XNYS:DIS Walt Disney Co Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

Commission File Number 1-11605

 

 

 

LOGO

 

 

 

Incorporated in Delaware   I.R.S. Employer Identification
  No. 95-4545390

500 South Buena Vista Street, Burbank, California 91521

(818) 560-1000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

There were 1,794,274,732 shares of common stock outstanding as of July 31, 2012.

 

 

 


PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited; in millions, except per share data)

 

     Quarter Ended     Nine Months Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
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   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

2


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)

 

     June 30,
2012
    October 1,
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   
  

 

 

   

 

 

 
     20,944        19,695   

Intangible assets, net

     5,069        5,121   

Goodwill

     25,044        24,145   

Other assets

     2,687        2,614   
  

 

 

   

 

 

 

Total assets

   $ 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   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 75,291      $ 72,124   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

3


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)

 

     Nine Months Ended  
     June 30,
2012
    July 2,
2011
 

OPERATING ACTIVITIES

    

Net income

   $ 4,783      $ 4,007   

Depreciation and amortization

     1,495        1,379   

Gains on acquisitions and 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

Income taxes

     36        249   
  

 

 

   

 

 

 

Cash provided by operations

     6,431        4,890   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Investments in parks, resorts and other property

     (2,851     (2,561

Proceeds from dispositions

     15        564   

Acquisitions

     (737     (172

Other

     103        2   
  

 

 

   

 

 

 

Cash used in investing activities

     (3,470     (2,167
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Commercial paper (repayments)/borrowings, net

     (558     620   

Borrowings

     3,251        500   

Reduction of borrowings

     (1,672     (308

Dividends

     (1,076     (756

Repurchases of common stock

     (2,042     (3,029

Proceeds from exercise of stock options

     844        1,101   

Other

     (427     (160
  

 

 

   

 

 

 

Cash used in financing activities

     (1,680     (2,032
  

 

 

   

 

 

 

Impact of exchange rates on cash and cash equivalents

     (92     106   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     1,189        797   

Cash and cash equivalents, beginning of period

     3,185        2,722   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 4,374      $ 3,519   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)

 

     Quarter Ended  
     June 30, 2012     July 2, 2011  
     Disney
Shareholders
    Non-
controlling
Interests
    Total
Equity
    Disney
Shareholders
    Non-
controlling
Interests
     Total
Equity
 

Beginning Balance

   $ 38,049      $ 1,863      $ 39,912      $ 38,650      $ 1,662       $ 40,312   

Net income

     1,831        205        2,036        1,476        187         1,663   

Other comprehensive income/(loss):

             

Market value adjustments for hedges and investments

     68        —          68        (2     —           (2

Pension and postretirement medical adjustments

     57        —          57        21        —           21   

Foreign currency translation and other

     (87     (19     (106     9        10         19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income

     38        (19     19        28        10         38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income

     1,869        186        2,055        1,504        197         1,701   

Equity compensation activity

     463        —          463        211        —           211   

Common stock repurchases

     (373     —          (373     (1,427     —           (1,427

Distributions and other

     (2     18        16        8        117         125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 40,006      $ 2,067      $ 42,073      $ 38,946      $ 1,976       $ 40,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (cont’d)

(unaudited; in millions)

 

     Nine Months Ended  
     June 30, 2012     July 2, 2011  
     Disney
Shareholders
    Non-
controlling
Interests
    Total
Equity
    Disney
Shareholders
    Non-
controlling
Interests
    Total
Equity
 

Beginning Balance

   $ 37,385      $ 2,068      $ 39,453      $ 37,519      $ 1,823      $ 39,342   

Net income

     4,438        345        4,783        3,720        287        4,007   

Other comprehensive income/(loss):

            

Market value adjustments for hedges and investments

     124        —          124        (56     —          (56

Pension and postretirement medical adjustments

     145        —          145        99        —          99   

Foreign currency translation and other

     (82     (24     (106     29        18        47   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     187        (24     163        72        18        90   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     4,625        321        4,946        3,792        305        4,097   

Equity compensation activity

     1,116        —          1,116        1,413        —          1,413   

Dividends

     (1,076     —          (1,076     (756     —          (756

Common stock repurchases

     (2,042     —          (2,042     (3,029     —          (3,029

Distributions and other

     (2     (322     (324     7        (152     (145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 40,006      $ 2,067      $ 42,073      $ 38,946      $ 1,976      $ 40,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

6


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

1. Principles of Consolidation

These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair statement of the results for the interim period. Operating results for the quarter and nine months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending September 29, 2012. Certain reclassifications have been made in the prior year financial statements to conform to the current year presentation.

These financial statements should be read in conjunction with the Company’s 2011 Annual Report on Form 10-K.

The Company enters into relationships or investments with other entities, and in certain instances, the entity in which the Company has a relationship or investment may be a variable interest entity (“VIE”). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Although the Company has less than a 50% direct ownership interest in Disneyland Paris, Hong Kong Disneyland Resort and Shanghai Disney Resort, they are VIEs, and given the nature of the Company’s relationships with these entities, which include management agreements, the Company has consolidated Disneyland Paris, Hong Kong Disneyland Resort and Shanghai Disney Resort in its financial statements.

The terms “Company,” “we,” “us,” and “our” are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted.

 

2. Segment Information

The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. The Company reports the performance of its operating segments including equity in the income of investees, which are primarily cable businesses included in the Media Networks segment.

 

7


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

     Quarter Ended     Nine Months Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Revenues(1):

        

Media Networks

   $ 5,084      $ 4,949      $ 14,555      $ 13,916   

Parks and Resorts

     3,441        3,170        9,495        8,668   

Studio Entertainment

     1,625        1,620        4,423        4,892   

Consumer Products

     742        685        2,369        2,233   

Interactive

     196        251        654        759   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 11,088      $ 10,675      $ 31,496      $ 30,468   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss) (1):

        

Media Networks

   $ 2,126      $ 2,094      $ 5,048      $ 4,684   

Parks and Resorts

     630        519        1,405        1,132   

Studio Entertainment

     313        49        642        501   

Consumer Products

     209        155        670        609   

Interactive

     (42     (86     (140     (214
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,236      $ 2,731      $ 7,625      $ 6,712   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Studio Entertainment segment revenues and operating income include an allocation of Consumer Products and Interactive revenues which is meant to reflect royalties on sales of merchandise based on certain Studio film properties. The increases/(decreases) related to these allocations on segment revenues and operating income as reported in the above table are as follows:

 

     Quarter Ended     Nine Months Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Studio Entertainment

   $ 64      $ 77      $ 194      $ 195   

Consumer Products

     (53     (76     (182     (192

Interactive

     (11     (1     (12     (3
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

A reconciliation of segment operating income to income before income taxes is as follows:

 

     Quarter Ended     Nine Months Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
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   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

8


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

3. Acquisitions

UTV

Pursuant to a delisting offer process governed by Indian law, on February 2, 2012, the Company purchased additional publicly held shares and all of the shares held by the founder of UTV Software Communications Limited (UTV), a media and entertainment company headquartered and publicly traded in India, for $377 million. The Company also assumed approximately $300 million of UTV’s borrowings. The purchase increased the Company’s ownership interest to 93% from 50%. As a result, the Company changed its accounting for UTV from an equity method investment to a consolidated subsidiary. The acquisition of UTV supports the Company’s strategic priority of increasing its brand presence and reach in key international markets.

Upon consolidation, the Company recognized a non-cash gain of $184 million ($116 million after tax) as a result of adjusting the carrying value of the Company’s 50% equity investment to its estimated fair value of $405 million. The gain was recorded in “Other Income” in the Condensed Consolidated Statement of Income. The fair value was determined based on the Company’s internal valuation of the UTV business using an income approach (discounted cash flow model) which the Company believes provides the most appropriate indicator of fair value.

The Company has performed a preliminary allocation of the purchase price to the estimated fair value of the tangible and intangible assets acquired and liabilities assumed. The majority of the purchase price has been allocated to goodwill, which is not amortizable for tax purposes. The goodwill reflects the synergies and increased Indian market penetration expected from combining the operations of UTV and the Company.

In accordance with Indian securities regulation, the Company can be required to purchase any outstanding UTV shares at the election of each remaining UTV shareholder for 1,100 Indian rupees per share until March 16, 2013. To date, the Company has paid $63 million to acquire an incremental 6% interest bringing its ownership percentage to 99%.

