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| DIS > SEC Filings for DIS > Form 10-Q on 3-Feb-2009 | All Recent SEC Filings |
3-Feb-2009
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
Other Financial Information
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
OVERVIEW
Our summary consolidated results are presented below:
Quarter Ended
December 27, December 29,
(in millions, except per share data) 2008 2007
Revenues $ 9,599 $ 10,452
Costs and expenses (8,382 ) (8,419 )
Other income 114 -
Net interest expense (139 ) (123 )
Equity in the income of investees 147 123
Income before income taxes and minority interests 1,339 2,033
Income taxes (488 ) (759 )
Minority interests (6 ) (24 )
Net income $ 845 $ 1,250
Diluted earnings per share $ 0.45 $ 0.63
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Quarter Results
Diluted earnings per share decreased 29% for the quarter due primarily to lower operating results, partially offset by a gain on the sale of our investment in two pay television services in Latin America which resulted in a benefit of $0.04 per diluted share. Lower operating results reflected decreased DVD unit sales due to the strong performance in the prior-year quarter of Pirates of the Caribbean: At World's End and High School Musical 2 and a decrease in catalog sales, lower advertising revenues at the ABC Television Network, ESPN and the owned television stations and decreased attendance and occupancy at our domestic parks. These decreases were partially offset by higher revenues from cable, satellite and telecommunications service providers (Cable Service Providers), principally at ESPN and lower broadcast programming and production cost amortization.
SEASONALITY
The Company's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 27, 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 theatrical releases and cable programming broadcasts.
Interactive Media revenues fluctuate due to the timing and performance of video game releases which are determined by several factors, including theatrical releases and cable programming broadcasts, competition and the timing of holiday periods. Revenues from our internet and mobile operations are not subject to significant seasonal trends.
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
December 27, December 29,
(in millions) 2008 2007
Revenues:
Media Networks $ 3,903 $ 4,109
Parks and Resorts 2,665 2,772
Studio Entertainment 1,945 2,641
Consumer Products 773 654
Interactive Media 313 276
$ 9,599 $ 10,452
Segment operating income:
Media Networks $ 655 $ 929
Parks and Resorts 382 505
Studio Entertainment 187 514
Consumer Products 265 287
Interactive Media (45 ) 13
$ 1,444 $ 2,248
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The following table reconciles segment operating income to income before income taxes and minority interests:
Quarter Ended
December 27, December 29,
(in millions) 2008 2007
Segment operating income $ 1,444 $ 2,248
Corporate and unallocated shared expenses (80 ) (92 )
Other income 114 -
Net interest expense (139 ) (123 )
Income before income taxes and minority interests $ 1,339 $ 2,033
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Depreciation expense is as follows:
Quarter Ended
December 27, December 29,
(in millions) 2008 2007
Media Networks
Cable Networks $ 24 $ 22
Broadcasting 22 21
Total Media Networks 46 43
Parks and Resorts
Domestic 205 198
International 79 82
Total Parks and Resorts 284 280
Studio Entertainment 12 9
Consumer Products 6 4
Interactive Media 3 5
Corporate 32 30
Total depreciation expense $ 383 $ 371
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Media Networks
The following table provides supplemental revenue and segment operating income
detail for the Media Networks segment:
Quarter Ended
December 27, December 29,
(in millions) 2008 2007 Change
Revenues:
Cable Networks $ 2,452 $ 2,412 2 %
Broadcasting 1,451 1,697 (14 ) %
$ 3,903 $ 4,109 (5 ) %
Segment operating income:
Cable Networks $ 517 $ 586 (12 ) %
Broadcasting 138 343 (60 ) %
$ 655 $ 929 (29 ) %
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Revenues
Media Networks revenues decreased 5%, or $206 million, to $3.9 billion, consisting of a 2% increase, or $40 million, at the Cable Networks and a 14% decrease, or $246 million, at Broadcasting.
Increased Cable Networks revenues were due to growth of $111 million from Cable Service Providers, partially offset by decreases of $55 million in advertising revenues and $16 million in other revenues. Revenues from Cable Service Providers are generally derived from fees charged on a per subscriber basis, and the increase in the current quarter was due to contractual rate increases and, to a lesser extent, subscriber growth primarily at ESPN. Lower advertising revenue reflected a decrease in sold inventory, partially offset by higher rates. The decrease in other revenues was driven by lower DVD sales reflecting the success of High School Musical 2 in the prior-year quarter, partially offset by miscellaneous other revenue increases.
