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| DIS > SEC Filings for DIS > Form 10-K on 20-Nov-2008 | All Recent SEC Filings |
20-Nov-2008
Annual Report
CONSOLIDATED RESULTS
(in millions, except per share data)
% change
2008 2007
vs. vs.
2008 2007 2006 2007 2006
Revenues $ 37,843 $ 35,510 $ 33,747 7 % 5 %
Costs and expenses (30,439) (28,681) (28,392) 6 % 1 %
Other (expense) / income (59) 1,004 88 nm >100 %
Net interest expense (524) (593) (592) (12) % - %
Equity in the income of
investees 581 485 473 20 % 3 %
Income from continuing
operations before income
taxes and minority interests 7,402 7,725 5,324 (4) % 45 %
Income taxes (2,673) (2,874) (1,837) (7) % 56 %
Minority interests (302) (177) (183) 71 % (3) %
Income from continuing
operations 4,427 4,674 3,304 (5) % 41 %
Discontinued operations, net
of tax - 13 70 nm (81) %
Net income $ 4,427 $ 4,687 $ 3,374 (6) % 39 %
Diluted Earnings per share
(1):
Earnings per share,
continuing operations $ 2.28 $ 2.24 $ 1.60 2 % 40 %
Earnings per share,
discontinued operations - 0.01 0.03 nm (67) %
Earnings per share (2) $ 2.28 $ 2.25 $ 1.64 1 % 37 %
Basic Earnings per share:
Earnings per share,
continuing operations $ 2.34 $ 2.33 $ 1.65 - % 41 %
Earnings per share,
discontinued operations - 0.01 0.03 nm (67) %
Earnings per share (2) $ 2.34 $ 2.34 $ 1.68 - % 39 %
Weighted average number of
common and common equivalent
shares outstanding:
Diluted 1,948 2,092 2,076
Basic 1,890 2,004 2,005
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(1) The calculation of diluted earnings per share assumes the conversion of the Company's convertible senior notes into 45 million shares of common stock for periods presented prior to their redemption in the third quarter of fiscal 2008. Related after-tax interest expense of $12 million for fiscal 2008 and $21 million for fiscal 2007 and 2006 has been added back for the calculation of diluted earnings per share.
(2) Total earnings per share may not equal the sum of the column due to rounding.
Organization of Information
Management's Discussion and Analysis provides a narrative on the Company's financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
• Consolidated Results
• Business Segment Results - 2008 vs. 2007
• Non-Segment Items - 2008 vs. 2007
• Pension and Benefit Costs
• Business Segment Results - 2007 vs. 2006
• Non-Segment Items - 2007 vs. 2006
• Liquidity and Capital Resources
• Contractual Obligations, Commitments, and Off Balance Sheet Arrangements
• Accounting Policies and Estimates
• Accounting Changes
• Forward-Looking Statements
CONSOLIDATED RESULTS
2008 vs. 2007
Revenues for the year increased 7%, or $2.3 billion, to $37.8 billion; net income decreased 6%, or $260 million, to $4.4 billion; and diluted earnings per share increased 1% to $2.28.
Net income for the current year included certain items that affected comparability, including an accounting gain related to the acquisition of the Disney Stores in North America and a gain on the sale of movies.com (together $0.01 per diluted share), the favorable resolution of certain prior-year income tax matters ($0.03 per diluted share), and a bad debt charge for a receivable from Lehman Brothers ($0.03 per diluted share). These items collectively resulted in a net benefit of $0.01 per diluted share. Fiscal 2007 included gains from the sales of E! Entertainment and Us Weekly ($0.31 per diluted share), favorable resolution of certain prior-year income tax matters ($0.03 per diluted share), income from the discontinued operations of the ABC Radio business ($0.01 per diluted share) and an equity-based compensation plan modification charge ($0.01 per diluted share). Including the impact of rounding, these items collectively resulted in a net benefit of $0.33 per diluted share.
The decrease in net income for the current year was the result of gains in the prior year from the sale of E! Entertainment and Us Weekly and a decrease in operating income at the Studio Entertainment segment, partially offset by higher operating income at the Media Networks, Parks and Resorts and Consumer Products segments. The increase in diluted earnings per share was driven by 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 guest spending and attendance at Walt Disney World Resort and Disneyland Resort Paris, and strong sales of licensed products at Consumer Products. The decrease at Studio Entertainment was primarily due to a decrease in home entertainment.
2007 vs. 2006
Revenues for the year increased 5%, or $1.8 billion, to $35.5 billion; net income increased 39%, or $1.3 billion, to $4.7 billion; and diluted earnings per share increased 37% to $2.25.
