The Walt Disney Company Reports Third Quarter Earnings

2012-08-08
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  • Disney 'We had a phenomenal third quarter, delivering the largest quarterly earnings in the history of our company'

    The Walt Disney Company (NYSE: DIS) reported earnings for its third fiscal quarter and nine months ended June 30, 2012. Diluted earnings per share (EPS) for the third quarter increased 31% to $1.01 from $0.77 in the prior-year quarter. Diluted EPS for the nine-months ended June 30, 2012 was $2.44 compared to $1.93 in the prior-year period.

    “We had a phenomenal third quarter, delivering the largest quarterly earnings in the history of our company”

    “We had a phenomenal third quarter, delivering the largest quarterly earnings in the history of our company,” said Robert A. Iger, Chairman and CEO of The Walt Disney Company. “Earnings per share were up 31% over last year, driven by growth in every one of our businesses. We also delivered record earnings per share for the first nine months of our fiscal year, and we believe our results clearly demonstrate Disney’s unique value proposition and great potential to deliver long-term growth.”

    The following table summarizes the third quarter and nine-month results for fiscal 2012 and 2011 (in millions, except per share amounts):

           
    Quarter Ended Nine Months Ended
    June 30,   July 2, June 30,   July 2,
    2012 2011 Change 2012 2011 Change
    Revenues $ 11,088 $ 10,675   4 % $

    31,496

    $

    30,468

      3 %
    Segment operating income (1) $ 3,236 $ 2,731 18 % $ 7,625 $ 6,712 14 %
    Net income (2) $ 1,831 $ 1,476 24 % $ 4,438 $ 3,720 19 %
    Diluted EPS (2) $ 1.01 $ 0.77 31 % $ 2.44 $ 1.93 26 %
    Cash provided by operations $ 2,885 $ 1,822 58 % $ 6,431 $ 4,890 32 %
    Free cash flow (1) $ 2,145 $ 1,106 94 % $ 3,580 $ 2,329 54 %
     

    (1)

    Aggregate segment operating income and free cash flow are non-GAAP financial measures. See the discussion of non-GAAP financial measures below.

    (2)

    Reflects amounts attributable to shareholders of The Walt Disney Company, i.e. after deduction of noncontrolling (minority) interests.

    EPS for the current quarter includes restructuring and impairment charges totaling $7 million, which had no net impact on EPS, while the prior-year quarter included restructuring and impairment charges totaling $34 million, which had a negative impact of $0.01 on EPS. Excluding these charges, EPS for the quarter increased 29% to $1.01 from $0.78 in the prior-year quarter.

    EPS for the current nine-month period included a $184 million non-cash gain recorded in connection with the acquisition of a controlling interest in UTV Software Communication Limited (UTV) and $51 million of restructuring and impairment charges. On an after-tax basis, these items benefitted EPS by $0.05. The UTV gain was recorded in “Other Income” in the Consolidated Statements of Income.

    EPS for the prior-year nine months included $75 million of gains from the sales of Miramax and BASS and $46 million of restructuring and impairment charges. On an after-tax basis, these items had a negative impact on EPS of $0.02. Excluding these and the current-year items discussed in the prior paragraph, EPS for the nine-month period increased 23% to $2.39 from $1.95 in the prior-year period.

    SEGMENT RESULTS

    The following table summarizes the third quarter and nine-month segment operating results for fiscal 2012 and 2011 (in millions):

           
    Quarter Ended Nine Months Ended
    June 30,   July 2, June 30,   July 2,
    2012 2011 Change 2012 2011 Change
    Revenues:
    Media Networks $ 5,084 $ 4,949 3 % $ 14,555 $ 13,916 5 %
    Parks and Resorts 3,441 3,170 9 % 9,495 8,668 10 %
    Studio Entertainment 1,625 1,620 ? % 4,423 4,892 (10 ) %
    Consumer Products 742 685 8 % 2,369 2,233 6 %
    Interactive   196     251   (22 ) %   654     759   (14 ) %
    $ 11,088   $ 10,675   4 % $ 31,496   $ 30,468   3 %
    Segment operating income (loss):
    Media Networks $ 2,126 $ 2,094 2 % $ 5,048 $ 4,684 8 %
    Parks and Resorts 630 519 21 % 1,405 1,132 24 %
    Studio Entertainment 313 49 >100

