

of the past until it builds out its own direct

billing relationship audience where the masses give ESPN a credit

card and for twenty bucks a month or something like

that ESPN gives them Max and Stephen a arguing about

whatever they argue about So with your investing hat on

while you might rationally expect further declines from cable here

in the future all right well the broadcast networks side

was a much rosier picture with company growing fourteen percent

C right there Why one word trump Not that he's

good bad or anything in between But the fast growing

economy continued with advertisers scrambling to spend their marginal dollars

to build market share in the big beneficiary was the

television network But aren't broadcast networks cyclical like don't think

go up a lot in good times and down a

lot in bad Uh well then there's the weirdest line

of all What is equity in the income of invest

Ease Well Accounting rules require that if a corporation owns

a percentage above a minimum threshold say twenty percent than

the corporation has to report it pro Radha or proportional

percentage of profits For example if Disney owned forty percent

of a company which earned a hundred million dollars in

the period it would report forty million dollars in the

form of equity in the income of invest Ease Yeah

under Page three and beyond We get more details The

report explains why ESPN is starting to show the big

hurt higher programming costs or cited along with various college

sport timing issues the whole bunch Other reasons like declining

subscribers or called out for the less than awesome numbers

here If you continue to read you'll reap the rewards

of all kinds of other details about the operating metrics

of the quarter Star Wars marijuana and other stuff all

drove the numbers Interest expense income taxes and more Page

five covers interest expense Disney carries a fair amount of

debt It also covers income taxes where Disney has been

paying thirty two point three percent You know that's what

they paid in the last quarter Other details including cash

flow cap tax depreciation and other notes all follow through

Page nine Then here starting on page eleven you get

to enjoy the Disney Income statement all over again Only

this time from a corporate level which includes those really

excellent G six jets note that in this segment revenues

come to the same number but are derived from services

and products as opposed to operating business segments And if

you continue to scroll you will see the dollar fifty

share in earnings that Disney produced in the quarter Well

keep scrolling down Page twelve You'll get Disney's balance sheet

roughly three point eight billion dollars in cash and equivalents

roughly nine point three billion dollars in money owed to

Disney and so on This is a moment snapshot taken

of all of Disney's bank and inventory accounts there notably

done on April one And no it was not an

April Fool's joke You could bet that anyway accountants are

not super into April Fool's Day All right well the

terms here complex if they look like gobbledygook Well don't

sweat It will hit each one of these items in

the next eighteen thousand hours of study here So you

know you might want to take your break now Oh