As discussed above, net income for fiscal 2007 included certain items which affected comparability. Net income for fiscal 2006 also included certain items which affected comparability, including income from the discontinued operations of the ABC Radio business ($0.03 per diluted share), gains on sales of a Spanish cable equity investment and Discover Magazine (together $0.02 per diluted share), favorable resolution of certain prior-year income tax matters ($0.02 per diluted share) and a net benefit associated with the completion of the Pixar acquisition ($0.01 per diluted share). Including the impact of rounding, these items collectively benefited diluted earnings per share by $0.09.
Growth in fiscal 2007 was driven by the E! and Us Weekly gains discussed above and higher operating income at the Media Networks, Studio Entertainment and Parks and Resorts segments. Growth at the operating segments was primarily due to higher affiliate and advertising revenues at our cable businesses, improved home entertainment performance driven by the success of Cars and Pirates of the Caribbean: Dead Man's Chest, strong sales of ABC Studios productions, increased guest spending and theme park attendance at Walt Disney World and Disneyland Resort Paris and lower costs for sports programming due to fewer hours at the ABC Television Network.
BUSINESS SEGMENT RESULTS - 2008 vs. 2007
% change
2008 2007
vs. vs.
(in millions) 2008 2007 2006 2007 2006
Revenues:
Media Networks $ 16,116 $ 15,104 $ 14,186 7 % 6 %
Parks and Resorts 11,504 10,626 9,925 8 % 7 %
Studio Entertainment 7,348 7,491 7,529 (2) % (1) %
Consumer Products 2,875 2,289 2,107 26 % 9 %
$ 37,843 $ 35,510 $ 33,747 7 % 5 %
Segment operating income(1):
Media Networks $ 4,755 $ 4,275 $ 3,481 11 % 23 %
Parks and Resorts 1,897 1,710 1,534 11 % 11 %
Studio Entertainment 1,086 1,195 728 (9) % 64 %
Consumer Products 718 631 607 14 % 4 %
$ 8,456 $ 7,811 $ 6,350 8 % 23 %
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(1) Segment operating income includes equity in the income of investees. In the Business Segment results discussion, equity in the income of investees is included in segment operating income but does not affect segment revenues or costs and expenses.
The Company evaluates the performance of its operating segments based on segment operating income and management uses aggregate segment operating income as a measure of the overall performance of the operating businesses. The Company believes that information about aggregate segment operating income assists investors by allowing them to evaluate changes in the operating results of the Company's portfolio of businesses separate from factors other than business operations that affect net income. The following table reconciles segment operating income to income from continuing operations before income taxes and minority interests.
% change
2008 2007
vs. vs.
(in millions) 2008 2007 2006 2007 2006
Segment operating income $ 8,456 $ 7,811 $ 6,350 8 % 23 %
Corporate and unallocated shared expenses (471) (497) (522) (5) % (5) %
Other (expense) / income (59) 1,004 88 nm >100 %
Net interest expense (524) (593) (592) (12) % - %
Income from continuing operations before
income taxes and minority interests $ 7,402 $ 7,725 $ 5,324 (4) % 45 %
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Media Networks
The following table provides supplemental revenue and operating income detail
for the Media Networks segment:
% change
2008 2007
vs. vs.
(in millions) 2008 2007 2006 2007 2006
Revenues
Cable Networks $ 10,041 $ 9,167 $ 8,159 10 % 12 %
Broadcasting 6,075 5,937 6,027 2 % (1) %
$ 16,116 $ 15,104 $ 14,186 7 % 6 %
Segment operating income
Cable Networks $ 4,100 $ 3,577 $ 3,001 15 % 19 %
Broadcasting 655 698 480 (6) % 45 %
$ 4,755 $ 4,275 $ 3,481 11 % 23 %
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Revenues
Media Networks revenues increased 7%, or $1.0 billion, to $16.1 billion, consisting of a 10% increase, or $874 million, at the Cable Networks and a 2% increase, or $138 million, at Broadcasting.
Increased Cable Networks revenues were primarily due to growth of $654 million from Cable Service Providers, $206 million from advertising revenues and $14 million from other revenues. Revenues from Cable Service Providers (Affiliate Fees) are generally derived from fees charged on a per-subscriber basis, and the increase in the current year was driven by increases at ESPN and, to a lesser extent, at the worldwide Disney Channels and ABC Family Channel. The increase at ESPN was primarily due to contractual rate increases and subscriber growth, the increase at the worldwide Disney Channels was driven by subscriber growth and the increase at the ABC Family was due to contractual rate increases. Higher advertising revenues at ESPN and ABC Family reflected improved rates and ratings. Higher other revenues were driven by DVD sales, primarily High School Musical, partially offset by the favorable settlement of a claim with an international distributor in the prior year.