Seven TV

On November 18, 2011, the Company acquired a 49% ownership interest in Seven TV, a broadcast television network in Russia for $300 million. Seven TV was converted to an ad-supported, free-to-air Disney Channel in Russia. The Company accounts for its interest in Seven TV as an equity method investment.

AETN

A&E Television Networks LLC (AETN) operates multiple cable broadcasting services and is owned 42.1% by the Company, 42.1% by the Hearst Corporation (Hearst) and 15.8% by NBCUniversal. On July 9, 2012, AETN agreed to redeem NBCUniversal’s entire 15.8% equity interest for approximately $3 billion. Approximately $2.5 billion represents the enterprise value of NBCUniversal’s equity interest in AETN, and the balance of approximately $0.5 billion represents the value of tax benefits expected to be generated as a result of the transaction, which is to be paid to NBCUniversal in accordance with the amended and restated limited liability company agreement of AETN. As a result of the transaction, the Company’s and Hearst’s ownership interest would increase to 50%. The transaction is expected to close prior to the end of calendar 2012 upon the satisfaction of closing conditions. The Company and Hearst will each make a $300 million equity contribution to AETN and each will potentially provide up to $500 million in shareholder loans to assist in financing the transaction. The Company expects that it will continue to account for its interest in AETN as an equity method investment.

 

9


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

Goodwill

The changes in the carrying amount of goodwill for the nine months ended June 30, 2012, are as follows:

 

     Media
Networks
    Parks and
Resorts
     Studio
Entertainment
    Consumer
Products
    Interactive     Total  

Balance at Oct. 1, 2011

   $ 15,728      $ 172       $ 5,284      $ 1,797      $ 1,164      $ 24,145   

Acquisitions

     445        —           426        —          175        1,046   

Dispositions

     —          —           (1     (3     —          (4

Other, net

     (64     —           (60     —          (19     (143
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 16,109      $ 172       $ 5,649      $ 1,794      $ 1,320      $ 25,044   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The carrying amount of goodwill at June 30, 2012 and October 1, 2011 includes accumulated impairments of $29 million at Interactive.

 

4. Dispositions and Other Income

Miramax

On December 3, 2010, the Company sold Miramax Film NY, LLC (Miramax) for $663 million. Net proceeds which reflect closing adjustments, the settlement of related claims and obligations and Miramax’s cash balance at closing were $532 million, resulting in a pre-tax gain of $64 million, which is reported in “Other income” in the fiscal 2011 Condensed Consolidated Statement of Income. The book value of Miramax included $217 million of allocated goodwill that is not deductible for tax purposes. Accordingly, tax expense recorded in connection with the transaction was approximately $103 million resulting in a loss of $39 million after tax.

 

5. Borrowings

During the nine months ended June 30, 2012, the Company’s borrowing activity was as follows:

 

     October 1,
2011
     Additions      Payments     Other
Activity
    June 30,
2012
 

Commercial paper borrowings

   $ 1,583       $ —         $ (558   $ —        $ 1,025   

U.S. medium-term notes

     8,400         2,977         (1,268     5        10,114   

European medium-term notes and other foreign currency denominated borrowings (1)

     1,111         272         (198     196        1,381   

Other(1)

     572         2         (82     55        547   

Disneyland Paris borrowings (2)

     1,981         —           (140     (150     1,691   

Hong Kong Disneyland borrowings (3)

     330         —           —          (65     265   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 13,977       $ 3,251       $ (2,246   $ 41      $ 15,023   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

The other activity is primarily borrowings assumed in the acquisition of UTV.

(2) 

The other activity is primarily the impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Euro.

 

10


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

(3)

The other activity reflects the conversion of a portion of the Government of the Hong Kong Special Administrative Region’s loan to equity pursuant to a capital realignment and expansion plan.

In June 2012, the Company entered into a new five-year $2.25 billion bank facility with a syndicate of lenders. This facility replaced an existing three-year $2.25 billion facility which was scheduled to expire in 2013, and in combination with an existing $2.25 billion facility that matures in 2015, is used to support commercial paper borrowings. The bank facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, subject to a cap and a floor that vary with the Company’s public debt rating. The spread above LIBOR can range from 0.26% to 1.93%.

 

6. International Theme Park Investments

The Company has a 51% effective ownership interest in the operations of Disneyland Paris, a 48% ownership interest in the operations of Hong Kong Disneyland Resort and a 43% ownership interest in the operations of Shanghai Disney Resort (collectively the “International Theme Parks”), all of which are consolidated in the Company’s financial statements.

The following tables present summarized balance sheet information for the Company as of June 30, 2012 and October 1, 2011, reflecting the impact of consolidating the balance sheets of the International Theme Parks.

 

     As of June 30, 2012  
     Before International
Theme Parks

Consolidation
     International
Theme Parks and
Adjustments
    Total  

Cash and cash equivalents

   $ 3,842       $ 532      $ 4,374   

Other current assets

     10,136         244        10,380   
  

 

 

    

 

 

   

 

 

 

Total current assets

     13,978         776        14,754   

Investments

     3,852         (1,455     2,397   

Fixed assets

     16,620         4,324        20,944   

Other assets

     37,122         74        37,196   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 71,572       $ 3,719      $ 75,291   
  

 

 

    

 

 

   

 

 

 

Current portion of borrowings

   $ 2,396       $ 173      $ 2,569   

Other current liabilities

     8,065         483        8,548   
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     10,461         656        11,117   

Borrowings

     10,671         1,783        12,454   

Deferred income taxes and other long-term liabilities

     9,497         150        9,647   

Equity

     40,943         1,130        42,073   
  

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 71,572       $ 3,719      $ 75,291   
  

 

 

    

 

 

   

 

 

 

 

11


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

     As of October 1, 2011  
     Before International
Theme Parks

Consolidation
     International
Theme Parks and
Adjustments
    Total  

Cash and cash equivalents

   $ 2,407       $ 778      $ 3,185   

Other current assets

     10,323         249        10,572   
  

 

 

    

 

 

   

 

 

 

Total current assets

     12,730         1,027        13,757   

Investments

     3,791         (1,356     2,435   

Fixed assets

     15,386         4,309        19,695   

Other assets

     36,137         100        36,237   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 68,044       $ 4,080      $ 72,124   
  

 

 

    

 

 

   

 

 

 

Current portion of borrowings

   $ 2,866       $ 189      $ 3,055   

Other current liabilities

     8,459         574        9,033   
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     11,325         763        12,088   

Borrowings

     8,800         2,122        10,922   

Deferred income taxes and other long-term liabilities

     9,507         154        9,661   

Equity

     38,412         1,041        39,453   
  

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 68,044       $ 4,080      $ 72,124   
  

 

 

    

 

 

   

 

 

 

The following table presents summarized income statement information of the Company for the nine months ended June 30, 2012, reflecting the impact of consolidating the income statements of the International Theme Parks.

 

     Before International
Theme Parks
Consolidation (1)
    International
Theme Parks and
Adjustments
    Total  

Revenues

   $ 29,924      $ 1,572      $ 31,496   

Cost and expenses

     (23,085     (1,572     (24,657

Restructuring and impairment charges

     (51     —          (51

Other income

     184        —          184   

Net interest expense

     (221     (57     (278

Equity in the income of investees

     425        27        452   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,176        (30     7,146   

Income taxes

     (2,360     (3     (2,363
  

 

 

   

 

 

   

 

 

 

Net income

   $ 4,816      $ (33   $ 4,783   
  

 

 

   

 

 

   

 

 

 

 

(1) 

These amounts include the International Theme Parks under the equity method of accounting. As such, royalty and management fee income from these operations is included in Revenues and our share of their net income/(loss) is included in Equity in the income of investees. There were $9 million in royalties and management fees recognized for the nine months ended June 30, 2012.

 

12


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

The following table presents summarized cash flow statement information of the Company for the nine months ended June 30, 2012, reflecting the impact of consolidating the cash flow statements of the International Theme Parks.

