Walt Disney Co (DIS)

[SAE]

The Walt Disney Company Reports Third Quarter Earnings

The Walt Disney Company (NYSE:DIS) today reported earnings for its third fiscal quarter and nine months ended July 2, 2011. Diluted earnings per share (EPS) for the third quarter increased 15% to $0.77, compared to $0.67 in the prior-year quarter. Diluted EPS for the nine-months ended July 2, 2011 was $1.93 compared to $1.60 in the prior-year period.

EPS for the current quarter included restructuring and impairment charges totaling $34 million primarily at Studio Entertainment. Excluding these charges, EPS for the quarter increased 16% to $0.78 compared to $0.67 in the prior-year quarter.

“Our third quarter demonstrates the continued strength of our Media Networks, including ESPN, Parks and Resorts and Consumer Products,” said Robert A. Iger, President and CEO of The Walt Disney Company. “In these turbulent times, our company and its array of strong brands are well-positioned to deliver long-term shareholder value.”

The following table summarizes the third quarter and nine-month results for fiscal 2011 and 2010 (in millions, except per share amounts):

Quarter Ended Nine Months Ended
July 2,

2011
July 3,

2010
Change July 2,

2011 July 3,

2010 Change
Revenues $ 10,675 $ 10,002 7 % $ 30,468 $ 28,321 8 %
Segment operating income (1) $ 2,731 $ 2,537 8 % $ 6,712 $ 5,869 14 %
Net income (2) $ 1,476 $ 1,331 11 % $ 3,720 $ 3,128 19 %
Diluted EPS (2) $ 0.77 $ 0.67 15 % $ 1.93 $ 1.60 21 %
Cash provided by operations $ 1,822 $ 1,883 (3 ) % $ 4,890 $ 4,372 12 %
Free cash flow (1) $ 1,106 $ 1,377 (20 ) % $ 2,329 $ 3,059 (24 ) %

(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.

SEGMENT RESULTS

The following table summarizes the third quarter and nine-month segment operating results for fiscal 2011 and 2010 (in millions):

Quarter Ended Nine Months Ended
July 2,

2011
July 3,

2010
Change July 2,

2011
July 3,

2010
Change
Revenues:
Media Networks $ 4,949 $ 4,729 5 % $ 13,916 $ 12,748 9 %
Parks and Resorts 3,170 2,831 12 % 8,668 7,942 9 %
Studio Entertainment 1,620 1,639 (1 ) % 4,892 5,110 (4 ) %
Consumer Products 685 606 13 % 2,233 1,948 15 %
Interactive Media 251 197 27 % 759 573 32 %
$ 10,675 $ 10,002 7 % $ 30,468 $ 28,321 8 %
Segment operating income (loss):
Media Networks $ 2,094 $ 1,885 11 % $ 4,684 $ 3,915 20 %
Parks and Resorts 519 477 9 % 1,132 1,002 13 %
Studio Entertainment 49 123 (60 ) % 501 589 (15 ) %
Consumer Products 155 117 32 % 609 493 24 %
Interactive Media (86 ) (65 )) (32 ) % (214 ) (130 ) (65 ) %
$ 2,731 $ 2,537 8 % $ 6,712 $ 5,869 14 %


Media Networks

Media Networks revenues for the quarter increased 5% to $4.9 billion and segment operating income increased 11% to $2.1 billion. The following table provides further detail of the Media Networks results (in millions):

Quarter Ended Nine Months Ended
July 2,

2011
July 3,

2010
Change July 2,

2011
July 3,

2010
Change
Revenues:
Cable Networks $ 3,516 $ 3,280 7 % $ 9,410 $ 8,346 13 %
Broadcasting 1,433 1,449 (1 ) % 4,506 4,402 2 %
$ 4,949 $ 4,729 5 % $ 13,916 $ 12,748 9 %

Segment operating income:
Cable Networks $ 1,844 $ 1,676 10 % $ 3,972 $ 3,403 17 %
Broadcasting 250 209 20 % 712 512 39 %
$ 2,094 $ 1,885 11 % $ 4,684 $ 3,915 20 %


