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DIS > SEC Filings for DIS > Form 10-K on 21-Nov-2012All Recent SEC Filings

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Form 10-K for WALT DISNEY CO/


21-Nov-2012

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

                              CONSOLIDATED RESULTS

                      (in millions, except per share data)



                                                                                                % Change
                                                                                             Better/(Worse)
                                                                                           2012          2011
                                                                                            vs.           vs.
                                           2012             2011            2010           2011          2010
Revenues                                $   42,278       $   40,893      $   38,063           3 %           7 %
Costs and expenses                        (33,415)         (33,112)        (31,337)         (1) %         (6) %
Restructuring and impairment charges         (100)             (55)           (270)        (82) %          80 %
Other income /(expense), net                   239               75             140        >100 %        (46) %
Net interest expense                         (369)            (343)           (409)         (8) %          16 %
Equity in the income of investees              627              585             440           7 %          33 %

Income before income taxes                   9,260            8,043           6,627          15 %          21 %
Income taxes                               (3,087)          (2,785)         (2,314)        (11) %        (20) %

Net income                                   6,173            5,258           4,313          17 %          22 %
Less: Net income attributable to
noncontrolling interests                     (491)            (451)           (350)         (9) %        (29) %

Net income attributable to The Walt
Disney Company (Disney)                 $    5,682       $    4,807      $    3,963          18 %          21 %

Earnings per share attributable to
Disney:
Diluted                                 $     3.13       $     2.52      $     2.03          24 %          24 %


Basic                                   $     3.17       $     2.56      $     2.07          24 %          24 %


Weighted average number of common
and common equivalent shares
outstanding:
Diluted                                      1,818            1,909           1,948


Basic                                        1,794            1,878           1,915


Table of Contents

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 - 2012 vs. 2011

Non-Segment Items - 2012 vs. 2011

Pension and Postretirement Medical Benefit Costs

Business Segment Results - 2011 vs. 2010

Non-Segment Items - 2011 vs. 2010

Liquidity and Capital Resources

Contractual Obligations, Commitments, and Off Balance Sheet Arrangements

Accounting Policies and Estimates

Forward-Looking Statements

CONSOLIDATED RESULTS

2012 vs. 2011

Revenues for fiscal 2012 increased 3%, or $1.4 billion, to $42.3 billion; net income attributable to Disney increased 18%, or $875 million, to $5.7 billion; and earnings per share attributable to Disney (EPS) for the year increased 24% to $3.13.

Net income attributable to Disney for fiscal 2012 included a $184 million ($116 million after tax) non-cash gain recorded in connection with the acquisition of a controlling interest in UTV (UTV Gain) and $79 million ($50 million after tax) for the recovery of a receivable from Lehman Brothers that was written off in 2008 as a result of the Lehman Brothers bankruptcy (Lehman recovery), partially offset by $100 million ($63 million after tax) of restructuring and impairment charges and a $24 million net charge ($7 million after tax and allocation to noncontrolling interests) related to the refinancing of Disneyland Paris borrowings (DLP debt charge). These items collectively had a $0.06 net benefit on EPS.

Net income attributable to Disney for fiscal 2011 included $55 million of restructuring and impairment charges and gains from the sales of businesses of $75 million. These items collectively had a $0.02 net negative impact on EPS. The table below shows the pretax and after tax impact of these items.

                                                      Benefit / (Expense)
                                                               Tax            After
                                             Pretax          Effect            Tax
   Restructuring and impairment charges   $      (55)      $      47       $      (8)
   Gains on sales of businesses                   75            (107)            (32)

                                          $       20       $     (60)      $     (40)

Restructuring and impairment charges included an impairment of assets that had tax basis significantly in excess of book value resulting in a $47 million tax benefit on the restructuring and impairment charges. The gains on sales of businesses included the sale of Miramax which had a book value that included $217 million of allocated goodwill which is not tax deductible. Accordingly, the taxable gain on the sales of businesses exceeded the $75 million book gain resulting in tax expense of $107 million.

After the impact of the items discussed above, the increase in EPS for fiscal 2012 reflected higher operating results driven by higher fees from MVPDs (Affiliate Fees) at ESPN and the worldwide Disney Channel, higher guest spending and attendance at our domestic parks and resorts, higher advertising revenue at ESPN, higher results at our theatrical business driven by Marvel's The Avengers, higher ABC program sales, improved social game performance due to lower acquisition accounting impacts and increased title performance, and higher merchandise licensing revenue driven by the strength of Marvel properties. These increases were partially offset by higher operating expenses at our domestic parks and resorts, higher sports programming costs at ESPN, lower advertising revenue at ABC and our owned television stations and higher film cost write-downs.