 

     Before International
Theme Parks
Consolidation
    International
Theme Parks  and
Adjustments
    Total  

Cash provided by operations

   $ 6,168      $ 263      $ 6,431   

Investments in parks, resorts and other property

     (2,392     (459     (2,851

Other investing activities

     (739     120        (619

Cash used by financing activities

     (1,544     (136     (1,680

Impact of exchange rates on cash and cash equivalents

     (58     (34     (92
  

 

 

   

 

 

   

 

 

 

Increase/(decrease) in cash and cash equivalents

     1,435        (246     1,189   

Cash and cash equivalents, beginning of period

     2,407        778        3,185   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 3,842      $ 532      $ 4,374   
  

 

 

   

 

 

   

 

 

 

 

7. Pension and Other Benefit Programs

The components of net periodic benefit cost are as follows:

 

     Pension Plans     Postretirement Medical Plans  
     Quarter Ended     Nine Months Ended     Quarter Ended     Nine Months Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Service cost

   $ 69      $ 73      $ 208      $ 220      $ 5      $ 4      $ 16      $ 14   

Interest cost

     111        104        330        311        19        17        56        50   

Expected return on plan assets

     (128     (111     (385     (331     (5     (6     (17     (18

Amortization of prior year service costs

     3        3        10        10        —          —          (1     (1

Recognized net actuarial loss

     77        57        232        171        7        2        23        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 132      $ 126      $ 395      $ 381      $ 26      $ 17      $ 77      $ 51   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ended June 30, 2012, the Company made contributions to its pension and postretirement medical plans totaling $393 million. The Company expects total pension and postretirement medical plan contributions in fiscal 2012 of approximately $400 million to $425 million including discretionary contributions above the minimum requirements. Final minimum pension plan funding requirements for fiscal 2012 will be determined based on our January 1, 2012 funding actuarial valuation which will be available by the end of the fourth quarter of fiscal 2012.

 

13


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

8. Earnings Per Share

Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period and are calculated using the treasury stock method for equity-based compensation awards (Awards). A reconciliation of the weighted average number of common and common equivalent shares outstanding and Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, is as follows:

 

     Quarter Ended      Nine Months Ended  
     June 30,
2012
     July 2,
2011
     June 30,
2012
     July 2,
2011
 

Shares (in millions):

           

Weighted average number of common shares outstanding (basic)

     1,791         1,883         1,794         1,891   

Weighted average dilutive impact of equity-based compensation awards

     21         29         24         33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common and common equivalent shares outstanding (diluted)

     1,812         1,912         1,818         1,924   
  

 

 

    

 

 

    

 

 

    

 

 

 

Awards excluded from diluted earnings per share

     10         10         13         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9. Equity

On November 30, 2011, the Company declared a $0.60 per share dividend ($1.1 billion) related to fiscal 2011 for shareholders of record on December 16, 2011, which was paid on January 18, 2012. The Company paid a $0.40 per share dividend ($756 million) during the second quarter of fiscal 2011 related to fiscal 2010.

During the nine months ended June 30, 2012, the Company repurchased 53 million shares of its common stock for $2,042 million. As of June 30, 2012, the Company had remaining authorization in place to repurchase 251 million additional shares. The repurchase program does not have an expiration date.

The par value of the Company’s outstanding common stock totaled approximately $28 million.

Accumulated other comprehensive income (loss), net of tax, is as follows:

 

     June 30,
2012
    October 1,
2011
 

Market value adjustments for investments and hedges

   $ 76      $ (48

Foreign currency translation and other

     (39     43   

Unrecognized pension and postretirement medical expense

     (2,480     (2,625
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss) (1)

   $ (2,443   $ (2,630
  

 

 

   

 

 

 

 

(1) 

Accumulated other comprehensive income (loss) and components of other comprehensive income (loss) are net of 37% estimated tax.

 

14


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

10. Equity-Based Compensation

The amount of compensation expense related to stock options, stock appreciation rights and restricted stock units (RSUs) is as follows:

 

     Quarter Ended      Nine Months Ended  
     June 30,
2012
     July 2,
2011
     June 30,
2012
     July 2,
2011
 

Stock options/rights (1)

   $ 29       $ 29       $ 89       $ 104   

RSUs

     77         70         234         216   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-based compensation expense (2)

   $ 106       $ 99       $ 323       $ 320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity-based compensation expense capitalized during the period

   $ 15       $ 16       $ 42       $ 50   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes stock appreciation rights issued in connection with acquisition of Playdom

(2) 

Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. During the quarter and nine months ended June 30, 2012, amortization of previously capitalized equity-based compensation totaled $15 million and $39 million, respectively. During the quarter and nine months ended July 2, 2011, amortization of previously capitalized equity-based compensation totaled $8 million and $43 million, respectively.

Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $190 million and $663 million, respectively, as of June 30, 2012.

The weighted average grant date fair values of options issued during the nine months ended June 30, 2012 and July 2, 2011 were $10.65 and $10.97, respectively.

During the nine months ended June 30, 2012, the Company made equity compensation grants totaling 19.8 million units, which included its regular annual grant issued in January, 2012, consisting of 9.8 million stock options and 8.6 million RSUs, of which 0.5 million RSUs included market and performance conditions.

In March 2012, shareholders of the Company approved an amendment to the 2011 Stock Incentive Plan, which increased the number of shares authorized to be awarded as grants by an incremental 15 million shares. Following this amendment, the maximum number of shares available for issuance (assuming all the awards are in the form of stock options) was approximately 131 million shares and the number available for issuance assuming all awards are in the form of RSUs was approximately 66 million shares.

 

11. Commitments and Contingencies

Legal Matters

Celador International Ltd. v. American Broadcasting Companies, Inc. On May 19, 2004, an affiliate of the creator and licensor of the television program, “Who Wants to be a Millionaire,” filed an action against the Company and certain of its subsidiaries, including American Broadcasting Companies, Inc. and Buena Vista Television, LLC, alleging it was damaged by defendants improperly engaging in certain intra-company transactions and charging merchandise distribution expenses, resulting in an underpayment to the plaintiff. On July 7, 2010, the jury returned a verdict for breach of contract against certain subsidiaries of the Company, awarding plaintiff damages of $269.4 million. The Company has stipulated with the plaintiff to an award of prejudgment interest of $50 million, which amount will be reduced pro rata should the Court of Appeals reduce the damages amount. On December 21, 2010, the Company’s

 

15


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

alternative motions for a new trial and for judgment as a matter of law were denied. Although we cannot predict the ultimate outcome of this lawsuit, the Company believes the jury’s verdict is in error and is vigorously pursuing its position on appeal, notice of which was filed by the Company on January 14, 2011. On or about January 28, 2011, plaintiff filed a notice of cross-appeal. The Company has determined that it does not have a probable loss under the applicable accounting standard relating to probability of loss for recording a reserve with respect to this litigation and therefore has not recorded a reserve.

The Company, together with, in some instances, certain of its directors and officers, is a defendant or codefendant in various other legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses. Management does not expect the Company to suffer any material liability by reason of these actions.

Contractual Guarantees

The Company has guaranteed bond issuances by the Anaheim Public Authority that were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the Disneyland Resort. Revenues from sales, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of June 30, 2012, the remaining debt service obligation guaranteed by the Company was $355 million, of which $84 million was principal. To the extent that tax revenues exceed the debt service payments in subsequent periods, the Company would be reimbursed for any previously funded shortfalls. To date, tax revenues have exceeded the debt service payments for the Anaheim bonds.

ESPN STAR Sports, a joint venture in which ESPN owns a 50% equity interest, has agreements for global rights to certain cricket programming through 2019. ESPN and the other joint-venture partner have jointly guaranteed the programming rights obligation of approximately $0.9 billion.

Long-Term Receivables and the Allowance for Credit Losses

The Company has accounts receivable with original maturities greater than one year in duration principally related to the Company’s sale of program rights in the television syndication markets within the Media Networks segment and the Company’s vacation ownership units within the Parks and Resorts segment. Allowances for credit losses are established against these receivables as necessary.

The Company estimates the allowance for credit losses related to receivables for the sale of syndicated programming based upon a number of factors, including historical experience, and an ongoing review of the financial condition of individual companies with which we do business. The balance of syndication receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $0.8 billion as of June 30, 2012. The activity in the current period related to the allowance for credit losses was not material.