Cable Networks
Operating income at Cable Networks increased $168 million to $1.8 billion for the quarter due to growth at ESPN and, to a lesser extent, higher equity income and an increase at the worldwide Disney Channels. These increases were partially offset by a decrease at ABC Family. The increase at ESPN reflected higher affiliate revenue driven by higher contractual rates and lower programming and production costs, partially offset by higher labor and marketing and sales costs. Recognition of previously deferred revenue at ESPN was comparable to the prior-year period as ESPN achieved the same levels of programming commitments in the current quarter as in the prior-year quarter. Advertising revenue at ESPN was essentially flat as higher rates were offset by the absence of the FIFA World Cup and game seven of the NBA finals and lower ratings. Lower programming and production costs reflected the absence of programming costs for the FIFA World Cup. Additionally, ESPN benefited from a decrease in the cost of time for ESPN programming aired on the ABC Television Network. Increased equity income reflected decreased cricket programming costs at our ESPN Star Sports joint venture due to fewer cricket matches aired in the current quarter and also decreased losses from our UTV investment. The increase at the worldwide Disney Channels was driven by higher affiliate revenue due to higher contractual rates domestically and subscriber growth internationally, partially offset by higher costs including increases in programming and marketing and sales. The decrease at ABC Family reflected higher programming costs, partially offset by higher advertising revenue. Higher programming costs at both the worldwide Disney Channels and ABC Family reflected more episodes of original programming.

Broadcasting
Operating income at Broadcasting increased $41 million to $250 million driven by lower programming and production costs and higher advertising revenue at the ABC Television Network. These increases were partially offset by a decrease in the cost charged to ESPN for programming aired on the ABC Television Network and lower advertising revenue at the owned television stations. Decreased programming and production costs reflected a lower cost mix of programming in primetime due to a shift in hours from original scripted programming to reality programming and the benefit of cost saving initiatives at news and daytime. Higher advertising revenues at the ABC Television Network reflected higher rates, partially offset by lower ratings, while decreased advertising revenue at the owned television stations was due to lower political advertising.

Parks and Resorts

Parks and Resorts revenues for the quarter increased 12% to $3.2 billion and segment operating income increased 9% to $519 million. Results for the quarter were driven by increases at our domestic parks and resorts, Disney Cruise Line, and Hong Kong Disneyland Resort, partially offset by decreases at Disneyland Paris and Tokyo Disney Resort. The decrease at Tokyo Disney Resort was driven by the impact of the March 2011 earthquake in Japan which resulted in a temporary closure of the two parks and hotels and a continuing reduction in volume after reopening. Results at both our domestic and international parks and resorts reflected a favorable impact due to a shift in the timing of the Easter holiday relative to our fiscal periods.

Higher operating income at our domestic parks and resorts was driven by higher guest spending and, to a lesser extent, attendance, partially offset by increased costs. Increased guest spending reflected higher average ticket prices, daily hotel room rates and food, beverage and merchandise spending. Increased costs reflected labor cost inflation, higher pension and healthcare costs, marketing and sales for new guest offerings, and expansion costs for Disney California Adventure at Disneyland Resort.

Higher operating income at Disney Cruise Line was due to increased passenger cruise ship days due to a full quarter of operations for the Disney Dream, partially offset by the related incremental operating costs.

The improvement at Hong Kong Disneyland Resort reflected higher guest spending and attendance. Guest spending was driven by increased merchandise, food and beverage spending, and increased daily hotel room rates. The decrease at Disneyland Paris was due to a prior-year sale of real estate and increased costs which were driven by volume related costs, repairs and maintenance and labor cost inflation. These decreases were partially offset by increased guest spending which was due to higher average ticket prices and daily hotel room rates.

Studio Entertainment

Studio Entertainment revenues were essentially flat at $1.6 billion and segment operating income decreased 60% to $49 million. Lower operating income was primarily due to a decrease in worldwide theatrical results, partially offset by lower film cost write-downs.

Lower theatrical results reflected the strong performance of Toy Story 3 and Iron Man 2 in the prior year compared to Cars 2 and Thor in the current year. The decrease in revenues due to the performance of these titles was largely offset by an increase in revenues from the strong performance of Pirates of the Caribbean: On Stranger Tides, which was released in the current quarter, compared to the ongoing performance of Alice in Wonderland, which was released in the second quarter of the prior year, and Prince of Persia, which was released in the prior-year third quarter. This revenue increase was partially offset by higher costs for Pirates of the Caribbean: On Stranger Tides including production cost amortization and marketing and distribution costs. The majority of the marketing and distribution costs for Alice in Wonderland were incurred in the second quarter of the prior year.