2011 vs. 2010

Revenues for fiscal 2011 increased 7%, or $2.8 billion, to $40.9 billion; net income attributable to Disney increased 21%, or $844 million, to $4.8 billion; and EPS increased 24% to $2.52.


Table of Contents

The increase in EPS for fiscal 2011 reflected higher operating results driven by Affiliate Fee growth at our Cable Networks, increased guest spending and volumes at our domestic parks and resorts, higher advertising revenue at ESPN and lower film cost write-downs. Additionally, EPS growth benefited from decreased programming and production costs at ABC, higher licensing revenue due to the strength of Cars merchandise and a full-period of results for Marvel, and higher equity income at AETN. These increases were partially offset by higher costs at ESPN and at our domestic parks and resorts, lower performance at our theatrical business, and the inclusion of a full-period of results for Playdom in fiscal 2011, which included the impact of acquisition accounting.

Restructuring and Impairment Charges

The Company recorded $100 million of restructuring and impairment charges in fiscal 2012. Restructuring charges were driven by severance and facilities costs related to organizational and cost structure initiatives across various of our businesses. Impairment charges primarily resulted from an intellectual property impairment.

The Company recorded $55 million of charges in fiscal 2011 reflecting severance and facilities costs related to organizational and cost structure initiatives primarily at the Studio Entertainment and Interactive segments.

The Company recorded $270 million of charges in fiscal 2010 related to organizational and cost structure initiatives primarily at our Studio Entertainment and Media Networks segments. Restructuring charges of $138 million were primarily for severance and other related costs. Impairment charges of $132 million consisted of write-offs of capitalized costs primarily related to abandoned film projects, the closure of a studio production facility and the closure of five ESPN Zone locations.

Other Income /(expense), net

Other income /(expense) is as follows (in millions):



                                                         2012           2011          2010
UTV Gain                                              $      184      $      -      $      -
Lehman recovery                                               79             -             -
DLP debt charge                                             (24)             -             -
Gain on sale of Miramax                                        -            64             -
Gain on sale of BASS                                           -            11             -
Gain on sales of investments in television services
in Europe                                                      -             -            75
Gain on sale of Power Rangers property                         -             -            43
Gain related to the acquisition of The Disney Store
Japan                                                          -             -            22

Other income /(expense), net                          $      239      $     75      $    140

BUSINESS SEGMENT RESULTS - 2012 vs. 2011

Below is a discussion of the major revenue and expense categories for our business segments. Costs and expenses for each segment consist of operating expenses, selling, general, administrative and other expenses and depreciation and amortization. Selling, general, administrative and other costs include third-party and internal marketing expenses.

Our Media Networks segment generates revenue from Affiliate Fees charged to MVPDs, advertising revenues from the sale to advertisers of time in programs for commercial announcements and other revenues which include the sale and distribution of television programming. Operating expenses include programming and production costs, technical support costs, distribution costs and operating labor.

Our Parks and Resorts segment generates revenue from the sale of admissions to theme parks, the sale of merchandise, food and beverages, charges for room nights at hotels, sales of cruise vacation packages and sales and rentals of vacation club properties. Operating expenses include labor, costs of sales, repairs and maintenance, entertainment and cruise ship fuel expense.


Table of Contents

Our Studio Entertainment segment generates revenue from the distribution of films in the theatrical, home entertainment and television markets. Operating expenses include film cost amortization, which consists of production cost amortization, participations and residuals, costs of sales and distribution expenses.

Our Consumer Products segment generates revenue from licensing characters from our film, television and other properties to third parties for use on consumer merchandise, publishing children's books and magazines and comic books, and operating retail stores, English language learning centers and internet shopping sites. Operating expenses include costs of goods sold, distribution, operating labor and retail occupancy costs.

Our Interactive segment generates revenue from the development and sale of multi-platform games, online advertising and sponsorships, subscriptions to and micro transactions for online games, and content and handset revenue from our Disney-branded mobile phone business in Japan. Certain properties are also licensed to third-party game publishers. Operating expenses include product development, costs of goods sold and distribution expenses. Certain costs related to website design and maintenance are allocated to other Company businesses.

