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| DIS > SEC Filings for DIS > Form 10-Q on 30-Jul-2008 | All Recent SEC Filings |
30-Jul-2008
Quarterly Report
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
ORGANIZATION OF INFORMATION
Management's Discussion and Analysis provides a narrative of the Company's financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
Overview
Seasonality
Business Segment Results
Quarter Results
Nine-Month Results
Other Financial Information
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
OVERVIEW
Our summary consolidated results are presented below:
Quarter Ended Nine Months Ended
(in millions, except per share June 28, June 30, June 28, June 30,
data) 2008 2007 Change 2008 2007 Change
Revenues $ 9,236 $ 9,045 2 % $ 28,398 $ 26,580 7 %
Costs and expenses (7,215 ) (7,022 ) 3 % (22,446 ) (21,370 ) 5 %
Other income 32 - nm 32 1,052 (97 ) %
Net interest expense (141 ) (143 ) (1 ) % (411 ) (430 ) (4 ) %
Equity in the income of investees 175 147 19 % 442 389 14 %
Income from continuing operations
before income taxes and minority
interests 2,087 2,027 3 % 6,015 6,221 (3 ) %
Income taxes (712 ) (762 ) (7 ) % (2,183 ) (2,353 ) (7 ) %
Minority interests (91 ) (69 ) 32 % (165 ) (77 ) nm
Income from continuing operations 1,284 1,196 7 % 3,667 3,791 (3 ) %
Income (loss) from discontinued
operations, net of tax - (18 ) nm - 19 nm
Net income $ 1,284 $ 1,178 9 % $ 3,667 $ 3,810 (4 ) %
Diluted earnings per share,
continuing operations $ 0.66 $ 0.58 14 % $ 1.87 $ 1.80 4 %
Diluted earnings per share $ 0.66 $ 0.57 16 % $ 1.87 $ 1.81 3 %
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Quarter Results
Diluted earnings per share increased 16% for the quarter due to a decrease in weighted average shares outstanding and growth in operating income at the Media Networks and Parks and Resorts segments, partially offset by a decline at the Studio Entertainment segment. Diluted earnings per share for the quarter included gains related to the acquisition of the Disney Stores in North America and the sale of movies.com and the favorable resolution of certain prior-year income tax matters. Collectively, these items had a net favorable impact of $0.04 per share. Earnings growth at Media Networks was primarily due to higher affiliate and advertising revenues at our cable businesses. At Parks and Resorts, the adverse impact on attendance from the absence of the Easter holidays in the current-year quarter was more than offset by favorable guest spending and higher
corporate alliance income. The decline at Studio Entertainment reflected the strong theatrical performance of Pirates of the Caribbean: At World's End in the prior-year quarter.
Nine-Month Results
Results for the current-year nine months included the net favorable impact of
the items discussed above, which totaled $0.04 per share. Results for the
prior-year nine months included the net favorable impact of the items summarized
below (amounts in millions, except per share data):
Favorable/(unfavorable) impact Nine Months Ended June 30, 2007
Net Diluted
Pre-Tax Income EPS
Gain on sale of equity investment in
E! $ 780 $ 487 $ 0.23
Gain on sale of equity investment in
Us Weekly 272 170 0.08
Income from the discontinued
operations of the ABC Radio business 51 19 0.01
Equity-based compensation plan
modification charge (48 ) (30 ) (0.01 )
Total $ 1,055 $ 646 $ 0.31
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Growth for the nine months was driven by higher operating income at the Media Networks, Parks and Resorts and Consumer Products segments and a decrease in weighted average shares outstanding. Earnings growth at the operating segments was primarily due to increases in affiliate and advertising revenues at our cable businesses, higher attendance and guest spending at Walt Disney World Resort and Disneyland Resort Paris, and strong sales of licensed products at Consumer Products.
SEASONALITY
The Company's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and nine months ended June 28, 2008 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
Media Networks revenues are subject to seasonal advertising patterns and changes in viewership levels. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Affiliate revenues are typically collected ratably throughout the year. Certain affiliate revenues at ESPN are deferred until annual programming commitments are met, and these commitments are typically satisfied during the second half of the Company's fiscal year which generally results in higher revenue recognition during that period.
Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods.