Consumer Products

Consumer Products revenues for the quarter increased 13% to $685 million and segment operating income increased 32% to $155 million driven by an increase at Merchandise Licensing.

Improved Merchandise Licensing results reflected the strong performance of Cars merchandise and higher revenue from Marvel properties. The increase in revenue from Marvel properties reflected the impact of acquisition accounting which reduced revenue recognition in the prior-year quarter. These increases were partially offset by a higher revenue share with the Studio Entertainment segment in the current quarter primarily due to the performance of Cars merchandise.

Interactive Media
Interactive Media revenues for the quarter increased 27% to $251 million and segment operating results decreased by $21 million to a loss of $86 million. Lower segment operating results were driven by the inclusion of Playdom, including the impact of acquisition accounting, partially offset by an improvement at our console game business.

The improvement at our console games business reflected higher unit sales and lower marketing costs. The increase in unit sales was driven by the performance of Lego Pirates of the Caribbean and Cars 2 in the current quarter compared to Toy Story 3 and Split Second in the prior year. These increases were partially offset by higher cost of sales reflecting fees paid to the developer of Lego Pirates of the Caribbean.

OTHER FINANCIAL INFORMATION

Corporate and Unallocated Shared Expenses

Corporate and unallocated shared expenses decreased from $119 million to $101 million driven by the timing of expenses.

Net Interest Expense

Net interest expense was as follows (in millions):

Quarter Ended
July 2, 2011 July 3, 2010
Interest expense $ (113 ) $ (103 )
Interest and investment income 25 14
Net interest expense $ (88 ) $ (89 )


Income Taxes

The effective income tax rate for the current-year quarter was 33.7% compared to 35.6% in the prior year quarter. The current quarter income tax rate reflects the benefit of an increase in the domestic production deduction rate.

Noncontrolling Interests

Net income attributable to noncontrolling interests increased from $174 million to $187 million driven by improved results at ESPN and Hong Kong Disneyland Resort, partially offset by lower results at Disneyland Paris. Net income attributable to noncontrolling interests is determined based on income after royalties, financing costs and income taxes.

Cash Flow

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

Nine Months Ended
July 2,

2011
July 3,
2010
Change
Cash provided by operations $ 4,890 $ 4,372 $ 518
Investments in parks, resorts and

other property (2,561 ) (1,313 ) (1,248 )
Free cash flow (1) $ 2,329 $ 3,059 $ (730 )

(1) Free cash flow is not a financial measure defined by GAAP. See the discussion of non-GAAP financial measures that follows below.

Cash provided by operations of $4.9 billion for the current nine month period increased 12% compared to the prior-year nine month period. The increase was primarily due to higher operating cash receipts driven by higher revenues at our Media Networks, Parks and Resorts, Interactive Media and Consumer Products businesses and the timing of receivable collections at our Media Networks and Consumer Products businesses. These increases were partially offset by higher cash payments at Corporate and at our Parks and Resorts, Interactive Media and Consumer Products businesses. The increase in cash payments at Corporate was driven by higher contributions to our pension plans. The increase in cash payments at Parks and Resorts was driven by labor cost inflation, costs associated with our new cruise ship, the Disney Dream, higher marketing and sales expenses and expansion costs for Disney California Adventure at Disneyland Resort, while the increase in cash payments at Interactive Media reflects the inclusion of Playdom, which was acquired subsequent to the prior-year nine month period. The increase in cash payments at Consumer Products was primarily due to the acquisitions of The Disney Store Japan and Marvel.

The increase in capital expenditures was primarily due to the final payment on our new cruise ship, the Disney Dream, theme park and resort expansions and new guest offerings at Walt Disney World Resort, Hong Kong Disneyland Resort, and Disney California Adventure and the development of Shanghai Disney Resort.