     

    % 642 501 28 %
    Consumer Products 209 155 35 % 670 609 10 %
    Interactive   (42 )   (86

    )

    51 %   (140 )   (214 ) 35 %
    $ 3,236   $ 2,731   18 % $ 7,625   $ 6,712   14 %

    Media Networks

    Media Networks revenues for the quarter increased 3% to $5.1 billion and segment operating income increased 2% to $2.1 billion. The following table provides further detail of the Media Networks results (in millions):

           
    Quarter Ended Nine Months Ended
    June 30,   July 2, June 30,   July 2,
    2012 2011 Change 2012 2011 Change
    Revenues:  
    Cable Networks $ 3,610 $ 3,516 3 % $ 10,086 $ 9,410 7 %
    Broadcasting   1,474     1,433   3 %   4,469     4,506   (1 ) %
    $ 5,084   $ 4,949   3 % $ 14,555   $ 13,916   5 %
     
    Segment operating income:
    Cable Networks $ 1,858 $ 1,844 1 % $ 4,325 $ 3,972 9 %
    Broadcasting   268     250   7 %   723     712   2 %
    $ 2,126   $ 2,094   2 % $ 5,048   $ 4,684   8 %

    Cable Networks

    Operating income at Cable Networks increased $14 million to $1.9 billion for the quarter due to growth at the domestic Disney Channels and ABC Family, partially offset by a decrease at ESPN. Higher operating income at the domestic Disney Channels was due to increased affiliate revenue from contractual rate increases, while the increase at ABC Family reflected lower marketing and sales costs due to fewer series premieres. The decrease at ESPN was driven by lower recognition of deferred affiliate fees related to annual programming commitments. However, the benefits of contractual rate increases and subscriber growth on affiliate fees along with higher advertising revenue more than offset increased programming and production costs at ESPN. Advertising revenue growth at ESPN was driven by higher rates, increased units sold and improved ratings, including the benefit of a shift in the timing of NBA games due to the NBA lockout. The decrease in deferred affiliate fee recognition was due to a change in contractual provisions related to annual programming commitments in an affiliate contract, which shifted the recognition of $139 million of affiliate revenue to the first and second quarter of the current year as compared to the third quarter of the prior year. Higher programming and production costs were due to the shift in the timing of NBA games and higher contractual rates for NBA and Major League Baseball programming.

    Broadcasting

    Operating income at Broadcasting increased $18 million to $268 million due to higher affiliate and royalty revenue and lower programming and production costs, partially offset by lower Network advertising revenues. Advertising revenues at the Network decreased modestly as lower ratings were partially offset by higher rates.

    Parks and Resorts

    Parks and Resorts revenues for the quarter increased 9% to $3.4 billion and segment operating income increased 21% to $630 million. Results for the quarter were driven by increases at Tokyo Disney Resort, Disney Cruise Line and the domestic parks and resorts.

    The increase at Tokyo Disney Resort reflected the loss of income from the March 2011 earthquake and tsunami in Japan, which resulted in a temporary suspension of operations and a reduction in volume after reopening in the prior-year quarter, and the collection of related business interruption insurance proceeds in the current-year quarter.

    Operating income growth at Disney Cruise Line was due to the first full quarter of operations of the Disney Fantasy.

    Higher operating income at the domestic parks and resorts was primarily due to increased guest spending at both Walt Disney World Resort and Disneyland Resort and attendance growth at Disneyland Resort, partially offset by higher costs. Increased guest spending reflected higher average ticket prices, food, beverage and merchandise spending, and daily hotel room rates. Higher costs were driven by labor cost inflation, resort expansion and new guest offerings, and increased investments in systems infrastructure at Walt Disney World Resort.

