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Accounting Allah shmoop ten Q Very much without sweating the

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details Take a shot at understanding more than fifteen percent

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of this ten Q filing from Disney Ticker DVDs It's

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from Q two of two thousand seventeen Ancient and yeah

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it's an actual report We picked an old public report

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

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the happiest financial reporting on Earth And at least when

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

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for a long time It includes details on divisions inside

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the company like sub segments the theme parks or different

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from their movies segments inside of divisions and the requisite

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income statement balance sheets and cash flow statements Yet all

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of these So here we go We got assets and

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current and notice All this is in millions so three

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thousand Whatever million is three point eight billion dollars there

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in cash They got a whole bunch of dough owed

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to them and note how it changed from April to

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

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

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

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the theme parks thinking there is a lot of depreciation

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associated with the theme parks So they spent fifty billion

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

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Matterhorn There were a bunch of land in there as

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

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park characters only other craft they bought All right moving

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on liabilities and angry All right well they owe some

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dough a billion dollars there in accounts payable All right

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Honored royalties Yeah They licensed there things out to motel

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and on their toy makers and even coach luggage now

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

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

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I got some deferred taxes there Yeah because income tax

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

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And they got a whole lot of retain earnings Wow

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

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And then we got Treasury Stock Means they bought back

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

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

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theme park of the one in France All right then

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We got the cash flow statements here got net income

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

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right Because those were phantom cost billion there And then

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we get deferred tax and then cash distribution see from

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equity investments and partnerships and movie things Maybe got sold

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equity based investment receivables and towards all this crap and

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cash by operations Wow Operations generate four point seven and

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

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right And then we got investing activities Yeah So the

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investment of theme parks and all And some training thing

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and then financing activities Yeah commercial paper and borrowing dividends

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They paid out And you know they fought back from

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stock and do a lot of three billion four billion

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

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then Everything footsie at Disney has really good accountant Well

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

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this lawyer sounding crap over here which covers one off

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events You keep scrolling through their filings and then that

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describes special treatment of Harry terms like inter segment transfer

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pricing So like what Is that All right Well just

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one example here to illustrate well when ABC Television Network

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owned one hundred percent by Disney spends money advertising on

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ESPN cable networks also one hundred percent owned by Disney

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

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that money twice To ABC the dough is an expense

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

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ads and all of it has to be accounted for

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properly and disclosed Well you can imagine how much chicken

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

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really tried the monkey with the numbers here they could

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make the company look a whole lot more or less

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profitable than it really is Digesting a ten Q is

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like eating Brussels sprouts but ones that are covered with

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brown sugar fatty bacon in Jack in the box special

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

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beginning but over time the sweetness grabs you And sometimes

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yes there are aftereffects So why ten queues like Why

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do they have to be so formal While ten queues

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served the vital function of allowing one company to compare

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itself with another and to allow invest or to do

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the same And you know from a public investor perspective

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

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company is selling little painted Chinese dragons nuclear warheads whoopee

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cushions or iPhone app So they just care about earnings

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growth more or less at least over the long run

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So the ten Q format puts all public companies on

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the same footing for investors or at least tries to

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and for the most part these air professional investors people

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like mutual fund managers hedge fund managers and investment bankers

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They all live and die based on how well or

04:43

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

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

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

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

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to disclose ah lot about their inner workings whether they

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like it or not And it is because of this

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force disclosure that so many companies these days simply choose

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to remain private or at least for a long as

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they can Okay So the first step in reading a

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ten Q is TIO actually read the ten Q in

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this report Disney clearly states its earnings per share our

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E P s that it increased from a dollar thirty

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a share to a dollar fifty a share in the

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period and see the diluted GPS line there Yet then

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

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the company is and how great their prospects are And

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

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keyword footnotes They matter there disclosures count legally just as

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

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worth actually reading Pretty much everyone knows what revenues are

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albeit with variability and how you define them and recognize

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them and accept them But what is segment operating income

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

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a footnote Number one which divulges that s O is

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not a gap measure meaning that Disney could have just

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made up the laws of accounting in defining the way

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it And on Lee it wants to report segment operating

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

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much a financial version of the purge So what is

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

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but you did solution The key word here is segment

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Disney for example has highly distinct discreet segments of its

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

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dotted lines and kind of sort of feed each other

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But the people running its theme parks have very little

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to do with the people running ESPN Same deal with

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the ABC television networks and the movie production business each

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

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Oh yes segment Each has its operating income reported separately

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and this is done for both clarity and for human

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management so that bonuses and other reporting can be accurately

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

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is also footnoted Yeah Footnote number two right here so

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

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controlling What on earth does that mean Fifty shades was

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not a Disney production So must be something else about

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control issues Well if you have a non controlling interest

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

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

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deal done Example Shanghai Disneyland Yeah without the Chinese government

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Or a provided China friendly business partner Disney would never

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have gotten the necessary permits and other rights to build

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Shanghai Disneyland in the first place or Disney able to

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control one hundred percent of its ownership in that park

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Well it certainly would have After all it has the

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cash ola But since it needed an outside partner Teo

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get parked build well It notes that separately And why