The Company estimates the allowance for credit losses related to receivables for sales of its vacation ownership units based primarily on historical collection experience. Projections of uncollectible amounts are also based on consideration of the economic environment and the age of receivables. The balance of mortgage receivables recorded in other non-current assets, net of a related allowance for credit losses of approximately 3%, was approximately $0.7 billion as of June 30, 2012. The activity in the period related to the allowance for credit losses was not material.

 

16


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

Income Taxes

During the nine months ended June 30, 2012, the Company settled certain tax matters with various jurisdictions. As a result of these settlements, the Company reduced its unrecognized tax benefits by $126 million, including interest and penalties.

In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to resolutions of open tax matters. These resolutions would reduce our unrecognized tax benefits by approximately $52 million.

 

12. Fair Value Measurements

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the following three categories:

 

Level 1 –   Quoted prices for identical instruments in active markets
Level 2 –   Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 –   Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable

The Company’s assets and liabilities measured at fair value are summarized by level in the following tables:

 

     Fair Value Measurement at June 30, 2012  
     Level 1      Level 2     Level 3      Total  

Assets

          

Investments

   $ 105       $ —        $ —         $ 105   

Derivatives (1)

          

Interest rate

     —           224        —           224   

Foreign exchange

     —           519        —           519   

Liabilities

          

Derivatives (1)

          

Foreign exchange

     —           (129     —           (129

Other

     —           (3     —           (3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total recorded at fair value

   $ 105       $ 611      $ —         $ 716   
  

 

 

    

 

 

   

 

 

    

 

 

 

Fair value of borrowings

   $ 8,580       $ 3,823      $ 3,218       $ 15,621   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

17


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

     Fair Value Measurements at October 1, 2011  
     Level 1      Level 2     Level 3      Total  

Assets

          

Investments

   $ 143       $ 43      $ —         $ 186   

Derivatives (1)

          

Interest rate

     —           214        —           214   

Foreign exchange

     —           498        —           498   

Residual Interests

     —           —          40         40   

Liabilities

          

Derivatives (1)

          

Interest rate

     —           (18     —           (18

Foreign exchange

     —           (262     —           (262

Other derivatives

     —           (1     —           (1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total recorded at fair value

   $ 143       $ 474      $ 40       $ 657   
  

 

 

    

 

 

   

 

 

    

 

 

 

Fair value of borrowings

   $ 8,953       $ 2,128      $ 3,070       $ 14,151   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

The Company has a master netting arrangement by counterparty with respect to certain derivative contracts. Contracts in a liability position totaling $111 million and $167 million have been netted against contracts in an asset position in the Condensed Consolidated Balance Sheets at June 30, 2012 and October 1, 2011, respectively.

Level 1 borrowings consist of U.S. medium-term notes.

The fair values of Level 2 investments are primarily determined by reference to market prices based on recent trading activity and other relevant information including pricing for similar securities as determined by third-party pricing services.

The fair values of Level 2 derivatives are primarily determined based on the present value of future cash flows using internal models that use observable inputs such as interest rates, yield curves and foreign currency exchange rates. Counterparty credit risk, which is mitigated by master netting agreements and collateral posting arrangements with certain counterparties, did not have a material impact on derivative fair value estimates.

Level 2 borrowings, which include commercial paper and U.S. medium-term notes, are valued based on quoted prices for similar instruments in active markets.

Level 3 residual interests relate to securitized vacation ownership mortgage receivables and are valued using a discounted cash flow model that considers estimated interest rates, discount rates, prepayment, and defaults. On June 5, 2012, the Company repurchased previously sold mortgage receivables.

Level 3 borrowings, which include International Theme Parks borrowings and other foreign currency denominated borrowings, are valued based on historical market transactions, interest rates, credit risk and market liquidity.

The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.

The Company also has assets and liabilities that are required to be recorded at fair value on a non-recurring basis when certain circumstances occur. During the nine months ended June 30, 2012 and July 2, 2011,

 

18


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

the Company recorded impairment charges of $111 million and $43 million, respectively, on film productions. These impairment charges are reported in “Costs and expenses” in the Condensed Consolidated Statements of Income. The film impairment charges reflected the excess of the unamortized cost of the films over the estimated fair value using discounted cash flows. The discounted cash flow analysis is a level 3 valuation technique. The aggregate carrying values of the films for which we prepared the fair value analyses were $124 million and $94 million as of June 30, 2012 and July 2, 2011, respectively.

Transfers of Financial Assets

Through December 4, 2008, the Company sold mortgage receivables arising from sales of its vacation ownership units under a facility that expired on December 4, 2008 and was not renewed. The Company continued to service the sold receivables and had a residual interest in those receivables. On June 5, 2012, the Company repurchased these receivables for $191 million which equaled the outstanding principal balance and approximated fair value.

 

13. Derivative Instruments

The Company manages its exposure to various risks of its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.

The following tables summarize the gross fair value of the Company’s derivative positions as of June 30, 2012 and October 1, 2011:

 

     As of June 30, 2012  
     Current
Assets
    Other Assets     Other
Accrued
Liabilities
    Other Long-
Term
Liabilities
 

Derivatives designated as hedges

        

Foreign exchange

   $ 178      $ 78      $ (58   $ (33

Interest rate

     —          224        —          —     

Other

     —          —          (3     —     

Derivatives not designated as hedges

        

Foreign exchange

     69        194        (38     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross fair value of derivatives

     247        496        (99     (33

Counterparty netting

     (87     (24     87        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivatives (1)

   $ 160      $ 472      $ (12   $ (9
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

     As of October 1, 2011  
     Current
Assets
    Other Assets     Other
Accrued
Liabilities
    Other Long-
Term
Liabilities
 

Derivatives designated as hedges

        

Foreign exchange

   $ 133      $ 33      $ (100   $ (90

Interest rate

     1        213        —          —     

Other

     —          —          (1     —     

Derivatives not designated as hedges

        

Foreign exchange

     103        229        (51     (21

Interest rate

     —          —          —          (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross fair value of derivatives

     237        475        (152     (129

Counterparty netting

     (111     (56     111        56   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivatives (1)

   $ 126      $ 419      $ (41   $ (73
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Refer to Note 12 for further information on derivative fair values and counterparty netting.

Interest Rate Risk Management

The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company typically uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate management activities.

The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of June 30, 2012 and October 1, 2011, the total notional amount of the Company’s pay-floating interest rate swaps was $3.1 billion and $1.2 billion, respectively. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Condensed Consolidated Statements of Income.

 

     Quarter Ended     Nine Months Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Gain (loss) on interest rate swaps

   $ 25      $ 16      $ 9      $ (61

Gain (loss) on hedged borrowings

     (25     (16     (9     61   

The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gain or losses from these cash flow hedges are deferred in accumulated other comprehensive income (AOCI) and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at June 30, 2012 nor at October 1, 2011.

Foreign Exchange Risk Management

The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.

 

20


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the Euro, Japanese yen, Canadian dollar and British pound. Cross-currency swaps are used to effectively convert foreign currency-denominated borrowings into U.S. dollar denominated borrowings.

The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of June 30, 2012 and October 1, 2011, the notional amounts of the Company’s net foreign exchange cash flow hedges were $5.2 billion and $3.6 billion, respectively. Mark to market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the nine months ended June 30, 2012 and July 2, 2011 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $120 million. The following table summarizes the pre-tax adjustments to AOCI for foreign exchange cash flow hedges.

 

     Quarter Ended     Nine Months Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Gain (loss) recorded in AOCI

   $ 157      $ (114   $ 218      $ (249

Reclassification of (gains) losses from AOCI into revenues and costs and expenses

     (29     63        (15     119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in AOCI

   $ 128      $ (51   $ 203      $ (130
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange risk management contracts with respect to foreign currency assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at June 30, 2012 and October 1, 2011 were $2.8 billion and $2.6 billion, respectively. During the quarters ended June 30, 2012 and July 2, 2011, the Company recognized net gains of $130 million and net losses of $62 million, respectively, in costs and expenses on these foreign exchange contracts which offset respective net losses of $136 million and net gains of $63 million on the related economic exposures. During the nine months ended June 30, 2012 and July 2, 2011, the Company recognized net gains of $73 million and net losses of $127 million, respectively, in costs and expenses on these foreign exchange contracts which offset respective net losses of $109 million and net gains of $119 million on the related economic exposures.