    Studio Entertainment

    Studio Entertainment revenues were essentially flat at $1.6 billion and segment operating income increased $264 million to $313 million. Higher operating income was primarily due to increases in worldwide theatrical results and worldwide television distribution, partially offset by a decrease in worldwide home entertainment.

    Higher worldwide theatrical results reflected the performance of the current quarter releases including Marvel’s The Avengers and Brave compared to Pirates of the Caribbean: On Stranger Tides and Cars 2 in the prior-year quarter. The increase in worldwide television was driven by higher sales in international markets due to stronger performing titles available in the current quarter.

    The decrease in worldwide home entertainment was primarily due to a decline in unit sales in the current quarter. Significant current quarter titles included John Carter and The Muppets while the prior-year quarter included Tron: Legacy, Tangled and Gnomeo & Juliet.

    Consumer Products

    Consumer Products revenues increased 8% to $742 million and segment operating income increased 35% to $209 million. Higher operating income was primarily due to increases at Merchandise Licensing and at our retail business.

    The increase at Merchandise Licensing was driven by lower revenue share with the Studio Entertainment segment and higher licensing revenue in Japan as a result of the impact of the earthquake and tsunami in the prior year. Lower revenue share with Studio Entertainment in the current-year quarter reflected a higher mix of revenues from properties subject to the revenue share in the prior-year quarter driven by sales of Cars merchandise.

    At our retail business, higher operating income was driven by new stores in North America and Europe and higher online sales.

    Interactive

    Interactive revenue for the quarter decreased 22% to $196 million and segment operating results improved from a loss of $86 million in the prior-year quarter to a loss of $42 million in the current quarter. Operating results were driven by improved performance from our games and online businesses.

    Improved results from our games business were driven by an increase at social games due to lower acquisition accounting impacts, which had an adverse impact on the prior-year quarter, and improved title performance in the current quarter. Console game results for the current quarter were comparable to the prior-year quarter as lower sales volume was offset by minimum guarantee recognition and lower marketing and product development costs. Lower sales volume reflected fewer significant titles in release in the current year and the strong prior year performance of Cars 2 and Lego Pirates of the Caribbean compared to Brave in the current quarter. Lower product development costs reflected our ongoing shift from console games to social and other interactive platforms.

    Online results reflected higher cost allocations to other company businesses related to website design and maintenance.

    OTHER FINANCIAL INFORMATION

    Net Interest Expense

    Net interest expense was as follows (in millions):

     
    Quarter Ended
    June 30,   July 2,
      2012     2011  
    Interest expense $ (115 ) $ (113 )
    Interest and investment income   22     25  
    Net interest expense $ (93 ) $ (88 )

    Interest expense for the quarter was essentially flat as the impact of higher average debt balances was largely offset by lower effective interest rates.

    Income Taxes

    The effective income tax rate for the current quarter decreased to 32.8% compared to 33.7% in the prior-year quarter primarily due to an increase in earnings from foreign operations subject to tax at rates lower than the federal statutory income tax rate.

    Cash Flow

    Cash provided by operations and free cash flow were as follows (in millions):

       
    Nine Months Ended
    June 30,   July 2,
      2012     2011   Change
    Cash provided by operations $ 6,431 $ 4,890 $ 1,541

    Investments in parks, resorts and other property

      (2,851 )   (2,561 )   (290 )
    Free cash flow (1) $ 3,580   $ 2,329   $ 1,251  

    Cash provided by operations increased 32% to $6.4 billion for the current nine month period compared to $4.9 billion in the prior-year nine month period. The increase was due to higher segment operating results, the timing of receivable collections, and lower pension contributions, partially offset by higher income tax payments.