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

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business partner owns twenty five percent of Shanghai Disneyland and

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Shanghai Disneyland earns a billion dollars in a given year

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Well then only seven hundred fifty million of those earnings

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

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hundred percent of the park like it does Disneyland and

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Disneyworld If Disney controls seventy five percent of the earnings

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of that joint venture well then and only keep seventy

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five percent of the games fare fare The same would

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be true if there were losses And this notion applies

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

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a distinct operating entity while they are relatively easy to

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dissect financially in theory over the last thirteen weeks Disney

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generated roughly two point five billion dollars in cash Did

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they do that by selling down a whole lot of

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their inventory like taking it from five and a half

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billion Now only two and a half No Or did

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they do it the old fashioned way from simply selling

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ads toe lots of eyeballs on their TV networks and

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everywhere else that they make money Alright at this point

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the answer is of course no freakin idea because we

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have to die further into the ten Q report So

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here we go on to page two segment results Disney

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is a corporation comprising four basic divisions Media networks of

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the broadcast divisions like you know ABC ESPN a few

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others Then you have Parks and resorts which are things

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

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the production part of Disney where they make the product

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rather than distributed as they do in the media networks

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line And then number four is well everything else has

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noted by the title Consumer products and interactive media Think

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Disney Princess Dolls disney dot com and a whole bunch

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of other stuff with the company then goes on to

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

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that the dominant cash machine for Disney is its media

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networks business But it should be troubling to an investor

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

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year Yeah you should be looking at that first change

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

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the studio entertainment division grew a healthy twenty percent plus

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and the everything else limped along growing three percent Well

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the result was that the overall Cos Segment profitability grew

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an anemic five percent to just under four billion dollars

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in the quarter So you can fairly ask yourself Well

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wait a second Why was free cash flow two point

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five billion and segment operating income was almost four billion

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What on Earth accounts for the billion and a half

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dollars difference Did the company by a new fleet of

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G six jets or something But with those questions in

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the back of your noodle you scroll further down to

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get the details of the media networks business on the

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middle of Page two here Well both the cable network

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Piece I ESPN Disney premium channels and so on and

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the ABC broadcast network grew only about three percent Their

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profitability was odd in that the cable networks profitability declined

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

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used to charge extremely high rates The cable operators to

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carry its ah must have sports related programming Then the

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cable operators began to rebel ESPN tried to go quote

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over the top by just streaming it sports programming directly

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off of it on ESPN hoping people would log on

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and paying money for doing that But in doing so

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Disney for went the seven dollars a household for month

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fees it had been getting from the cable operators you

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know and and assume that it could either sell enough

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Internet banner and video ads to make up for the

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seven dollars Or it could create its own premium content

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service streamed over the Web Think like Netflix only Disney

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

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then ESPN no longer needs Comcast and direct TV in

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Cocks and Cablevision and the others And it can just

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own its own distribution Well a bunch of other factors

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led to a rejiggering of industry dynamics which may be

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extremely high profit margins of ESPN very likely a thing

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of the past until it builds out its own direct

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billing relationship audience where the masses give ESPN a credit

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card and for twenty bucks a month or something like

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that ESPN gives them Max and Stephen a arguing about

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whatever they argue about So with your investing hat on

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while you might rationally expect further declines from cable here

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in the future all right well the broadcast networks side

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was a much rosier picture with company growing fourteen percent

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

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good bad or anything in between But the fast growing

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economy continued with advertisers scrambling to spend their marginal dollars

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to build market share in the big beneficiary was the

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

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go up a lot in good times and down a

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

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of all What is equity in the income of invest

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Ease Well Accounting rules require that if a corporation owns

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a percentage above a minimum threshold say twenty percent than

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the corporation has to report it pro Radha or proportional

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percentage of profits For example if Disney owned forty percent

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of a company which earned a hundred million dollars in

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the period it would report forty million dollars in the

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form of equity in the income of invest Ease Yeah

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under Page three and beyond We get more details The

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report explains why ESPN is starting to show the big

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hurt higher programming costs or cited along with various college

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sport timing issues the whole bunch Other reasons like declining

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subscribers or called out for the less than awesome numbers

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

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of all kinds of other details about the operating metrics

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of the quarter Star Wars marijuana and other stuff all

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drove the numbers Interest expense income taxes and more Page

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five covers interest expense Disney carries a fair amount of

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debt It also covers income taxes where Disney has been

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

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they paid in the last quarter Other details including cash

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flow cap tax depreciation and other notes all follow through

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Page nine Then here starting on page eleven you get

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to enjoy the Disney Income statement all over again Only

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this time from a corporate level which includes those really

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excellent G six jets note that in this segment revenues

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come to the same number but are derived from services

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and products as opposed to operating business segments And if

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you continue to scroll you will see the dollar fifty

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share in earnings that Disney produced in the quarter Well

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

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roughly three point eight billion dollars in cash and equivalents

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roughly nine point three billion dollars in money owed to

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Disney and so on This is a moment snapshot taken

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

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done on April one And no it was not an

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

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

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

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sweat It will hit each one of these items in

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the next eighteen thousand hours of study here So you

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know you might want to take your break now Oh

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