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| DIS > SEC Filings for DIS > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-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
Quarter Results
Six-Month Results
Other Financial Information
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
OVERVIEW
Our summary consolidated results are presented below:
Quarter Ended Six Months Ended
(in millions, except per share March 28, March 29, March 28, March 29,
data) 2009 2008 Change 2009 2008 Change
Revenues $ 8,087 $ 8,710 (7) % $ 17,686 $ 19,162 (8) %
Costs and expenses (6,800) (6,812) - % (15,182) (15,231) - %
Restructuring and impairment
charges (305) - nm (305) - nm
Other income - - nm 114 - nm
Net interest expense (128) (147) 13 % (267) (270) 1 %
Equity in the income of
investees 147 144 2 % 294 267 10 %
Income before income taxes and
minority interests 1,001 1,895 (47) % 2,340 3,928 (40) %
Income taxes (348) (712) 51 % (836) (1,471) 43 %
Minority interests (40) (50) 20 % (46) (74) 38 %
Net income $ 613 $ 1,133 (46) % $ 1,458 $ 2,383 (39) %
Diluted earnings per share $ 0.33 $ 0.58 (43) % $ 0.78 $ 1.21 (36) %
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Quarter Results
Diluted earnings per share (EPS) decreased 43% for the quarter primarily due to lower operating results driven by a decline in domestic sales of DVD units, lower performing theatrical releases, decreased guest spending at our domestic parks and at Disneyland Resort Paris, lower advertising sales at the owned television stations and ESPN, and higher programming costs at the ABC Television Network. These decreases were partially offset by the benefit of higher rates on affiliate fees from cable, satellite and telecommunications service providers (Cable Service Providers), principally at ESPN.
The current quarter results also included restructuring and impairment charges which had a $0.10 per share impact on EPS and consisted of radio FCC license and other impairments, along with
severance and related charges resulting from organizational and cost structure initiatives across our businesses. See Note 15 to Condensed Consolidated Financial Statements for further detail.
Six-Month Results
Diluted earnings per share decreased 36% for the six months primarily due to lower operating results driven by a decline in worldwide sales of DVD units, lower advertising sales at the ABC Television Network, owned television stations and ESPN, decreased volumes and guest spending at our domestic parks, and lower performing theatrical titles. These decreases were partially offset by the benefit of higher rates on affiliate fees from Cable Service Providers, principally at ESPN. The current six months also included the restructuring and impairment charges described above, partially offset by a gain in the first quarter on the sale of our investment in two pay television services in Latin America. Collectively, these items adversely affected EPS by $0.07.
SEASONALITY
The Company's businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and six months ended March 28, 2009 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 Six Months Ended
March 28, March 29, March 28, March 29,
(in millions) 2009 2008 Change 2009 2008 Change
Revenues:
Media Networks $ 3,620 $ 3,550 2 % $ 7,523 $ 7,659 (2 ) %
Parks and Resorts 2,407 2,725 (12 ) % 5,072 5,497 (8 ) %
Studio Entertainment 1,435 1,822 (21 ) % 3,380 4,463 (24 ) %
Consumer Products 496 457 9 % 1,269 1,111 14 %
Interactive Media 129 156 (17 ) % 442 432 2 %
$ 8,087 $ 8,710 (7 ) % $ 17,686 $ 19,162 (8 ) %
Segment operating income:
Media Networks $ 1,306 $ 1,356 (4 ) % $ 1,961 $ 2,285 (14 ) %
Parks and Resorts 171 339 (50 ) % 553 844 (34 ) %
Studio Entertainment 13 377 (97 ) % 200 891 (78 ) %
Consumer Products 97 127 (24 ) % 362 414 (13 ) %
Interactive Media (61) (60) (2 ) % (106) (47) nm
$ 1,526 $ 2,139 (29 ) % $ 2,970 $ 4,387 (32 ) %
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The following table reconciles segment operating income to income before income taxes and minority interests:
Quarter Ended Six Months Ended
March 28, March 29, March 28, March 29,
(in millions) 2009 2008 Change 2009 2008 Change
Segment operating income $ 1,526 $ 2,139 (29 ) % $ 2,970 $ 4,387 (32 ) %
Corporate and unallocated shared
expenses (92) (97) 5 % (172) (189) 9 %
Restructuring and impairment
charges (305) - nm (305) - nm
Other income - - nm 114 - nm
Net interest expense (128) (147) 13 % (267) (270) 1 %
Income before income taxes and
minority interests $ 1,001 $ 1,895 (47 ) % $ 2,340 $ 3,928 (40 ) %
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Depreciation expense is as follows:
Quarter Ended Six Months Ended
March 28, March 29, March 28, March 29,
(in millions) 2009 2008 Change 2009 2008 Change
Media Networks
Cable Networks $ 32 $ 22 45 % $ 56 $ 44 27 %
Broadcasting 22 21 5 % 44 43 2 %
Total Media Networks 54 43 26 % 100 87 15 %
Parks and Resorts
Domestic 201 202 - % 406 400 2 %
International 77 85 (9 ) % 156 167 (7 ) %
Total Parks and Resorts 278 287 (3 ) % 562 567 (1 ) %
Studio Entertainment 12 9 33 % 24 18 33 %
Consumer Products 7 4 75 % 13 9 44 %
Interactive Media 10 5 100 % 13 8 63 %
Corporate 32 30 7 % 64 60 7 %
Total depreciation expense $ 393 $ 378 4 % $ 776 $ 749 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 Six Months Ended
March 28, March 29, March 28, March 29,
(in millions) 2009 2008 Change 2009 2008 Change
Revenues:
Cable Networks $ 2,204 $ 2,110 4 % $ 4,656 $ 4,522 3 %
Broadcasting 1,416 1,440 (2 ) % 2,867 3,137 (9 ) %
$ 3,620 $ 3,550 2 % $ 7,523 $ 7,659 (2 ) %
Segment operating income:
Cable Networks $ 1,144 $ 1,094 5 % $ 1,661 $ 1,680 (1 ) %
Broadcasting 162 262 (38 ) % 300 605 (50 ) %
$ 1,306 $ 1,356 (4 ) % $ 1,961 $ 2,285 (14 ) %
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Revenues
Media Networks revenues increased 2%, or $70 million, to $3.6 billion, consisting of a 4% increase, or $94 million, at the Cable Networks and a 2% decrease, or $24 million, at Broadcasting.