    Capital Expenditures and Depreciation Expense

    Investments in parks, resorts and other property were as follows (in millions):

     
    Nine Months Ended
    June 30,   July 2,
    2012 2011
    Media Networks
    Cable Networks $ 88 $ 79
    Broadcasting   42   86
    Total Media Networks   130   165
    Parks and Resorts
    Domestic 1,840 1,799
    International   459   270
    Total Parks and Resorts   2,299   2,069
    Studio Entertainment 49 86
    Consumer Products 46 63
    Interactive 16 16
    Corporate   311   162
    Total investments in parks, resorts and other property $ 2,851 $ 2,561

    Capital expenditures increased from $2.6 billion to $2.9 billion driven by an increase at Parks and Resorts due to resort expansion and new guest offerings at Walt Disney World Resort and Disneyland Paris and construction costs at Shanghai Disney Resort, and an increase at Corporate driven by investments in facilities and information technology infrastructure.

    Depreciation expense was as follows (in millions):

     
    Nine Months Ended
    June 30,   July 2,
    2012 2011
    Media Networks
    Cable Networks $ 107 $ 99
    Broadcasting   74   76
    Total Media Networks   181   175
    Parks and Resorts
    Domestic 689 628
    International   234   241
    Total Parks and Resorts   923   869
    Studio Entertainment 42 42
    Consumer Products 41 36
    Interactive 12 12
    Corporate   141   111
    Total depreciation expense $ 1,340 $ 1,245

    Borrowings

    Total borrowings and net borrowings are detailed below (in millions):

         
    June 30, October 1,
      2012     2011   Change
    Current portion of borrowings $ 2,569 $ 3,055 $ (486 )
    Long-term borrowings   12,454     10,922     1,532  
    Total borrowings 15,023 13,977 1,046
    Less: cash and cash equivalents   (4,374 )   (3,185 )   (1,189 )
    Net borrowings (1) $ 10,649   $ 10,792   $ (143 )

    The total borrowings shown above include $1,956 million and $2,311 million attributable to our consolidated international theme parks as of June 30, 2012 and October 1, 2011, respectively. Cash and cash equivalents attributable to our consolidated international theme parks totaled $532 million and $778 million as of June 30, 2012 and October 1, 2011, respectively.

    Non-GAAP Financial Measures

    This earnings release presents earnings per share excluding the impact of certain items, net borrowings, free cash flow, and aggregate segment operating income, all of which are important financial measures for the Company but are not financial measures defined by GAAP.

    These measures should be reviewed in conjunction with the relevant GAAP financial measures and are not presented as alternative measures of earnings per share, borrowings, cash flow or net income as determined in accordance with GAAP. Net borrowings, free cash flow, and aggregate segment operating income as we have calculated them may not be comparable to similarly titled measures reported by other companies.

    Earnings per share excluding certain items – The Company uses earnings per share excluding certain items to evaluate the performance of the Company’s operations exclusive of certain items that impact the comparability of results from period to period. The Company believes that information about earnings per share exclusive of these impacts is useful to investors, particularly where the impact of the excluded items is significant in relation to reported earnings, because the measure allows for comparability between periods of the operating performance of the Company’s business and allows investors to evaluate the impact of these items separately from the impact of the operations of the business.

    The following table reconciles reported earnings per share to earnings per share excluding certain items:

           
    Quarter Ended Nine Months Ended
    June 30,   July 2, June 30,   July 2,
    2012 2011 Change 2012 2011 Change
    Diluted EPS as reported $ 1.01 $ 0.77 31   % $ 2.44 $ 1.93 26   %
    Exclude:
    Restructuring and impairment charges (1) ? 0.01 nm 0.02 ? nm
    Other income (2)   ?     ?     (0.06 )   0.02   nm
    Diluted EPS excluding certain items (3) $ 1.01   $ 0.78   29 % $ 2.39   $ 1.95   23 %
     
    (1) Restructuring and impairment charges for the current quarter and nine months were $7 million and $51 million, respectively, primarily for severance and other related costs. Restructuring and impairment charges for the prior-year quarter and nine months were $34 million and $46 million, respectively, primarily for severance and facilities costs. The nine months also included an impairment charge related to the sale of assets. The impairment charge included assets that had tax basis significantly in excess of the book value and resulted in a $44 million tax benefit on the restructuring and impairment charges.
     