Certain of the Company's contracts with cable and satellite operators include annual live programming commitments. In these cases, recognition of revenues subject to the commitments is deferred until the annual commitments are satisfied, which generally results in higher revenue recognition in the second half of the year.
Increased Broadcasting revenues reflected higher international sales of ABC Studios productions and increased revenues at the Internet Group, partially offset by decreased advertising revenues, largely at the owned television stations. Increased international sales of ABC Studios productions were driven by Grey's Anatomy, Private Practice and Reaper. The increase in revenues at the Internet Group reflected subscription revenue at 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 and general and administrative costs, increased 6%, or $641 million, to $12 billion, consisting of an 8% increase, or $463 million, at the Cable Networks and a 3% increase, or $178 million, at Broadcasting. The increase at Cable Networks was primarily due to increased costs at ESPN and to a lesser extent, the worldwide Disney Channels, driven by higher programming, administrative and marketing costs. These increases were partially offset by the absence of Major League Baseball programming costs at ABC Family. The increase at Broadcasting was due to higher production cost amortization related to international sales of our programs and higher costs at the Internet Group related to international mobile and online operations, Disney Online and Club Penguin, partially offset by the absence of costs related to the Disney-branded mobile phone service, which was shut down in the first quarter of the current year.
Sports Programming Costs
The Company has various contractual commitments for the purchase of rights for multi-year sports and other programming arrangements, including the National Football League, National Basketball Association, National Association of Stock Car Auto Racing (NASCAR), Major League Baseball and various college football and basketball conferences and football bowl games. 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 11%, or $480 million, to $4.8 billion for the year due to an increase of $523 million at the Cable Networks partially offset by a decrease of $43 million at Broadcasting. The increase at the Cable Networks was primarily due to growth at ESPN, higher income at our cable equity investments, and increases at ABC Family and the domestic Disney Channels, partially offset by a favorable settlement of a claim with an international distributor in the prior year. The decrease at Broadcasting was primarily due to lower advertising revenues at the owned television stations, partially offset by an improvement at the Internet Group. The improvement at the Internet Group was driven by the absence of costs related to the Disney-branded mobile phone service, partially offset by higher costs for international mobile and online operations and Disney Online. The increase in income at our cable equity investments was primarily due to higher affiliate and advertising revenue at Lifetime and a gain on the sale of a European cable channel.
ABC Radio Transaction
On June 12, 2007, the Company completed the spin-off of its wholly-owned subsidiary, ABC Radio Holdings, Inc., which was then merged into a subsidiary of Citadel Broadcasting Corporation (Citadel). Prior to the spin-off, the Company consolidated its ABC Radio business, consisting of 22 large-market radio stations and the ABC Radio Network businesses, under ABC Radio Holdings, Inc. The transaction did not include the Company's ESPN Radio or Radio Disney network and station businesses. The results of the ABC Radio business have been reported as discontinued operations for all periods presented. The Company now includes the ESPN Radio and Radio Disney network and stations businesses with Cable Networks in the Media Networks segment. Prior to the transaction, the Company's radio businesses were included with Broadcasting in the Media Networks segment. Previously reported results have been reclassified to reflect this presentation.
Summarized financial information for the discontinued operations is as follows (in millions, except per share data):
2007 2006
Revenues $ 372 $ 538
Income from discontinued operations before income taxes 45 123
Income from discontinued operations, net of tax 13 70
Diluted EPS, discontinued operations 0.01 0.03
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Sale of E! Entertainment Television
On November 21, 2006, in connection with the execution of new long-term agreements for the provision of programming to cable service provider Comcast Corporation (Comcast), the Company sold its 39.5% interest in E! Entertainment Television (E!) to Comcast (which owned the remainder of the interest in E!) for $1.23 billion, which resulted in a pre-tax gain of $780 million ($487 million after-tax) reported in "Other (expense) / income". Equity income from E! was included in Media Networks segment operating income through the date of the sale.
Parks and Resorts
Revenues
Parks and Resorts revenues increased 8%, or $878 million, to $11.5 billion due to increases of $439 million at our domestic resorts and $439 million at our international resorts.