Increased Cable Networks revenues were due to growth of $132 million from Cable Service Providers, partially offset by a $40 million decrease in advertising 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 subscriber growth primarily at ESPN and, to a lesser extent, contractual rate increases at the domestic Disney Channel and at ABC Family. Lower advertising revenue reflected a decrease at ESPN partially offset by an increase at ABC Family. The decrease at ESPN was driven by lower sold inventory, partially offset by higher rates. The increase at ABC Family reflected increased rates and sold inventory.
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.
Decreased Broadcasting revenues were primarily due to lower advertising sales at the owned television stations, partially offset by higher international sales of ABC Studios productions. Increased international sales of ABC Studios productions were led by Ugly Betty, Private Practice and Criminal Minds.
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 5%, or $120 million, reflecting a 6% increase, or $76 million, at Broadcasting, and a 4% increase, or $44 million, at the Cable Networks. The increase at Broadcasting was primarily due to higher production expenses, which reflected increased production activity during the current quarter compared to the prior-year quarter, which was affected by the Writers' Guild of America work stoppage. The increase at Cable Networks was driven by increased rights costs at ESPN.
Segment Operating Income
Segment operating income decreased 4%, or $50 million, to $1.3 billion for the quarter due to a decrease of 38%, or $100 million, at Broadcasting, and an increase of 5%, or $50 million, at the Cable Networks. The decrease at Broadcasting was primarily due to lower advertising sales at the owned television stations and higher programming costs at the ABC Television Network, partially offset by increased sales of ABC Studios Productions. The increase at the Cable Networks was due to growth at ESPN, ABC Family and the domestic Disney Channel.
Parks and Resorts
Revenues
Parks and Resorts revenues decreased 12%, or $318 million, to $2.4 billion due to decreases of $233 million at our domestic operations and $85 million at our international operations. Revenues were unfavorably impacted by the shift of the Easter holiday season from the second quarter of fiscal 2008 to the third quarter of fiscal 2009.
Domestic Operations
At our domestic operations, decreased revenue was primarily due to decreased guest spending at both Walt Disney World Resort and Disneyland Resort and a decrease at Disney Vacation Club. Decreased guest spending at Walt Disney World Resort reflected lower average daily hotel room rates, lower average ticket prices and decreased merchandise spending and lower guest spending at Disneyland Resort was driven by lower average ticket prices and decreased merchandise spending. Lower revenues at Disney Vacation Club reflected unfavorable impacts associated with securitized ownership interests, decreased sales of term extensions on certain existing properties and lower rentals of vacation club units.
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
March 28, March 29, March 28, March 29, March 28, March 29,
2009 2008 2009 2008 2009 2008
Parks
(Increase/decrease)
Attendance (1) % 7 % 2 % 2 % 0 % 5 %
Per Capita Guest
Spending (4) % 3 % (10) % 8 % (6) % 5 %
Hotels (1)
Occupancy 89 % 88 % 69 % 83 % 87 % 88 %
Available Room
Nights (in
thousands) 2,134 2,150 200 200 2,334 2,350
Per Room Guest
Spending $ 199 $ 239 $ 320 $ 340 $ 207 $ 247
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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, decreased guest spending and lower attendance. Decreased guest spending was due to lower average ticket prices, lower average daily hotel room rates and decreased merchandise spending.
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, decreased 6%, or $150 million. The decrease in costs and expenses was primarily due to decreases at Disneyland Resort Paris, and our domestic parks and resorts, partially offset by an increase at Disney Vacation Club. The decrease at Disneyland Resort Paris was due to the favorable impact of foreign currency translation, as a result of the strengthening of the U.S. dollar against the Euro. Lower costs at the domestic parks and resorts were driven by cost mitigation activities and lower cost of merchandise, food and beverages sold, partially offset by labor and other cost inflation. The increase at Disney Vacation Club reflected higher per unit cost of sales.
