Without a doubt, Walt Disney Co. (NYSE:DIS) is one of the world's most impressive businesses.
From its namesake channels to Pixar, Marvel, Lucasfilm, ABC Family, an 80% stake in ESPN, and 50% ownership of A&E Networks, the entertainment conglomerate has built an unrivaled portfolio of brands and characters since it was founded in 1923. What's more, Disney continues to command more of our entertainment dollars with each passing year.
Last fiscal year, for example, Disney's revenue climbed 8% to $48.8 billion, while net income rose an even more impressive 22% to $7.5 billion. That performance was led by broad growth in operating income from each of its five businesses, including a 7% jump from Media Networks to $7.321 billion, a 20% increase at Parks and Resorts to $2.663 billion, 134% growth from Studio Entertainment to $1.549 billion, and a 22% increase in Consumer Products to $1.356 billion. Disney's Interactive gaming segment also swung from an $87 million operating loss in 2013 to income of $116 million in fiscal 2014.
But these numbers don't tell the entire story of Disney's incredible year. In fact, if you take a deeper look at Disney's most recent annual report -- specifically under the "Other income/(expense)" section -- you'll notice a single line item reflects a whopping $143 million loss.
How do you say "ouch" in Spanish?
That's not to say Disney did anything wrong. In fact, it makes a convincing argument that these losses were unavoidable. So what happened?
In short, the blame lies with Venezuela -- or, more specifically, Venezuela's deepening economic crisis, which has greatly devalued its currency, the Venezuelan bolivar, or BsF. Keeping in mind Disney has material operations in Venezuela, including merchandise licensing and film and television distribution, that reduces the reported U.S. dollar value of its monetary assets denominated in the bolivar. For reference, at of the end of last quarter Disney had monetary assets (primarily consisting of cash) in the country valued at roughly 1.7 billion Venezuelan bolivares, up from 1.4 billion BsF at the end of last fiscal year.
Of course, that wouldn't be a problem if Disney were able to repatriate its cash at the Venezuelan government's official foreign currency exchange rate, which is currently set at 6.3 BsF per U.S. dollar. This is the value Disney used to translate its net monetary assets in Venezuela all the way through the end of 2013.
But early last year, two new alternative rates were introduced by the Venezuelan government to handle exchanges of currency arising from certain transactions. These new rates, called SICAD 1 and SICAD 2, currently sit around 12 and 50 BsF per U.S. dollar, respectively. And unfortunately, only a small portion of Disney's cash was expected to be eligible for exchange at the more attractive SICAD 1 rate, with the vast majority subject to exchange based on the SICAD 2 rate. As a result, Disney stopped using the official government rate to translate its BsF denominated cash and began using the SICAD 2 rate instead.
The product of this newly unfavorable foreign currency translation was Disney's $143 million loss.
Disney's not alone
To Disney's credit, it's not the only company suffering through the fallout of Venezuela's weak currency and struggling economy. According to a Reuters report last month, at least 40 members of the S&P 500 have significant exposure to Venezuela and -- if they haven't already -- could soon be forced to collectively take billions of dollars in similar writedowns.
Nonetheless, it speaks volumes of the strength of Disney's business that it was able to absorb such an enormous charge without most investors so much as batting an eye. After all, put in the context of Disney's broader results, that $143 million was still less than 2% of Disney's total net income in fiscal 2014. But at the same time, you can also be sure the folks at the House of Mouse wouldn't mind having that cash back in their pockets stateside.