Studio Entertainment revenues fluctuate due to the timing and performance of releases in the theatrical, home entertainment, and television markets. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
Consumer Products revenues are influenced by seasonal consumer purchasing behavior and by the timing and performance of animated theatrical releases and cable programming broadcasts.
BUSINESS SEGMENT RESULTS
The Company evaluates the performance of its operating segments based on segment
operating income, which is shown below along with segment revenues:
Quarter Ended Nine Months Ended
June 28, June 30, June 28, June 30,
(in millions) 2008 2007 Change 2008 2007 Change
Revenues:
Media Networks $ 4,123 $ 3,829 8 % $ 11,904 $ 11,071 8 %
Parks and Resorts 3,038 2,904 5 % 8,535 7,839 9 %
Studio Entertainment 1,433 1,775 (19 ) % 5,896 5,958 (1 ) %
Consumer Products 642 537 20 % 2,063 1,712 21 %
$ 9,236 $ 9,045 2 % $ 28,398 $ 26,580 7 %
Segment operating income:
Media Networks $ 1,472 $ 1,356 9 % $ 3,697 $ 3,216 15 %
Parks and Resorts 641 621 3 % 1,485 1,280 16 %
Studio Entertainment 97 190 (49 ) % 988 1,027 (4 ) %
Consumer Products 113 118 (4 ) % 542 476 14 %
$ 2,323 $ 2,285 2 % $ 6,712 $ 5,999 12 %
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The following table reconciles segment operating income to income from continuing operations before income taxes and minority interests:
Quarter Ended Nine Months Ended
June 28, June 30, June 28, June 30,
(in millions) 2008 2007 Change 2008 2007 Change
Segment operating income $ 2,323 $ 2,285 2 % $ 6,712 $ 5,999 12 %
Corporate and unallocated shared expenses (127 ) (115 ) 10 % (318 ) (352 ) (10 ) %
Equity-based compensation
plan modification charge - - - - (48 ) nm
Other income 32 - nm 32 1,052 (97 ) %
Net interest expense (141 ) (143 ) (1 ) % (411 ) (430 ) (4 ) %
Income from continuing
operations before income
taxes and minority interests $ 2,087 $ 2,027 3 % $ 6,015 $ 6,221 (3 ) %
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Depreciation expense from continuing operations is as follows:
Quarter Ended Nine Months Ended
June 28, June 30, June 28, June 30,
(in millions) 2008 2007 Change 2008 2007 Change
Media Networks
Cable Networks $ 22 $ 22 - % $ 66 $ 66 - %
Broadcasting 27 26 4 % 77 70 10 %
Total Media Networks 49 48 2 % 143 136 5 %
Parks and Resorts
Domestic 203 198 3 % 603 594 2 %
International 89 79 13 % 256 226 13 %
Total Parks and Resorts 292 277 5 % 859 820 5 %
Studio Entertainment 10 4 nm 28 20 40 %
Consumer Products 5 4 25 % 15 13 15 %
Corporate 31 34 (9 ) % 91 100 (9 ) %
Total depreciation expense $ 387 $ 367 5 % $ 1,136 $ 1,089 4 %
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Media Networks
The following table provides supplemental revenue and segment operating income
detail for the Media Networks segment:
Quarter Ended Nine Months Ended
June 28, June 30, June 28, June 30,
(in millions) 2008 2007 Change 2008 2007 Change
Revenues:
Cable Networks $ 2,592 $ 2,305 12 % $ 7,114 $ 6,372 12 %
Broadcasting 1,531 1,524 - % 4,790 4,699 2 %
$ 4,123 $ 3,829 8 % $ 11,904 $ 11,071 8 %
Segment operating income:
Cable Networks $ 1,212 $ 1,063 14 % $ 2,892 $ 2,485 16 %
Broadcasting 260 293 (11 ) % 805 731 10 %
$ 1,472 $ 1,356 9 % $ 3,697 $ 3,216 15 %
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Revenues
Media Networks revenues increased 8%, or $294 million, to $4.1 billion, driven by a 12% increase, or $287 million, at the Cable Networks.
Increased Cable Networks revenues were due to growth of $202 million from cable and satellite operators, $75 million in advertising revenues, and $10 million in other revenues. Revenues from cable and satellite operators are generally derived from fees charged on a per subscriber basis, and the increase in the current quarter was due to contractual rate increases, subscriber growth and higher recognition of previously deferred revenues (discussed below) at ESPN and, to a lesser extent, subscriber growth at the international Disney Channels. Higher advertising revenue reflected increases at ESPN driven by higher ratings and rates.