Certain of the Company's contracts with Cable Service Providers 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.
Decreased Broadcasting revenues were primarily due to lower advertising revenue at the ABC Television Network and at the owned television stations. The decrease in advertising revenues at the ABC Television Network was driven by lower primetime ratings.
Costs and Expenses
Costs and expenses at Media Networks, which consist primarily of programming rights costs, production costs, participation costs, distribution and marketing expenses, labor costs, and general and administrative costs, increased 2%, or $78 million, reflecting a 6% increase, or $119 million, at the Cable Networks, and a 3% decrease, or $41 million, at Broadcasting. The increase at Cable Networks was driven by an increase at ESPN primarily due to higher NFL programming costs and higher general and administrative costs. The decrease at Broadcasting was primarily due to lower programming costs at the ABC Television Network due to a lower cost mix of programming including a shift of hours from primetime to news, partially offset by a bad debt charge in connection with the bankruptcy of a syndication customer.
Segment Operating Income
Segment operating income decreased 29%, or $274 million, to $655 million for the quarter due to a decrease of 12%, or $69 million, at the Cable Networks and a decrease of 60%, or $205 million, at Broadcasting. The decrease at the Cable Networks was primarily due to decreases at the domestic Disney Channels and at ESPN. The decrease at Broadcasting was primarily due to lower primetime advertising revenue at the ABC Television Network and at the owned television stations, and a bad debt charge in connection with the bankruptcy of a syndication customer, partially offset by lower programming and development costs.
Parks and Resorts
Revenues
Parks and Resorts revenues decreased 4%, or $107 million, to $2.7 billion due to decreases of $69 million at our domestic operations and $38 million at our international operations.
Domestic Operations
At our domestic operations, decreased revenue was primarily due to lower attendance and occupancy, partially offset by higher vacation club ownership sales at Disney Vacation Club.
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
December 27, December 29, December 27, December 29, December 27, December 29,
2008 2007 2008 2007 2008 2007
Parks
(Increase/decrease)
Attendance (5 )% 4 % (6 )% 1 % (5 )% 3 %
Per Capita Guest Spending 1 % 3 % (3 )% 2 % - % 3 %
Hotels (1)
Occupancy 85 % 89 % 85 % 91 % 85 % 89 %
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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 Operations
At our international operations, decreased revenue was due to a decline at Disneyland Resort Paris due to the unfavorable impact of foreign currency translation, as a result of the strengthening of the U.S. dollar against the Euro, and lower real estate sales, partially offset by an increase in attendance.
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 1%, or $16 million. The increase in costs and expenses was due to an increase at our domestic operations, partially offset by a decrease at Disneyland Resort Paris. Higher costs at our domestic operations reflected mark to market adjustments on fuel hedge contracts, labor and other cost inflation and higher cost of ownership sales at Disney Vacation Club, partially offset by cost mitigation activities. The decrease at Disneyland Resort Paris was primarily due to the favorable impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Euro and lower real estate cost of sales, partially offset by labor cost inflation and higher marketing and sales costs.
Segment Operating Income
Segment operating income decreased 24%, or $123 million, to $382 million due to decreases at the domestic operations and Disneyland Resort Paris.
Studio Entertainment
Revenues
Revenues decreased 26%, or $696 million, to $1.9 billion primarily due to a decrease of $516 million at worldwide home entertainment driven by a decline in DVD unit sales reflecting the strong performance of Pirates of the Caribbean: At World's End, High School Musical 2, Ratatouille and Jungle Book Platinum Release in the prior-year quarter and lower catalog sales in the current quarter. Key current quarter releases included WALL-E, The Chronicles of Narnia: Prince Caspian and Tinker Bell.
Costs and Expenses
Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs decreased 17%, or $369 million, primarily due
to a decrease in worldwide home entertainment driven by lower amortization, distribution expenses, and participation costs as a result of decreased unit sales.
Segment Operating Income
Segment operating income decreased 64%, or $327 million, to $187 million primarily due to a decrease at worldwide home entertainment.
Consumer Products
Revenues
Revenues for the quarter increased 18%, or $119 million, to $773 million, primarily due to an increase of $114 million at our retail business due to the acquisition of the Disney Stores North America during the third quarter of fiscal 2008. At Merchandise Licensing, revenue was comparable to the prior-year quarter.