                                                                                              % Change
                                                                                           Better/(Worse)
                                                                                         2012          2011
                                                                                          vs.           vs.
(in millions)                             2012            2011            2010           2011          2010
Revenues:
Media Networks                         $   19,436      $   18,714      $   17,162           4 %           9 %
Parks and Resorts                          12,920          11,797          10,761          10 %          10 %
Studio Entertainment                        5,825           6,351           6,701         (8) %         (5) %
Consumer Products                           3,252           3,049           2,678           7 %          14 %
Interactive                                   845             982             761        (14) %          29 %

                                       $   42,278      $   40,893      $   38,063           3 %           7 %

Segment operating income (loss):
Media Networks                         $    6,619      $    6,146      $    5,132           8 %          20 %
Parks and Resorts                           1,902           1,553           1,318          22 %          18 %
Studio Entertainment                          722             618             693          17 %        (11) %
Consumer Products                             937             816             677          15 %          21 %
Interactive                                 (216)           (308)           (234)          30 %        (32) %

                                       $    9,964      $    8,825      $    7,586          13 %          16 %

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 before income taxes.

                                                                                               % Change
                                                                                            Better/(Worse)
                                                                                           2012         2011
                                                                                           vs.          vs.
(in millions)                                  2012           2011           2010          2011         2010
Segment operating income                    $   9,964      $   8,825      $   7,586          13 %         16 %
Corporate and unallocated shared expenses       (474)          (459)          (420)         (3) %        (9) %
Restructuring and impairment charges            (100)           (55)          (270)        (82) %         80 %
Other income /(expense), net                      239             75            140        >100 %       (46) %
Net interest expense                            (369)          (343)          (409)         (8) %         16 %

Income before income taxes                  $   9,260      $   8,043      $   6,627          15 %         21 %


Table of Contents

Media Networks

Operating results for the Media Networks segment are as follows:




                                                           Year Ended                  % Change
                                                 September 29,        October 1,       Better /
(in millions)                                        2012              2011 (1)         (Worse)
Revenues
Affiliate Fees                                   $       9,360        $    8,837            6 %
Advertising                                              7,699             7,598            1 %
Other                                                    2,377             2,279            4 %

Total revenues                                          19,436            18,714            4 %
Operating expenses                                    (10,535)          (10,282)          (2) %
Selling, general, administrative and other             (2,651)           (2,633)          (1) %
Depreciation and amortization                            (258)             (237)          (9) %
Equity in the income of investees                          627               584            7 %

Operating Income                                 $       6,619        $    6,146            8 %

(1) Certain reclassifications have been made to the amounts presented for fiscal 2011 and fiscal 2010 to conform to the fiscal 2012 presentation

Revenues

Affiliate Fee growth of 6% was driven by increases of 5% from higher contractual rates and 1% from subscriber growth at Cable Networks.

Higher advertising revenues were due to an increase of $263 million at Cable Networks from $3,522 million to $3,785 million, partially offset by a decrease of $162 million at Broadcasting from $4,076 million to $3,914 million. The increase at Cable Networks reflected an increase of 6% due to higher rates. The decrease at Broadcasting reflected decreases of 7% due to lower ABC ratings, and 2% due to lower local television advertising driven by lower political advertising, partially offset by an increase of 5% due to higher ABC advertising rates.

The increase in other revenues was primarily due to higher program sales driven by Castle, Once Upon a Time, and Revenge, partially offset by lower home entertainment revenues, primarily due to Lost, and lower Disney Channel program sales.

Costs and Expenses

Operating expenses include programming and production costs which increased $231 million from $8,760 million to $8,991 million. At Cable Networks, an increase in programming and production costs of $359 million was primarily due to higher sports rights costs due to contractual rate increases for college sports, NFL, MLB, and NBA programming and expanded rights for the Wimbledon Championships. At Broadcasting, programming and production costs decreased $128 million reflecting the absence of The Oprah Winfrey Show at our local television stations and lower program write-offs at ABC.

Equity in the Income of Investees

Income from equity investees increased to $627 million in the current year from $584 million in the prior year driven by an increase at AETN primarily due to higher advertising and affiliate revenues, partially offset by higher programming costs. This increase was partially offset by equity losses at Hulu which were driven by higher programming and marketing costs, partially offset by higher advertising and subscription revenues.

Segment Operating Income

Segment operating income increased 8%, or $473 million, to $6.6 billion. The increase was primarily due to increases at ESPN and the worldwide Disney Channels, higher program sales, lower broadcast programming costs and increased equity income from AETN, partially offset by lower broadcast advertising revenue.


Table of Contents

The following table provides supplemental revenue and operating income detail for the Media Networks segment:

                                             Year Ended                 % Change
                                   September 29,       October 1,       Better /
        (in millions)                   2012              2011          (Worse)
        Revenues
        Cable Networks              $     13,621      $    12,877            6 %
        Broadcasting                       5,815            5,837            - %

                                    $     19,436      $    18,714            4 %

        Segment operating income
        Cable Networks              $      5,704      $     5,233            9 %
        Broadcasting                         915              913            - %

                                    $      6,619      $     6,146            8 %

Restructuring and impairment charges

The Company recorded charges of $14 million, $3 million and $95 million related to Media Networks for fiscal years 2012, 2011 and 2010, respectively. The charges in fiscal 2012 were primarily for severance related to organizational and cost structure initiatives. The charges in fiscal 2010 were for severance costs and the closure of five ESPN Zone locations. These charges were reported in "Restructuring and impairment charges" in the Consolidated Statements of Income.