Certain of the Company's existing contracts with cable and satellite operators include annual programming commitments. In these cases, revenue subject to the commitment is deferred until the annual commitments are satisfied, which generally results in revenue shifting from the first half of the year to the second half. During the quarter, the Company recognized previously deferred revenues of $78 million related to these commitments compared to $49 million in the prior-year quarter.
Broadcasting revenues increased $7 million reflecting higher internet revenues, partially offset by lower advertising revenues at the owned television stations. The increase in internet revenues included Club Penguin which was acquired in the fourth quarter of the prior year. Revenues at the ABC Television Network were comparable to the prior year as the impact of lower ratings was offset by higher advertising rates and digital media revenues.
Costs and Expenses
Costs and expenses, which consist primarily of programming rights costs, production costs, participation costs, distribution and marketing expenses, labor costs, and general and administrative costs, increased 8%, or $211 million, reflecting a 12% increase, or $171 million, at the Cable Networks, and a 3% increase, or $40 million, at Broadcasting. The increase at Cable Networks was primarily due to increased programming and production, administrative and marketing costs. Higher programming and production costs reflected increased sports rights costs for various sporting events and higher production costs including costs for additional NBA games. The increase at Broadcasting was primarily due to higher production cost amortization related to programs in syndication and higher internet costs, partially offset by lower costs for pilot productions. Pilot costs decreased due to a delay in pick-up decisions in the current year primarily due to the Writers Guild of America work stoppage.
Sports Programming Costs
The Company has various contractual commitments for the purchase of television rights for sports and other programming, including the National Football League, NASCAR, Major League Baseball, various college football and basketball conferences and football bowl games and the National Basketball Association. The costs of these contracts have increased significantly in recent years. We enter into these contractual commitments with the expectation that, over the life of the contracts, revenue from advertising during the programming and affiliate fees will exceed the costs of the programming. While contract costs may initially exceed incremental revenues and negatively impact operating income, it is our expectation that the combined value to our networks from all of these contracts will result in long-term benefits. The actual impact of these contracts on the Company's results over the term of the contracts is dependent upon a number of factors, including the strength of advertising markets, effectiveness of marketing efforts, and the size of viewer audiences.
Segment Operating Income
Segment operating income increased 9%, or $116 million, to $1.5 billion for the quarter due to an increase of 14%, or $149 million, at the Cable Networks and a decrease of 11%, or $33 million, at Broadcasting. The increase at the Cable Networks was primarily due to growth at ESPN, higher equity income and, to a lesser extent, increases at the international Disney Channels. The decrease at Broadcasting was primarily due to higher production cost amortization related to programs in syndication and lower advertising sales at the owned television stations, partially offset by lower costs for pilot productions. The increase in equity income was primarily driven by the recognition of previously deferred revenues in connection with finalizing certain affiliate contracts at ESPN's STAR Sports joint venture in Asia and higher advertising revenues at Lifetime.
Parks and Resorts
Revenues
Parks and Resorts revenues increased 5%, or $134 million, to $3.0 billion due to increases of $45 million at our domestic resorts and $89 million at our international resorts.
Domestic Parks and Resorts
Revenues at our domestic parks and resorts reflected decreased attendance due to the timing of the Easter holiday season, which fell in the third quarter of fiscal 2007 and in the second quarter of fiscal 2008. The Easter impact was more than offset by higher corporate alliance income and increased guest spending at Walt Disney World Resort driven by higher average ticket prices.
The following table presents attendance, per capita theme park guest spending and hotel statistics for our domestic properties:
East Coast West Coast Total Domestic
Quarter Ended Quarter Ended Quarter Ended
June 28, June 30, June 28, June 30, June 28, June 30,
2008 2007 2008 2007 2008 2007
Parks
(Increase/decrease)
Attendance (2 )% 4 % - % 1 % (1 )% 3 %
Per Capita Guest
Spending 3 % 2 % (2 )% 3 % 1 % 2 %
Hotels (1)
Occupancy 92 % 93 % 91 % 96 % 92 % 93 %
Available Room
Nights
(in thousands) 2,136 2,154 200 202 2,336 2,356
Per Room Guest
Spending $ 235 $ 235 $ 339 $ 322 $ 244 $ 243
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(1) Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverage and merchandise at the hotels. Hotel statistics include rentals of Disney Vacation Club units.