Segment Operating Income
Segment operating income decreased 50%, or $168 million, to $171 million reflecting decreases at the domestic operations and Disneyland Resort Paris.
Studio Entertainment
Revenues
Revenues decreased 21%, or $387 million, to $1.4 billion primarily due to decreases of $225 million in worldwide home entertainment, $50 million in domestic theatrical distribution, and $34 million in music distribution.
Lower worldwide home entertainment revenues were primarily due to lower unit sales in the domestic market reflecting the performance of current quarter titles, and to a lesser extent, lower average unit sales prices in international markets driven by a higher average selling price for Ratatouille in the prior-year quarter. Significant current-quarter titles in the domestic market included Bolt, Beverly Hills Chihuahua and High School Musical 3: Senior Year, while the prior-year quarter included Enchanted, Game Plan, and No Country for Old Men.
The decrease in domestic theatrical distribution revenues was primarily due to
the performance of current quarter titles, including Bedtime Stories, Race to
Witch Mountain and Confessions of a Shopaholic, compared to National Treasure 2:
Book of Secrets, Hannah Montana/Miley Cyrus: Best of Both Worlds and Step Up 2
in the prior-year quarter. Lower revenues in music distribution reflected the
strong performance of the Hannah Montana concert tour in the prior-year quarter.
Costs and Expenses
Costs and expenses, which consist primarily of production cost amortization, distribution and marketing expenses, product costs and participation costs, were essentially flat at $1.4 billion as decreases in international home entertainment and music distribution were largely offset by an increase in worldwide theatrical distribution.
The decrease in costs at international home entertainment was primarily due to lower distribution expenses and production cost amortization. Lower amortization was driven by the strong performance of Ratatouille in the prior-year quarter. The decrease in music distribution reflected higher costs and expenses associated with the Hannah Montana concert tour in the prior-year quarter.
Higher costs in theatrical distribution were primarily due to higher international production cost amortization driven by Bolt in the current quarter, and higher international distribution expenses driven by more titles in release. Additionally, costs increased in the domestic market primarily due to higher marketing expenses for future quarter releases.
Segment Operating Income
Segment operating income decreased 97%, or $364 million, to $13 million primarily due to decreases in domestic home entertainment and worldwide theatrical distribution.
Consumer Products
Revenues
Revenues for the quarter increased 9%, or $39 million, to $496 million, primarily due to an increase of $50 million at our retail business, which reflected the acquisition of the Disney Stores North America during the third quarter of fiscal 2008 partially offset by decreases of $14 million at Disney Publishing Worldwide primarily due to lower book sales and $11 million at Merchandise Licensing driven by lower earned royalty revenue across multiple product categories.
Costs and Expenses
Costs and expenses, which consist primarily of cost of sales, salaries and benefits, marketing, and occupancy, increased 22%, or $71 million, to $401 million, primarily due to an increase at our retail business driven by the acquisition of the Disney Stores North America, partially offset by lower sales and marketing costs at Disney Publishing Worldwide.
Operating Income
Segment operating income decreased 24%, or $30 million, to $97 million, primarily due to lower results at our retail business and a decline in earned royalties at Merchandise Licensing.
Interactive Media
Revenues
Interactive Media revenues decreased 17%, or $27 million, to $129 million primarily due to a decrease of $41 million at Disney Interactive Studios partially offset by an increase of $17 million driven by our mobile phone service business in Japan, which was launched in the second quarter of fiscal 2008.
The decrease at Disney Interactive Studios was primarily due to lower sales of self-published video games in the current quarter reflecting the strong performance of Turok in the prior-year quarter.
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, decreased 11%, or $23 million, to $193 million.
The decrease was primarily due to lower marketing expenses at Disney Online and decreased costs of sales and marketing expenses associated with lower video game sales at Disney Interactive Studios in the current quarter.
Operating Loss
Segment operating loss increased 2% to $61 million due to a decline at Disney Interactive Studios partially offset by increases at our mobile phone service business in Japan and at Disney Online.
BUSINESS SEGMENT RESULTS - Six Month Results
Media Networks
Revenues
Media Networks revenues decreased 2%, or $136 million, to $7.5 billion, consisting of a 9% decrease, or $270 million, at Broadcasting, and a 3% increase, or $134 million, at the Cable Networks.
Increased Cable Networks revenues were due to growth of $243 million from Cable Service Providers, partially offset by a $95 million decrease in advertising revenues and $14 million in other revenues. Increased revenues from Cable Service Providers were primarily due to contractual rate increases at ESPN and to a lesser extent, the domestic Disney Channel and ABC Family. Lower advertising revenue reflected lower units sold, partially offset by higher rates at ESPN. Lower advertising revenue at ESPN was partially offset by an increase at ABC Family. The decrease in other revenues reflected the success of High School Musical 2 DVD sales in the prior-year.
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