    (2) Other income for the current nine-months consists of the UTV Gain ($184 million). Other income for the prior-year nine months consists of gains on the sales of Miramax and BASS ($75 million). The tax effect on these gains exceeded the pretax benefit and resulted in a $32 million after tax loss.
     
    (3) Diluted EPS excluding certain items may not equal the sum of the column due to rounding.

    Net borrowings – The Company believes that information about net borrowings provides investors with a useful perspective on our financial condition. Net borrowings reflect the subtraction of cash and cash equivalents from total borrowings. Since we earn interest income on our cash balances that offsets a portion of the interest expense we pay on our borrowings, net borrowings can be used as a measure to gauge net interest expense. In addition, a portion of our cash and cash equivalents is available to repay outstanding indebtedness when the indebtedness matures or when other circumstances arise. However, we may not immediately apply cash and cash equivalents to the reduction of debt, nor do we expect that we would use all of our available cash and cash equivalents to repay debt in the ordinary course of business.

    Free cash flow – The Company uses free cash flow (cash provided by operations less investments in parks, resorts and other property), among other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures. Management believes that information about free cash flow provides investors with an important perspective on the cash available to service debt, make strategic acquisitions and investments and pay dividends or repurchase shares.

    Aggregate segment operating income – 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 performance of operating businesses separate from non-operating factors. 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 non-operational factors that affect net income, thus providing separate insight into both operations and the other factors that affect reported results.

    A reconciliation of segment operating income to net income is as follows (in millions):

         
    Quarter Ended Nine Months Ended
    June 30,   July 2, June 30,   July 2,
      2012     2011     2012     2011  
    Segment operating income $ 3,236 $ 2,731 $ 7,625 $ 6,712
    Corporate and unallocated shared expenses (107 ) (101 ) (334 ) (335 )
    Restructuring and impairment charges (7 ) (34 ) (51 ) (46 )
    Other income ? ? 184 75
    Net interest expense   (93 )   (88 )   (278 )   (266 )
    Income before income taxes 3,029 2,508 7,146 6,140
    Income taxes   (993

    )

      (845

    )

      (2,363 )   (2,133 )
    Net income $ 2,036   $ 1,663   $ 4,783   $ 4,007  

    CONFERENCE CALL INFORMATION

    In conjunction with this release, The Walt Disney Company will host a conference call today, August 7, 2012, at 5:00 PM EDT/2:00 PM PDT via a live Webcast. To access the Webcast go to www.disney.com/investors. The discussion will be available via replay through August 14, 2012 at 7:00 PM EDT/4:00 PM PDT.

    FORWARD-LOOKING STATEMENTS

    Management believes certain statements in this earnings release may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Management does not undertake any obligation to update these statements.

    Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company’s control, including:

    • changes in domestic and global economic conditions, competitive conditions and consumer preferences
    • adverse weather conditions or natural disasters;
    • health concerns;
    • international, political, or military developments; and
    • technological developments.

    Such developments may affect travel and leisure businesses generally and may, among other things, affect:

    • the performance of the Company’s theatrical and home entertainment releases;
    • the advertising market for broadcast and cable television programming;
    • expenses of providing medical and pension benefits;
    • demand for our products; and
    • performance of some or all company businesses either directly or through their impact on those who distribute our products.

    Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year ended October 1, 2011 under Item 1A, “Risk Factors,” and subsequent reports.

     
    The Walt Disney Company
    CONSOLIDATED STATEMENTS OF INCOME
    (unaudited; in millions, except per share data)
     
      Quarter Ended     Nine Months Ended
    June 30,   July 2, June 30,   July 2,
      2012     2011     2012     2011  
     
    Revenues $ 11,088 $ 10,675 $ 31,496 $ 30,468
     
    Costs and expenses (8,128 ) (8,229 ) (24,657 ) (24,554 )
     
    Restructuring and impairment charges (7 ) (34 ) (51 ) (46 )
     
    Other income ? ? 184 75
     
    Net interest expense (93 ) (88 ) (278 ) (266 )
     