Parks and Resorts

Operating results for the Parks and Resorts segment are as follows:




                                                          Year Ended                   % Change
                                               September 29,        October 1,         Better /
(in millions)                                       2012               2011            (Worse)
Revenues
Domestic                                        $     10,339        $    9,302              11 %
International                                          2,581             2,495               3 %

Total revenues                                        12,920            11,797              10 %
Operating expenses                                   (7,928)           (7,383)             (7) %
Selling, general, administrative and other           (1,849)           (1,696)             (9) %
Depreciation and amortization                        (1,241)           (1,165)             (7) %

Operating Income                                $      1,902        $    1,553              22 %

Revenues

Parks and Resorts revenues increased 10%, or $1.1 billion, to $12.9 billion due to an increase of $1.0 billion at our domestic operations and an increase of $86 million at our international operations.

Revenue growth of 11% at our domestic operations reflected a 5% increase from higher average guest spending and a 5% increase from volume. Increased guest spending was primarily due to higher average ticket prices, food and beverage spending, and daily hotel room rates. The volume increase was driven by higher passenger cruise days from the Disney Fantasy and the Disney Dream, which launched in March 2012 and January 2011, respectively, increased attendance at our domestic parks reflecting strong growth at Disneyland Resort which benefited from the opening of Cars Land at Disney California Adventure and higher hotel occupancy from Aulani, our new hotel and vacation club resort in Hawaii, which opened in August 2011.

Revenue growth of 3% at our international operations reflected a 3% increase from higher average guest spending, a 3% increase from higher attendance and a 3% increase from higher royalty revenue from Tokyo Disney Resort. These increases were partially offset by a decrease of 4% from the unfavorable impact of foreign currency translation due to the strengthening of the U.S. dollar against the euro and a decrease of 1% from lower hotel occupancy at Disneyland Paris. Higher guest spending was primarily due to higher daily hotel room rates and average ticket prices. Higher royalty revenue from Tokyo Disney Resort reflected the prior-year impact from the earthquake and tsunami in Japan.


Table of Contents

The following table presents supplemental attendance, per capita theme park guest spending, and hotel statistics:

                                           Domestic                         International (2)                           Total
                                Fiscal Year        Fiscal Year        Fiscal Year        Fiscal Year       Fiscal Year        Fiscal Year
                                   2012               2011               2012               2011               2012              2011
Parks
Increase/ (decrease)
Attendance                               3 %                1 %                6 %                6 %               4 %                2 %
Per Capita Guest Spending                7 %                8 %                1 %                2 %               5 %                6 %
Hotels (1)
Occupancy                               81 %               82 %               85 %               88 %              82 %               83 %
Available Room Nights
(in thousands)                      9,850               9,625             2,468               2,466           12,318              12,091
Per Room Guest Spending        $      257         $       241        $      317         $       294        $     270         $       253

(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.

(2) Per capita guest spending and per room guest spending exclude the impact of foreign currency translation. The euro to U.S. dollar weighted average foreign currency exchange rate was $1.30 and $1.39 for fiscal 2012 and 2011, respectively.

Costs and Expenses

Operating expenses include operating labor which increased by $285 million from $3,540 million to $3,825 million and cost of sales which increased $96 million from $1,198 million to $1,294 million. Higher operating labor was driven by new guest offerings, labor cost inflation and higher employee benefit costs. The increase in cost of sales was driven by higher volumes. Operating expenses also increased due to costs associated with resort expansion and new guest offerings including investments in supporting systems infrastructure. New guest offerings included the Disney Fantasy and Disney Dream, and the expansion of Disney California Adventure at Disneyland Resort. These increases were partially offset by a favorable impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the euro and the collection of business interruption insurance proceeds related to the prior-year earthquake and tsunami in Japan.

The increase in selling, general, administrative and other costs was driven by marketing for resort expansion and new guest offerings and labor and other cost inflation.

Segment Operating Income

Segment operating income increased 22%, or $349 million, to $1.9 billion driven by increases at our domestic parks and resorts, Tokyo Disney Resort, Disney Cruise Line and Hong Kong Disneyland Resort, partially offset by a decrease at Disneyland Paris.

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows:



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