Capital Expenditures and Depreciation Expense

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

Nine Months Ended
July 2, 2011 July 3, 2010
Media Networks
Cable Networks $ 79 $ 60
Broadcasting 86 52
Total Media Networks 165 112
Parks and Resorts
Domestic 1,799 851
International 270 148
Total Parks and Resorts 2,069 999
Studio Entertainment 86 65
Consumer Products 63 41
Interactive Media 16 13
Corporate 162 83
Total investments in parks, resorts and other property $ 2,561 $ 1,313


Depreciation expense is as follows (in millions):

Nine Months Ended
July 2,

2011
July 3,

2010
Media Networks
Cable Networks $ 99 $ 87
Broadcasting 76 71
Total Media Networks 175 158
Parks and Resorts
Domestic 628 614
International 241 249
Total Parks and Resorts 869 863
Studio Entertainment 42 42
Consumer Products 36 22
Interactive Media 12 16
Corporate 111 103
Total depreciation expense $ 1,245 $ 1,204


Borrowings

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

July 2,

2011
Oct. 2,

2010 Change
Current portion of borrowings $ 4,062 $ 2,350 $ 1,712
Long-term borrowings 9,176 10,130 (954 )
Total borrowings 13,238 12,480 758
Less: cash and cash equivalents (3,519 ) (2,722 ) (797 )
Net borrowings (1) $ 9,719 $ 9,758 $ (39 )

(1) Net borrowings is a non-GAAP financial measure. See the discussion of non-GAAP financial measures that follows.

The total borrowings shown above include $2,479 million and $2,586 million attributable to Disneyland Paris and Hong Kong Disneyland Resort as of July 2, 2011 and October 2, 2010, respectively. Cash and cash equivalents attributable to Disneyland Paris, Hong Kong Disneyland Resort and Shanghai Disney Resort totaled $706 million and $657 million as of July 2, 2011 and October 2, 2010, 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
July 2,

2011
July 3,

2010
Change July 2,

2011
July 3,

2010
Change
Diluted EPS as reported $ 0.77 $ 0.67 15 % $ 1.93 $ 1.60 21 %
Exclude:
Restructuring and impairment charges (1) 0.01 0.01 - % - 0.07 nm
Other income (2) - (0.01 ) nm 0.02 (0.05 ) nm
Diluted EPS excluding certain items $ 0.78 $ 0.67 16 % $ 1.95 $ 1.62 20 %

(1) Restructuring and impairment charges for the current quarter totaled $34 million primarily for severance and facilities costs at our Studio Entertainment and Interactive Media segments. Restructuring and impairment charges for the prior-year quarter totaled $36 million and were primarily for the closure of five ESPN Zone locations.

Restructuring and impairment charges for the current nine months totaled $46 million and consist of severance and facilities costs totaling $36 million and a $10 million impairment charge related to the sale of assets. The impairment charge related to assets that had tax basis significantly in excess of the book value, resulting in a $44 million tax benefit on the restructuring and impairment charges. Restructuring and impairment charges for the prior-year nine months totaled $212 million and were related to organizational and cost structure initiatives primarily at our Studio Entertainment and Media Networks segments. Impairment charges were $126 million and consisted of write-offs of capitalized costs primarily related to abandoned film projects and the closure of a studio production facility and the closure of the ESPN Zones which was recorded in the third quarter of the prior year. Restructuring charges were $86 million and primarily reflected severance costs.

(2) Other income for the current nine months consists of gains on the sales of Miramax and BASS ($75 million). The tax effect on these gains exceeded the pretax benefit resulting in a $32 million net loss. Other income for the prior-year nine months consists of gains on the sales of our investments in television services in Europe in the first and second quarters, an accounting gain related to the acquisition of the Disney Stores in Japan in the second quarter and a gain on the sale of the Power Rangers in the third quarter which collectively totaled $140 million.

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
July 2, 2011 July 3, 2010 July 2, 2011 July 3, 2010
Segment operating income $ 2,731 $ 2,537 $ 6,712 $ 5,869
Corporate and unallocated shared expenses (101 ) (119 ) (335 ) (282 )
Restructuring and impairment charges (34 ) (36 ) (46 ) (212 )
Other income - 43 75 140
Net interest expense (88 ) (89 ) (266 ) (322 )
Income before income taxes 2,508 2,336 6,140 5,193
Income taxes (845 ) (831 ) (2,133 ) (1,846 )
Net income $ 1,663 $ 1,505 $ 4,007 $ 3,347


CONFERENCE CALL INFORMATION

In conjunction with this release, The Walt Disney Company will host a conference call today, August 9, 2011, at 5:00 PM EST/2:00 PM PST via a live Webcast. To access the Webcast go to www.disney.com/investors. The discussion will be available via replay through August 23, 2011 at 7:00 PM EST/4:00 PM PST.

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