International Parks and Resorts
At our international parks and resorts, revenue growth was primarily due to the favorable impact of foreign currency translation as a result of the weakening of the U.S. dollar against the Euro at Disneyland Resort Paris. In addition, Disneyland Resort Paris benefited from higher guest spending and theme park attendance. Increased guest spending was primarily due to higher average ticket prices.
Costs and Expenses
Costs and expenses, which consist principally of labor, depreciation, costs of merchandise, food and beverage sold, marketing and sales expense, repairs and maintenance and entertainment, increased 5%, or $114 million. The increase in costs and expenses was primarily due to the unfavorable impact of foreign currency translation as a result of the weakening of the U.S. dollar against the Euro at Disneyland Resort Paris. Additionally, increased costs were driven by labor and other cost inflation at our domestic parks and resorts and at Disneyland Resort Paris, new guest offerings at Walt Disney World Resort and higher marketing at Walt Disney World Resort and Disneyland Resort Paris, partially offset by a favorable claim settlement at Disneyland Resort Paris.
Segment Operating Income
Segment operating income increased 3%, or $20 million, to $641 million reflecting increases at the Walt Disney World Resort and Disneyland Resort Paris, partially offset by a decrease at Disneyland Resort.
Studio Entertainment
Revenues
Revenues decreased 19%, or $342 million, to $1.4 billion primarily due to a decrease of $373 million in worldwide theatrical distribution reflecting the strong performance of Pirates of the Caribbean: At World's End in the prior-year quarter compared to The Chronicles of Narnia: Prince Caspian in the current quarter.
Costs and Expenses
Costs and expenses, which consist primarily of production cost amortization,
distribution and marketing expenses, product costs and participation costs,
decreased 16%, or $249 million, primarily due to lower production cost
amortization reflecting the theatrical performance of The Chronicles of Narnia:
Prince Caspian in the current quarter compared to Pirates of the Caribbean: At
World's End in the prior-year quarter, and lower theatrical distribution
expenses reflecting fewer titles in release.
Segment Operating Income
Segment operating income decreased 49%, or $93 million, to $97 million primarily due to a decrease in worldwide theatrical distribution.
Consumer Products
Revenues
Revenues for the quarter increased 20%, or $105 million, to $642 million, primarily due to increases of $87 million at the Disney Stores and $43 million at Merchandise Licensing, partially offset by a decrease of $32 million at Disney Interactive Studios.
The increase at the Disney Stores was due to the acquisition of the Disney Stores in North America (see discussion of the Disney Store acquisition below). The revenue growth at Merchandise Licensing was primarily due to higher earned royalties reflecting the strong performance of Hannah Montana and High School Musical merchandise.
The decrease at Disney Interactive Studios was primarily due to lower sales of self-published video games reflecting the strong performance of games based on Pirates of the Caribbean: At World's End in the prior-year quarter compared to The Chronicles of Narnia: Prince Caspian and High School Musical in the current quarter.
Costs and Expenses
Costs and expenses, which consist primarily of cost of sales, occupancy, salaries and benefits, marketing, and video game development, increased 26%, or $110 million, to $529 million, primarily due to the acquisition of the Disney Stores in North America and higher salaries and benefits at Merchandise Licensing. At Disney Interactive Studios, lower cost of sales due to lower sales of self-published video games and decreased marketing expense were largely offset by higher video game development costs.
Operating Income
Segment operating income decreased 4%, or $5 million, to $113 million primarily due to a decrease at Disney Interactive Studios due to lower sales of self-published video games and higher video game development costs largely offset by growth at Merchandise Licensing.
Disney Store Acquisition
On April 30, 2008, the Company acquired the Disney Stores in North America from subsidiaries of The Children's Place Retail Stores, Inc. (TCP) for cash consideration totaling approximately $64 million and terminated TCP's long-term licensing arrangement relating to the Disney Stores. The Company acquired the inventory, leasehold improvements, and certain fixed assets of, and assumed the leases on, approximately 225 stores that it intends to operate. The Company conducted the wind-down and closure of an additional 89 stores but did not assume the leases on these stores.
Business Segment Results - Nine Month Results . . .
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