Domestic Parks and Resorts
At our domestic parks and resorts, revenue growth was primarily due to increases at the Walt Disney World Resort and Disney Vacation Club. Revenue growth at Walt Disney World Resort was primarily due to increased guest spending and theme park attendance. Increased guest spending was due to higher average ticket prices, increased food and beverage sales and higher average daily hotel room rates. At Disney Vacation Club, revenue growth reflected higher vacation club ownership sales, including extensions of the term of ownership on existing vacation home properties.
The following table presents attendance, per capita theme park guest spending, and hotel statistics for our domestic properties:
East Coast West Coast Total Domestic
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
2008 2007 2008 2007 2008 2007
Parks
Increase/ (decrease)
Attendance 2 % 6 % - % (1) % 2 % 3 %
Per Capita Guest Spending 3 % 3 % 2 % 2 % 3 % 3 %
Hotels (1)
Occupancy 90 % 89 % 88 % 92 % 89 % 89 %
Available Room Nights (in
thousands) 8,566 8,614 801 810 9,367 9,424
Per Room Guest Spending $ 223 $ 217 $ 339 $ 309 $ 233 $ 225
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(1) Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverages 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 resulted from an increase at Disneyland Resort Paris due to the favorable impact of foreign currency translation as a result of the weakening of the U.S. dollar against the Euro, and increased guest spending and theme park attendance. Increased guest spending was due to higher average daily hotel room rates and average ticket prices.
Costs and Expenses
Costs and expenses, which consist primarily of labor, depreciation, costs of merchandise, food and beverage sold, marketing and sales expense, repairs and maintenance and entertainment, increased 8%, or $691 million. The increase in costs and expenses was primarily due to increases at Disneyland Resort Paris, Walt Disney World Resort and Disney Vacation Club. The increase at Disneyland Resort Paris was due to the unfavorable impact of foreign currency translation as a result of the weakening of the U.S. dollar against the Euro, labor cost inflation and higher volume-related costs. The increase at the Walt Disney World Resort was due to labor and other cost inflation, new guest offerings and volume-related costs. The increase at Disney Vacation Club was driven by higher ownership sales.
Segment Operating Income
Segment operating income increased 11%, or $187 million, to $1.9 billion, primarily due to increases at Disneyland Resort Paris and the Walt Disney World Resort.
Studio Entertainment
Revenues
Revenues decreased 2%, or $143 million, to $7.3 billion primarily due to decreases of $117 million in worldwide television distribution, $112 million in domestic theatrical distribution, and $66 million in domestic home entertainment, partially offset by an increase of $147 million in international home entertainment.
The decrease in worldwide television distribution revenues was driven by the absence of the multi-season sale of Home Improvement which occurred in the prior year. Lower revenues in domestic theatrical distribution reflected the strong performance of prior-year titles, including Pirates of the Caribbean: At World's End, Ratatouille, and Wild Hogs, compared to the current year titles, which included National Treasure 2: Book of Secrets and WALL-E. Lower revenues in domestic home entertainment were primarily due to a decline in unit sales reflecting the performance of Pirates of the Caribbean: At World's End and Ratatouille in the current year compared to Pirates of the Caribbean: Dead Man's Chest and Cars in the prior year.
Revenue growth in international home entertainment was primarily due to a higher unit sales mix of television DVD box-sets, which have higher average unit sales prices.
Cost and Expenses
Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, production costs and participation costs, were comparable to the prior year as decreases in worldwide television distribution and domestic theatrical distribution were largely offset by an increase in international home entertainment.
Lower costs and expenses in worldwide television distribution were primarily due to a decrease in amortization and participation costs driven by the absence of the Home Improvement sale. The decrease in domestic theatrical distribution was primarily due to lower amortization expense reflecting decreased revenues for current year releases and lower film cost write-downs. The increase in international home entertainment was primarily due to higher distribution costs driven by extensive marketing campaigns to launch current year titles.
Segment Operating Income
Segment operating income decreased 9%, or $109 million, to $1.1 billion primarily due to lower revenues in domestic home entertainment.
Consumer Products
Revenues
Revenues increased 26%, or $586 million, to $2.9 billion, due to increases of $231 million at the Disney Stores, $181 million at Merchandise Licensing and $162 million at Disney Interactive Studios.
The increase at the Disney Stores was due to the acquisition of the Disney Stores North America during the third quarter (see discussion of the Disney Stores acquisition below). The revenue growth at Merchandise Licensing was primarily due to higher earned royalties across multiple product categories, led by Hannah Montana and High School Musical merchandise, partially offset by lower recognition of minimum guarantee revenues. The increase in Disney Interactive Studios revenues was primarily due to the performance of new self-published titles including High School Musical, Hannah Montana and Turok in the current . . .
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