    Equity in the income of investees   169     184     452     463  
     
    Income before income taxes 3,029 2,508 7,146 6,140
     
    Income taxes   (993 )   (845 )   (2,363 )   (2,133 )
     
    Net income 2,036 1,663 4,783 4,007
     
    Less: Net income attributable to noncontrolling interests (205 ) (187 ) (345 ) (287 )
           
    Net income attributable to The Walt Disney Company (Disney) $ 1,831   $ 1,476   $ 4,438   $ 3,720  
     
    Earnings per share attributable to Disney:
    Diluted $ 1.01   $ 0.77   $ 2.44   $ 1.93  
     
    Basic $ 1.02   $ 0.78   $ 2.47   $ 1.97  
     
    Weighted average number of common and common equivalent shares outstanding:
    Diluted   1,812     1,912     1,818     1,924  
     
    Basic   1,791     1,883     1,794     1,891  
     
    The Walt Disney Company
    CONSOLIDATED BALANCE SHEETS
    (unaudited; in millions, except per share data)
     
      June 30,   October 1,
      2012     2011  
    ASSETS
    Current assets
    Cash and cash equivalents $ 4,374 $ 3,185
    Receivables 5,951 6,182
    Inventories 1,485 1,595
    Television costs 721 674
    Deferred income taxes 1,482 1,487
    Other current assets   741     634  

    Total current assets

    14,754

    13,757

     
    Film and television costs 4,396 4,357
    Investments 2,397 2,435
    Parks, resorts and other property, at cost
    Attractions, buildings and equipment 37,624 35,515
    Accumulated depreciation   (20,254 )   (19,572 )
    17,370 15,943
    Projects in progress 2,413 2,625
    Land   1,161     1,127  
    Total parks, resorts and other property, at cost 20,944 19,695
     
    Intangible assets, net 5,069 5,121
    Goodwill 25,044 24,145
    Other assets   2,687     2,614  
    $ 75,291   $ 72,124  
     
    LIABILITIES AND EQUITY
    Current liabilities
    Accounts payable and other accrued liabilities $ 5,516 $ 6,362
    Current portion of borrowings 2,569 3,055
    Unearned royalties and other advances   3,032     2,671  
    Total current liabilities 11,117 12,088
     
    Borrowings 12,454 10,922
    Deferred income taxes 3,150 2,866
    Other long-term liabilities 6,497 6,795
    Commitments and contingencies
    Disney Shareholders’ equity
    Preferred stock, $.01 par value
    Authorized – 100 million shares, Issued – none
    Common stock, $.01 par value
    Authorized – 4.6 billion shares, Issued – 2.8 billion shares 31,427 30,296
    Retained earnings 41,720 38,375
    Accumulated other comprehensive loss   (2,443 )   (2,630 )
    70,704 66,041

    Treasury stock, at cost, 991.1 million shares at June 30, 2012 and 937.8 million shares at October 1, 2011

      (30,698 )   (28,656 )
    Total Disney Shareholders’ equity 40,006 37,385
    Noncontrolling interests   2,067     2,068  
    Total equity   42,073     39,453  
    $ 75,291   $ 72,124  
     
    The Walt Disney Company
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (unaudited; in millions)
     
      Nine Months Ended
    June 30,   July 2,
      2012     2011  
    OPERATING ACTIVITIES
    Net income $ 4,783 $ 4,007
    Depreciation and amortization 1,495 1,379
    Gains on dispositions (184 ) (75 )
    Deferred income taxes 153 207
    Equity in the income of investees (452 ) (463 )
    Cash distributions received from equity investees 501 463
    Net change in film and television costs (185 ) 216
    Equity-based compensation 311 310
    Other 200 14
    Changes in operating assets and liabilities:
    Receivables 236 (532 )
    Inventories 76 (105 )
    Other assets (77 ) 59
    Accounts payable and other accrued liabilities (462 ) (839 )


    Logos, product and company names mentioned are the property of their respective owners.

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