Costs and Expenses
Costs and expenses, which consist primarily of cost of sales, salaries and benefits, marketing, and occupancy, increased 38%, or $141 million, to $508 million, primarily due to an increase at our retail business driven by the acquisition of the Disney Stores North America as well as higher selling and administrative costs.
Operating Income
Segment operating income decreased 8%, or $22 million, to $265 million, driven by lower results at our retail business, including the absence of royalties from the former licensee for the Disney Stores North America, and higher selling and administrative costs.
Interactive Media
Revenues
Interactive Media revenues increased 13%, or $37 million, to $313 million primarily due to an increase of $23 million at Disney Interactive Studios.
The increase at Disney Interactive Studios was primarily due to higher video game unit volume driven by current quarter titles, which included High School Musical 3, Sing It and Bolt compared to the prior-year quarter, which included High School Musical and Hannah Montana.
Costs and Expenses
Costs and expenses, which consist primarily of video game and internet content development costs, product costs, distribution and marketing expenses, general and administrative costs, and technology infrastructure costs, increased 36%, or $95 million, to $358 million. The increase was primarily due to an increase in unit cost of sales and increased distribution and marketing costs at Disney Interactive Studios.
Operating Income
Segment operating income decreased $58 million to a loss of $45 million due to a decline at Disney Interactive Studios.
OTHER FINANCIAL INFORMATION
Corporate and Unallocated Shared Expenses
Corporate and unallocated shared expenses decreased from $92 million to $80 million for the quarter due to an increase in allocation of costs to the business segments.
Net Interest Expense
Net interest expense is as follows:
Quarter Ended
December 27, December 29,
(in millions) 2008 2007 Change
Interest expense $ (168 ) $ (216 ) (22 ) %
Interest and investment income 29 93 (69 ) %
Net interest expense $ (139 ) $ (123 ) 13 %
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The decrease in interest expense for the quarter was primarily due to lower effective interest rates.
Interest and investment income for the quarter decreased as the prior-year quarter included a gain on the sale of an investment and a recovery in connection with the Company's leveraged lease investment with Delta Air Lines which had been written off previously.
Income Taxes
The effective income tax rate decreased 0.9 percentage points from 37.3% to 36.4% for the quarter. The decrease in the effective income tax rate was driven by increased benefits from Internal Revenue Code (IRC) Section 199 related to qualified domestic production activities.
Minority Interests
Minority interest expense decreased for the quarter due to the impact of lower performance at Disneyland Resort Paris and at ESPN. The minority interest impact is determined on income after royalties, financing costs and income taxes.
FINANCIAL CONDITION
The change in cash and cash equivalents is as follows:
Quarter Ended
December 27, December 29,
(in millions) 2008 2007 Change
Cash provided by operations $ 262 $ 662 $ (400 )
Cash used in investing
activities (578 ) (324 ) (254 )
Cash provided (used) by
financing activities 1,110 (594 ) 1,704
Increase/(decrease) in cash and
cash equivalents $ 794 $ (256 ) $ 1,050
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Operating Activities
Cash provided by operations decreased by $400 million to $262 million primarily due to lower segment operating results and higher net investment in film and television productions, partially offset by lower income tax payments.
Film and Television Costs
The Company's Studio Entertainment and Media Networks segments incur costs to acquire and produce television and feature film programming. Film and television production costs include all internally produced content such as live action and animated feature films, animated direct-to-video programming, television series, television specials, theatrical stage plays or other similar product. Programming costs include film or television product licensed for a specific period from third parties for airing on the Company's broadcast, cable networks and television stations. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities. Accordingly, we analyze our programming assets net of the related liability.
The Company's film and television production and programming activity for the quarters ended December 27, 2008 and December 29, 2007 are as follows:
Quarter Ended
December 27, December 29,
(in millions) 2008 2007
Beginning balances:
Production and programming assets $ 5,935 $ 5,682
Programming liabilities (1,108 ) (1,210 )
4,827 4,472
Spending:
Film and television production 998 850
Broadcast programming 1,431 1,348
2,429 2,198
Amortization:
Film and television production (790 ) (1,022 )
Broadcast programming (1,394 ) (1,392 )
(2,184 ) (2,414 )
Change in film and television production and
programming costs 245 (216 )
Other non-cash activity (24 ) 12
Ending balances:
Production and programming assets 6,290 5,632
Programming liabilities (1,242 ) (1,364 )
$ 5,048 $ 4,268
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Investing Activities Cash used by investing activities during the quarter ended December 27, 2008 of $578 million included $291 million of investments in parks, resorts and other . . . |
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