Commodity Price Risk Management

The Company is subject to the volatility of commodities prices and designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark to market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The fair value of the commodity hedging contracts and related gains or losses recognized in earnings were not material at June 30, 2012 nor at October 1, 2011.

Risk Management – Other Derivatives Not Designated as Hedges

The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which may include pay fixed interest rate swaps and certain commodity swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings.

 

21


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

 

At June 30, 2012, the notional amount of other risk management contracts was not material. The notional amount of these pay fixed interest rate swaps not designated as hedges at October 1, 2011 was $184 million. On June 5, 2012, the Company terminated these pay fixed interest rate swaps in connection with the repurchase of securitized vacation ownership mortgage receivables. For the nine months ended June 30, 2012 and July 2, 2011, gains and losses recognized in income on these risk management contracts were not material.

Contingent Features

The Company’s derivative financial instruments may require the Company to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. If the Company’s credit ratings were to fall below investment grade, such counterparties would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair value of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $21 million and $114 million on June 30, 2012 and October 1, 2011, respectively.

 

14. Restructuring and Impairment Charges

In the current quarter and nine months, the Company recorded $7 million and $51 million, respectively, of restructuring and impairment charges primarily for severance and related costs for organizational and cost structure initiatives, across various of our businesses.

In the prior-year quarter and nine months, the Company recorded $34 million and $46 million, respectively, of restructuring and impairment charges for severance and facilities costs related to organizational and cost structure initiatives, primarily at our Studio Entertainment and Interactive segments.

 

22


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Nine-Month Results

Other Financial Information

Financial Condition

Commitments and Contingencies

Other Matters

Market Risk

OVERVIEW

Our summary consolidated results are presented below:

 

     Quarter Ended     % Change     Nine Months Ended     % Change  
(in millions, except per share data)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

Revenues

   $ 11,088      $ 10,675        4   $ 31,496      $ 30,468        3

Costs and expenses

     (8,128     (8,229     1     (24,657     (24,554     —  

Restructuring and impairment charges

     (7     (34     79     (51     (46     (11 )% 

Other income

     —          —          —       184        75        >100

Net interest expense

     (93     (88     (6 )%      (278     (266     (5 )% 

Equity in the income of investees

     169        184        (8 )%      452        463        (2 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Income before income taxes

     3,029        2,508        21     7,146        6,140        16

Income taxes

     (993     (845     (18 )%      (2,363     (2,133     (11 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income

     2,036        1,663        22     4,783        4,007        19

Less: Net income attributable to noncontrolling interests

     (205     (187     (10 )%      (345     (287     (20 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income attributable to Disney

   $ 1,831      $ 1,476        24   $ 4,438      $ 3,720        19
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted earnings per share

   $ 1.01      $ 0.77        31   $ 2.44      $ 1.93        26
  

 

 

   

 

 

     

 

 

   

 

 

   

Quarter Results

Diluted earnings per share (EPS) increased 31% for the quarter driven by improved segment performance, a decrease in weighted average shares outstanding and a lower effective income tax rate. Improved segment results were driven by the worldwide theatrical success of Marvel’s The Avengers, the benefit from contractual rate increases and subscriber growth on revenues from Multi-channel Video Service Providers (MVSP) (Affiliate Fees) along with higher advertising revenues at ESPN, increased guest spending at our domestic parks and resorts, the launch of the Disney Fantasy cruise ship, and an increase in royalties from Tokyo Disney Resort, which was impacted by the March 2011 earthquake and tsunami in Japan in the prior-year. These increases were partially offset by a negative impact from the timing of deferred Affiliate Fee revenue recognition at ESPN, increased operating expenses at our domestic parks and resorts and higher programming and production costs at ESPN. The Affiliate Fee timing impact at ESPN of $139 million was due to a change in the provisions related to annual programming commitments in a MVSP contract, which shifted the recognition of affiliate revenue to the first and second quarter of the current year as compared to recognition in the third quarter of the prior year.

 

23


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Nine-Month Results

Diluted EPS increased 26% for the nine months driven by improved segment performance and a decrease in weighted average shares outstanding as well as a gain related to an acquisition discussed below. Improved segment results were driven by higher attendance and guest spending at our domestic parks and resorts, higher Affiliate Fees due to contractual rate increases and subscriber growth along with higher advertising revenues at ESPN, an increase at Tokyo Disney Resort and the worldwide theatrical success of Marvel’s The Avengers. These increases were partially offset by higher film cost write-downs, increased operating expenses at our domestic parks and resorts, higher programming and production costs at ESPN and lower political advertising revenues at our local television stations.

In the current nine months, the Company recorded a $184 million ($116 million after tax) non-cash gain in connection with the Company’s acquisition of an incremental interest in UTV Software Communication Limited (UTV Gain) and $51 million ($32 million after tax) of restructuring and impairment charges due to severance related to organizational and cost structure initiatives. See Note 3 to the Condensed Consolidated Financial Statements for discussion of the UTV Gain.

In the prior-year nine months, the Company recorded $46 million of restructuring and impairment charges and gains on the sale of Miramax and BASS totaling $75 million. Restructuring and impairment charges in the prior-year quarter included an impairment related to assets that had tax basis in excess of the book value resulting in a $44 million tax benefit on the restructuring and impairment charges. The book value of Miramax included allocated goodwill totaling $217 million which is not tax deductible. Accordingly, the taxable gain on the sales of Miramax and BASS exceeded the $75 million book gain resulting in tax expense of $107 million. The table below shows the pretax and after tax impact of the prior year items.

 

     Benefit / (Expense)  
(in millions)    Pretax     Tax
Effect
    After
Tax
 

Restructuring and impairment charges

   $ (46   $ 44      $ (2

Gains on sales of businesses

     75        (107     (32
  

 

 

   

 

 

   

 

 

 
   $ 29      $ (63   $ (34
  

 

 

   

 

 

   

 

 

 

SEASONALITY

The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and nine months ended June 30, 2012 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.

 

24


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

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, which generally results in increased revenues during the Company’s first fiscal quarter, and by the timing and performance of theatrical releases and cable programming broadcasts.

Interactive 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 certain of our internet and mobile operations are subject to similar 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     % Change     Nine Months Ended     % Change  
(in millions)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

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
  

 

 

   

 

 

     

 

 

   

 

 

   

 

25


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

The following table reconciles segment operating income to income before income taxes:

 

     Quarter Ended     % Change     Nine Months Ended     % Change  
(in millions)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

Segment operating income

   $ 3,236      $ 2,731        18   $ 7,625      $ 6,712        14

Corporate and unallocated shared expenses

     (107     (101     (6 )%      (334     (335     —  

Restructuring and impairment charges

     (7     (34     79     (51     (46     (11 )% 

Other income

     —          —          —       184        75        >100

Net interest expense

     (93     (88     (6 )%      (278     (266     (5 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Income before income taxes

   $ 3,029      $ 2,508        21   $ 7,146      $ 6,140        16
  

 

 

   

 

 

     

 

 

   

 

 

   

Depreciation expense is as follows:

 

     Quarter Ended      % Change     Nine Months Ended      % Change  
(in millions)    June 30,
2012
     July 2,
2011
     Better/
(Worse)
    June 30,
2012
     July 2,
2011
     Better/
(Worse)
 

Media Networks

                

Cable Networks

   $ 36       $ 34         (6 )%    $ 107       $ 99         (8 )% 

Broadcasting

     26         25         (4 )%      74         76         3
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Media Networks

     62         59         (5 )%      181         175         (3 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Parks and Resorts

                

Domestic

     232         219         (6 )%      689         628         (10 )% 

International

     77         83         7     234         241         3
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Parks and Resorts

     309         302         (2 )%      923         869         (6 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Studio Entertainment

     16         12         (33 )%      42         42         —  

Consumer Products

     14         11         (27 )%      41         36         (14 )% 

Interactive

     4         3         (33 )%      12         12         —  

Corporate

     50         37         (35 )%      141         111         (27 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Total depreciation expense

   $ 455       $ 424         (7 )%    $ 1,340       $ 1,245         (8 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Amortization of intangible assets is as follows:

 

     Quarter Ended      % Change     Nine Months Ended      % Change  
(in millions)    June 30,
2012
     July 2,
2011
     Better/
(Worse)
    June 30,
2012
     July 2,
2011
     Better/
(Worse)
 

Media Networks

   $ 9       $ 2         >(100 )%    $ 13       $ 6         >(100 )% 

Parks and Resorts

     —           —           —       —           —           —  

Studio Entertainment

     34         25         (36 )%      72         56         (29 )% 

Consumer Products

     15         15         —       45         43         (5 )% 

Interactive

     9         10         10     25         29         14
  

 

 

    

 

 

      

 

 

    

 

 

    

Total amortization of intangible assets

   $ 67       $ 52         (29 )%    $ 155       $ 134         (16 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

 

26


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Media Networks

Operating results for the Media Networks segment are as follows:

 

     Quarter Ended     % Change
Better/
(Worse)
 
(in millions)    June 30,
2012
    July 2,
2011
   

Revenues

      

Affiliate Fees

   $ 2,565      $ 2,566        —  

Advertising

     2,020        1,913        6

Other

     499        470        6
  

 

 

   

 

 

   

Total revenues

     5,084        4,949        3

Operating expenses

     (2,429     (2,329     (4 )% 

Selling, general, administrative and other

     (628     (649     3

Depreciation and amortization

     (71     (61     (16 )% 

Equity in the income of investees

     170        184        (8 )% 
  

 

 

   

 

 

   

Operating Income

   $ 2,126      $ 2,094        2
  

 

 

   

 

 

   

Revenues

Affiliate Fees were essentially flat as an increase of 6% from higher contractual rates and subscriber growth at both ESPN and the domestic Disney Channels were offset by a 5% reduction in revenue recognition due to a change in the provisions related to annual programming commitments in a MVSP contract at Cable Networks, which shifted the recognition of affiliate revenue to the first and second quarter of the current year as compared to recognition in the third quarter of the prior year.

Higher advertising revenues were due to an increase of $115 million, or 13%, at Cable Networks from $859 million to $974 million, partially offset by a decrease of $8 million at Broadcasting from $1,054 million to $1,046 million. Advertising revenue growth at Cable Networks was driven by an increase of 4% due to higher rates, an increase of 3% due to higher units sold and an increase of 3% due to higher ratings at ESPN, all of which included the impact of the timing of NBA games due to the NBA lockout which shifted games into the third quarter of the current year. The change in revenues at Broadcasting resulted from lower ratings at the ABC Television Network, largely offset by higher rates.

The increase in other revenues reflected higher revenue from the sale of ABC Studios’ productions and higher royalties from MVSP distribution of our programs.

Costs and Expenses

Operating expenses include programming and production costs, which increased $85 million from $1,971 million to $2,056 million. At Cable Networks, an increase in programming and production costs of $100 million was primarily due to the timing of NBA games and contractual rate increases for NBA and Major League Baseball programming. At Broadcasting, the $15 million decrease in programming and production costs reflected the absence of The Oprah Winfrey Show at our local television stations.

The decrease in selling, general, administrative and other costs and expenses is primarily due to lower marketing costs at ABC Family reflecting fewer series premieres in the current year quarter.

Equity in the Income of Investees

Income from equity investees was $170 million for the current quarter compared to $184 million in the prior-year quarter. The decrease in income from equity investees was primarily due to higher operating costs at Hulu.

 

27


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Segment Operating Income

Segment operating income increased 2%, or $32 million, to $2.1 billion. The increase was primarily due to increases at the domestic Disney Channels and our local television stations, partially offset by a decrease at ESPN.

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

 

     Quarter Ended      % Change
Better/
(Worse)
 
(in millions)    June 30,
2012
     July 2,
2011
    

Revenues

        

Cable Networks

   $ 3,610       $ 3,516         3

Broadcasting

     1,474         1,433         3
  

 

 

    

 

 

    
   $ 5,084       $ 4,949         3
  

 

 

    

 

 

    

Segment operating income

        

Cable Networks

   $ 1,858       $ 1,844         1

Broadcasting

     268         250         7
  

 

 

    

 

 

    
   $ 2,126       $ 2,094         2
  

 

 

    

 

 

    

Restructuring and impairment charges

The Company recorded charges of $1 million in both the current and prior-year quarters, which 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:

 

     Quarter Ended     % Change
Better/
(Worse)
 
(in millions)    June 30,
2012
    July 2,
2011
   

Revenues

      

Domestic

   $ 2,789      $ 2,532        10

International

     652        638        2
  

 

 

   

 

 

   

Total revenues

     3,441        3,170        9

Operating expenses

     (2,032     (1,913     (6 )% 

Selling, general, administrative and other

     (470     (436     (8 )% 

Depreciation and amortization

     (309     (302     (2 )% 
  

 

 

   

 

 

   

Operating Income

   $ 630      $ 519        21
  

 

 

   

 

 

   

Revenues

Parks and Resorts revenues increased 9%, or $271 million due to an increase of $257 million at our domestic operations and an increase of $14 million at our international operations.

Revenue growth of 10% at our domestic operations reflected a 5% increase from higher average guest spending and a 4% increase from volume. Increased guest spending was due to higher average ticket prices, food, beverage and merchandise spending and daily hotel room rates. Higher volume was driven by the addition of the Disney Fantasy cruise ship which launched in March 2012.

 

28


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Revenue growth of 2% at our international operations reflected a 4% increase from higher average guest spending, a 4% increase from higher royalty revenue from Tokyo Disney Resort and a 1% increase from higher attendance at Disneyland Paris and Hong Kong Disneyland Resort. These increases were partially offset by a 7% decrease due to the impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Euro. Higher guest spending was primarily due to higher daily hotel room rates. 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 at the resort and a reduction in volume after reopening in the prior-year quarter.

The following table presents supplemental park and hotel statistics:

 

     Domestic     International (2)     Total  
     Quarter Ended     Quarter Ended     Quarter Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Parks

            

Increase/ (decrease)

            

Attendance

     1     2     3     7     1     3

Per Capita Guest Spending

     8     8     4     4     7     7

Hotels (1)

            

Occupancy

     79     81     89     91     81     83

Available Room Nights (in thousands)

     2,455        2,407        614        615        3,069        3,022   

Per Room Guest Spending

   $ 279      $ 262      $ 343      $ 317      $ 293      $ 274   

 

(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.

(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 $1.29 and $1.44 for the quarters ended June 30, 2012 and July 2, 2011, respectively.

Costs and Expenses

Operating expenses include operating labor which increased by $74 million from $923 million to $997 million and cost of sales which increased $25 million from $312 million to $337 million. Higher operating labor was driven by new guest offerings and labor cost inflation. The increase in cost of sales was driven by higher volumes. Operating expenses also increased due to costs associated with new guest offerings, including fuel, supplies and entertainment, and investments in systems infrastructure. New guest offerings included the Disney Fantasy, the expansion of Disney California Adventure at Disneyland Resort and our new hotel and vacation club resort in Hawaii. These increases were partially offset by the favorable impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Euro.

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

Segment Operating Income

Segment operating income increased 21%, or $111 million, to $630 million due to increases at Tokyo Disney Resort, Disney Cruise Line and our domestic parks and resorts.

 

29


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows:

 

     Quarter Ended     % Change
Better/
(Worse)
 
(in millions)    June 30,
2012
    July 2,
2011
   

Revenues

      

Theatrical distribution

   $ 834      $ 665        25

Home entertainment

     239        431        (45 )% 

Television distribution and other

     552        524        5
  

 

 

   

 

 

   

Total revenues

     1,625        1,620        —  

Operating expenses

     (746     (914     18

Selling, general, administrative and other

     (516     (620     17

Depreciation and amortization

     (50     (37     (35 )% 
  

 

 

   

 

 

   

Operating Income

   $ 313      $ 49        >100
  

 

 

   

 

 

   

Revenues

The increase in theatrical distribution revenue was primarily due to the strong performance of Marvel’s The Avengers in the current quarter compared to Pirates of the Caribbean: On Stranger Tides and Thor in the prior-year quarter. Other key titles included Brave in the current quarter and Cars 2 in the prior-year quarter.

Lower home entertainment revenue reflected a 44% decrease due to a decline in unit sales reflecting lower performance of current quarter titles and lower catalog sales. Significant current quarter titles included John Carter and The Muppets while the prior-year quarter included Tron: Legacy and Tangled.

The increase in television distribution and other revenue was driven by higher sales in international television distribution due to stronger performing titles available in the current quarter compared to the prior-year quarter.

Costs and Expenses

Operating expense included a decrease of $137 million in film cost amortization, from $571 million to $434 million driven by a lower amortization rate for Marvel’s The Avengers in the current quarter compared to the amortization rate for Pirates of the Caribbean: On Stranger Tides in the prior-year quarter, lower home entertainment sales volume and lower film cost write-downs. Operating expenses also include cost of goods sold and distribution costs which decreased $31 million, from $343 million to $312 million driven by a decline in home entertainment unit sales.

The decrease in selling, general, administrative and other costs was primarily due to lower marketing expenses at our theatrical and home entertainment businesses due to fewer major releases in the current year quarter.

Segment Operating Income

Segment operating income increased $264 million to $313 million due to improved theatrical and television distribution results, partially offset by a decrease in home entertainment results.

 

30


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Restructuring and impairment charges

The Company recorded credits of $3 million and charges of $30 million related to the Studio Entertainment segment in the current and prior-year quarters, respectively, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. The prior-year quarter charges were for severance and facilities costs related to organizational and cost structure initiatives.

Consumer Products

Operating results for the Consumer Products segment are as follows:

 

     Quarter Ended     % Change
Better/
(Worse)
 
(in millions)    June 30,
2012
    July 2,
2011
   

Revenues

      

Licensing and publishing

   $ 501      $ 459        9

Retail and other

     241        226        7
  

 

 

   

 

 

   

Total revenues

     742        685        8

Operating expenses

     (307     (308     —  

Selling, general, administrative and other

     (197     (196     (1)

Depreciation and amortization

     (29     (26     (12 )% 
  

 

 

   

 

 

   

Operating Income

   $ 209      $ 155        35
  

 

 

   

 

 

   

Revenues

The 9% increase in licensing and publishing revenue was driven by an increase in licensing revenue while publishing revenue was flat to the prior-year quarter. The increase at licensing was due to a lower revenue share with Studio Entertainment and higher licensing revenue in Japan as a result of the impact in the prior year from the earthquake and tsunami. The lower revenue share with Studio Entertainment reflected a higher mix of revenues from properties subject to the revenue share in the prior-year quarter driven by sales of Cars merchandise.

Higher retail and other revenue reflected a 7% increase from our retail business driven by new stores in North America and Europe, increased online sales and higher comparable store sales in North America.

Costs and Expenses

Operating expenses included an increase of $9 million in cost of goods sold, from $115 million to $124 million, driven by increased sales volume at our retail business. The increase was largely offset by lower third-party royalty expense and a decrease in distribution expense.

Segment Operating Income

Segment operating income increased 35% to $209 million due to increases at our licensing and retail businesses.

Restructuring and impairment charges

The Company recorded charges totaling $8 million in the current quarter related to the Consumer Products segment, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. The current quarter charges were for severance related to organizational and cost structure initiatives. There were no charges recorded in the prior-year quarter.

 

31


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Interactive

Operating results for the Interactive segment are as follows:

 

     Quarter Ended     % Change
Better/
(Worse)
 
(in millions)    June 30,
2012
    July 2,
2011
   

Revenues

      

Game sales and subscriptions

   $ 137      $ 199        (31 )% 

Advertising and other

     59        52        13
  

 

 

   

 

 

   

Total revenues

     196        251        (22 )% 

Operating expenses

     (128     (188     32

Selling, general, administrative and other

     (97     (136     29

Depreciation and amortization

     (13     (13     —  
  

 

 

   

 

 

   

Operating Loss

   $ (42   $ (86     51
  

 

 

   

 

 

   

Revenues

The decrease in game sales and subscriptions revenue reflected a 43% decrease from a decline in console game unit sales reflecting fewer titles in release in the current quarter and stronger performing titles in the prior-year quarter. Current quarter titles included Brave while the prior-year quarter included Lego Pirates of the Caribbean and Cars 2. The decrease was partially offset by higher recognition of minimum guarantees for licensed video games and improved social games performance in the current quarter.

Higher advertising and other revenue was driven by our mobile phone service in Japan due to increased subscribers and higher rates.

Costs and Expenses

Lower operating expense included a decrease in product development costs from $89 million to $80 million driven by decreased console game development and a decrease in cost of sales from $99 million to $48 million driven by lower unit sales of console games. The decrease in operating expenses also reflected higher cost allocations to other Company businesses related to website design and maintenance services.

The decrease in selling, general, administrative and other expenses was driven by lower marketing costs at our console games business due to fewer releases in the current quarter and lower acquisition accounting impacts at our social games business, which had a higher adverse impact on the prior-year quarter.

Segment Operating Loss

Segment operating loss was $42 million compared to $86 million in the prior-year quarter driven by improved results at our social games and online businesses.

Restructuring and impairment charges

The Company recorded charges totaling $1 million and $7 million in the current and prior-year quarters, respectively, related to the Interactive segment, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. The prior-year quarter charges were due to severance related to organizational and cost structure initiatives.

 

32


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

BUSINESS SEGMENT RESULTS – Nine Month Results

Media Networks

Operating results for the Media Networks segment are as follows:

 

     Nine Months Ended     % Change  
(in millions)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

Revenues

      

Affiliate Fees

   $ 6,775      $ 6,368        6

Advertising

     6,079        5,902        3

Other

     1,701        1,646        3
  

 

 

   

 

 

   

Total revenues

     14,555        13,916        5

Operating expenses

     (7,854     (7,649     (3 )% 

Selling, general, administrative and other

     (1,911     (1,865     (2 )% 

Depreciation and amortization

     (194     (181     (7 )% 

Equity in the income of investees

     452        463        (2 )% 
  

 

 

   

 

 

   

Operating Income

   $ 5,048      $ 4,684        8
  

 

 

   

 

 

   

Revenues

The 6% increase in Affiliate Fees reflected increases of 5% from higher contractual rates and 1% from subscriber growth at Cable Networks.

Higher advertising revenues were due to an increase of $234 million at Cable Networks from $2,705 million to $2,939 million, partially offset by a decrease of $57 million at Broadcasting from $3,197 million to $3,140 million. The increase at Cable Networks was driven by a 5% increase from higher rates and a 3% increase due to higher units sold, partially offset by a 1% decrease due to ratings at ESPN. The decrease at Broadcasting reflected a 2% decrease due to lower local television political advertising revenues and a 5% decrease due to lower ratings at the ABC Television Network, partially offset by a 5% increase due to higher rates at the ABC Television Network.

The increase in other revenues reflected sales of Disney Channel and ABC Family programs and higher royalties from MVSP distribution of our programs, partially offset by lower sales of ABC Studios’ productions driven by Brothers and Sisters and Lost.

Costs and Expenses

Operating expenses include programming and production costs which increased $131 million from $6,582 million to $6,713 million. At Cable Networks, an increase in programming and production spending of $239 million was primarily due to higher sports rights costs driven by contractual rate increases for college sports and NFL. At Broadcasting, programming and production costs decreased $108 million driven by lower production cost amortization due to decreased sales of ABC Studios’ productions and the absence of The Oprah Winfrey Show at our local television stations.

The increase in selling, general and administrative and other costs and expenses includes higher marketing costs at the ABC Television Network and the international Disney Channels.

Equity in the Income of Investees

Income from equity investees decreased by $11 million from $463 million to $452 million. The decrease was due to higher programming and marketing costs at Hulu and higher equity losses at UTV, partially offset by increased affiliate and advertising revenues at A&E Television Networks.

 

33


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Segment Operating Income

Segment operating income increased 8%, or $364 million, to $5 billion due to increases at ESPN, the domestic Disney Channels and the ABC Television Network, partially offset by a decrease at the local television stations.

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

 

     Nine Months Ended      % Change  
(in millions)    June 30,
2012
     July 2,
2011
     Better/
(Worse)
 

Revenues

        

Cable Networks

   $ 10,086       $ 9,410         7

Broadcasting

     4,469         4,506         (1 )% 
  

 

 

    

 

 

    
   $ 14,555       $ 13,916         5
  

 

 

    

 

 

    

Segment operating income

        

Cable Networks

   $ 4,325       $ 3,972         9

Broadcasting

     723         712         2
  

 

 

    

 

 

    
   $ 5,048       $ 4,684         8
  

 

 

    

 

 

    

Restructuring and impairment charges

The Company recorded charges of $11 million related to Media Networks in the current nine month period, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. The current nine month period charges were due to severance related to organizational and cost structure initiatives. There were no charges recorded in the prior-year nine month period.

Parks and Resorts

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

 

     Nine Months Ended     % Change  
(in millions)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

Revenues

      

Domestic

   $ 7,687      $ 6,938        11

International

     1,808        1,730        5
  

 

 

   

 

 

   

Total revenues

     9,495        8,668        10

Operating expenses

     (5,821     (5,418     (7 )% 

Selling, general, administrative and other

     (1,346     (1,249     (8 )% 

Depreciation and amortization

     (923     (869     (6 )% 
  

 

 

   

 

 

   

Operating Income

   $ 1,405      $ 1,132        24
  

 

 

   

 

 

   

Revenues

Parks and Resorts revenues increased 10%, or $827 million due to increases of $749 million at our domestic operations and $78 million at our international operations.

Revenue growth of 11% at our domestic operations reflected a 5% increase from higher average guest spending at our domestic parks and resorts and a 5% increase due to higher volume. The volume increase was driven by higher passenger cruise ship days from the Disney Dream and the Disney Fantasy which launched in January 2011 and March 2012, respectively, increased attendance at our domestic parks and higher hotel occupied room nights from our Hawaii resort which opened in August 2011. Guest spending increased due to higher average ticket prices, food, beverage and merchandise spending, and daily hotel room rates.

Revenue growth of 5% at our international operations reflected a 4% increase from higher average guest spending, a 3% increase from higher royalty revenue from Tokyo Disney Resort and a 1% increase from higher attendance at Hong Kong Disneyland Resort. These increases were partially offset by a decrease of 3% from the unfavorable impact of foreign currency translation as a result of 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. The increase at Tokyo Disney Resort reflected the prior-year impact from the earthquake and tsunami in Japan.

 

34


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

The following table presents supplemental park and hotel statistics:

 

     Domestic     International (2)     Total  
     Nine Months Ended     Nine Months Ended     Nine Months Ended  
      June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Parks

            

Increase/(decrease)

            

Attendance

     3 %      1     3 %      6     3 %      3

Per Capita Guest Spending

     7     7     3 %      2     6 %      6

Hotels (1)

            

Occupancy

     82 %      82     84 %      87     82 %      83

Available Room Nights (in thousands)

     7,307        7,209        1,847        1,845        9,154        9,054   

Per Room Guest Spending

   $ 261      $ 246      $ 300      $ 280      $ 269      $ 253   

 

(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.

(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 $1.31 and $1.39 for the nine months ended June 30, 2012 and July 2, 2011, respectively.

Costs and Expenses

Operating expenses include operating labor which increased by $233 million from $2,642 million to $2,875 million and cost of sales which increased by $44 million from $898 million to $942 million. Higher operating labor was driven by labor cost inflation and new guest offerings. The increase in cost of sales was driven by higher volumes. Operating expenses also increased due to costs associated with new guest offerings, including fuel, supplies and entertainment, and investments in systems infrastructure. New guest offerings included the Disney Dream and Disney Fantasy, our new hotel and vacation club resort in Hawaii, 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 labor and other cost inflation and marketing of new guest offerings and resort expansions.

Segment Operating Income

Segment operating income increased 24%, or $273 million, to $1.4 billion due to 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.

 

35


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows:

 

     Nine Months Ended     % Change  
(in millions)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

Revenues

      

Theatrical distribution

   $ 1,193      $ 1,284        (7 )% 

Home entertainment

     1,669        2,011        (17 )% 

Television distribution and other

     1,561        1,597        (2 )% 
  

 

 

   

 

 

   

Total revenues

     4,423        4,892        (10 )% 

Operating expenses

     (2,162     (2,509     14

Selling, general, administrative and other

     (1,505     (1,784     16

Depreciation and amortization

     (114     (98     (16 )% 
  

 

 

   

 

 

   

Operating Income

   $ 642      $ 501        28
  

 

 

   

 

 

   

Revenues

Lower theatrical distribution revenue reflected fewer Disney branded titles in wide release in the current period. The decrease was partially offset by the strong performance of Marvel’s The Avengers in the current period compared to Thor in the prior-year period. Key Disney branded titles in the prior year included Pirates of the Caribbean: On Stranger Tides, Tangled, Tron: Legacy, and Cars 2 while the current period included John Carter, Brave and The Muppets.

The decrease in home entertainment revenue reflected a 17% decrease due to a decline in unit sales reflecting the performance of the current-period titles and lower catalog sales. Significant titles in the current period included Cars 2 and Pirates of the Caribbean: On Stranger Tides while the prior-year period included Toy Story 3 and Tangled. Additionally, Pirates of the Caribbean: On Stranger Tides was released in the fourth quarter of fiscal 2011 in certain key international markets.

Costs and Expenses

Operating expenses included a decrease of $245 million in film cost amortization, from $1,463 million to $1,218 million driven by fewer Disney branded theatrical titles in release and lower home entertainment sales volume, partially offset by amortization for Marvel’s The Avengers and higher film cost write-downs in the current period. Operating expenses also include cost of goods sold and distribution costs which decreased $102 million, from $1,046 million to $944 million driven by a decline in home entertainment unit sales.

The decrease in selling, general, administrative and other costs was primarily due to lower theatrical marketing expenses driven by fewer Disney branded titles in the current period and decreased marketing spend at our home entertainment business.

Segment Operating Income

Segment operating income increased 28% to $642 million primarily due to improved results at our theatrical business partially offset by decreased home entertainment results.

Restructuring and impairment charges

The Company recorded charges of $4 million and $31 million in the current and prior-year nine month periods, respectively, related to the Studio Entertainment segment, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. The prior-year nine month period charges were for severance and facilities costs related to organizational and cost structure initiatives.

 

36


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Consumer Products

Operating results for the Consumer Products segment are as follows:

 

     Nine Months Ended     % Change  
(in millions)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

Revenues

      

Licensing and publishing

   $ 1,464      $ 1,373        7

Retail and other

     905        860        5
  

 

 

   

 

 

   

Total revenues

     2,369        2,233        6

Operating expenses

     (1,009     (984     (3 )% 

Selling, general, administrative and other

     (604     (561     (8 )% 

Depreciation and amortization

     (86     (79     (9 )% 
  

 

 

   

 

 

   

Operating Income

   $ 670      $ 609        10
  

 

 

   

 

 

   

Revenues

The 7% increase in licensing and publishing revenue reflected a 5% increase from licensing revenue driven by the performance of Spider-Man, Avengers, Minnie and Mickey merchandise, higher recognition of minimum guarantees and a 2% increase from a favorable impact of foreign currency translation primarily as a result of the weakening of the U.S. dollar against the Japanese Yen.

Higher retail and other revenue reflected a 5% increase from our retail business driven by new stores in North America and Europe, increased online sales due to promotional events, and higher comparable store sales in North America. The increase was partially offset by lower comparable store sales in Europe.

Costs and Expenses

Operating expenses included an increase of $18 million in cost of goods sold, from $433 million to $451 million, driven by increased sales volume at our retail business. Operating expenses also increased 2% due to higher labor and occupancy costs driven by the expansion of the Disney English business in China and new retail stores in North America and Europe. These increases were partially offset by lower third-party royalty expense in the current period.

The increase in selling, general, administrative and other expenses was driven by higher marketing and promotions expense and an unfavorable foreign currency impact at our licensing business driven by the weakening of the U.S. dollar against the Japanese Yen.

Segment Operating Income

Segment operating income increased 10% to $670 million due to an increase at our licensing business.

Restructuring and impairment charges

The Company recorded charges totaling $15 million in the current nine month period related to the Consumer Products segment, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. The current nine month period charges were due to severance related to organizational and cost structure initiatives. There were no charges recorded in the prior-year nine month period.

 

37


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

 

Interactive

Operating results for the Interactive segment are as follows:

 

     Nine Months Ended     % Change  
(in millions)    June 30,
2012
    July 2,
2011
    Better/
(Worse)
 

Revenues

      

Game sales and subscriptions

   $ 484      $ 603        (20 )% 

Advertising and other

     170        156        9