10-Q 1 d10q.htm FORM 10-Q Form 10-Q

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

April 2, 2011

  

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 1,890,153,714 shares of common stock outstanding as of May 3, 2011.


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      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Revenues

     $     9,077             $     8,580           $ 19,793             $ 18,319       

Costs and expenses

     (7,549)           (7,068)           (16,325)               (15,393)     

Restructuring and impairment charges

     —            (71)           (12)           (176)     

Other income

     —            70             75             97       

Net interest expense

     (83)           (130)           (178)           (233)     

Equity in the income of investees

     123             154             279             243       
                                   

Income before income taxes

     1,568             1,535             3,632             2,857       

Income taxes

     (558)           (537)           (1,288)           (1,015)     
                                   

Net income

     1,010             998             2,344             1,842       

Less: Net income attributable to noncontrolling interests

     (68)           (45)           (100)           (45)     
                                   

Net income attributable to The Walt Disney Company (Disney)

     $ 942             $ 953             $ 2,244             $ 1,797       
                                   

Earnings per share attributable to Disney:

           

Diluted

     $ 0.49             $ 0.48             $ 1.16             $ 0.93       
                                   

Basic

     $ 0.50             $ 0.49             $ 1.18             $ 0.94       
                                   

Weighted average number of common and common equivalent shares outstanding:

           

Diluted

     1,934             1,973             1,930             1,938       
                                   

Basic

     1,899             1,940             1,895             1,903       
                                   

See Notes to Condensed Consolidated Financial Statements

 

2


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)

 

     April 2,
2011
     October 2,
2010
 

ASSETS

     

Current assets

     

Cash and cash equivalents

     $       3,094            $       2,722      

Receivables

     6,075            5,784      

Inventories

     1,453            1,442      

Television costs

     878            678      

Deferred income taxes

     1,051            1,018      

Other current assets

     669            581      
                 

Total current assets

     13,220            12,225      

Film and television costs

     4,609            4,773      

Investments

     2,499            2,513      

Parks, resorts and other property, at cost

     

Attractions, buildings and equipment

     34,832            32,875      

Accumulated depreciation

     (19,156)           (18,373)     
                 
     15,676            14,502      

Projects in progress

     2,086            2,180      

Land

     1,136            1,124      
                 
     18,898            17,806      

Intangible assets, net

     5,139            5,081      

Goodwill

     24,127            24,100      

Other assets

     2,096            2,708      
                 

Total assets

     $       70,588            $       69,206      
                 

LIABILITIES AND EQUITY

     

Current liabilities

     

Accounts payable and other accrued liabilities

     $       5,150            $       6,109      

Current portion of borrowings

     4,084            2,350      

Unearned royalties and other advances

     3,569            2,541      
                 

Total current liabilities

     12,803            11,000      

Borrowings

     8,688            10,130      

Deferred income taxes

     2,841            2,630      

Other long-term liabilities

     5,944            6,104      

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 – 2.7 billion shares

     29,938            28,736      

Retained earnings

     35,814            34,327      

Accumulated other comprehensive loss

     (1,837)           (1,881)     
                 
     63,915            61,182      

Treasury stock, at cost 844.8 million shares at April 2, 2011 and 803.1 million shares at October 2, 2010

     (25,265)           (23,663)     
                 

Total Disney Shareholders’ equity

     38,650            37,519      

Noncontrolling interests

     1,662            1,823      
                 

Total equity

     40,312            39,342      
                 

Total liability and equity

     $       70,588            $       69,206      
                 

See Notes to Condensed Consolidated Financial Statements

 

3


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)

 

     Six Months Ended  
     April 2,
2011
     April 3,
2010
 

OPERATING ACTIVITIES

     

Net income

     $       2,344            $       1,842      

Depreciation and amortization

     903            847      

Gains on dispositions

     (75)           (75)     

Deferred income taxes

     195            235      

Equity in the income of investees

     (279)           (243)     

Cash distributions received from equity investees

     295            202      

Net change in film and television costs

     (184)           (481)     

Equity-based compensation

     247            272      

Impairment charges

     10            96      

Other

     (87)           (78)     

Changes in operating assets and liabilities:

     

Receivables

     (21)           (348)     

Inventories

     (30)           66      

Other assets

     28            58      

Accounts payable and other accrued liabilities

     2            330      

Income taxes

     (280)           (234)     
                 

Cash provided by operations

     3,068            2,489      
                 

INVESTING ACTIVITIES

     

Investments in parks, resorts and other property

     (1,845)           (807)     

Proceeds from dispositions

     566            115      

Acquisitions

     (171)           (2,261)     

Other

     (106)           (25)     
                 

Cash used in investing activities

     (1,556)           (2,978)     
                 

FINANCING ACTIVITIES

     

Commercial paper borrowings, net

     470            974      

Reduction of borrowings

     (73)           (243)     

Dividends

     (756)           (653)     

Repurchases of common stock

     (1,602)           (240)     

Exercise of stock options and other

     754            421      
                 

Cash (used)/provided by financing activities

     (1,207)           259      
                 

Impact of exchange rates on cash and cash equivalents

     67            (112)     
                 

Increase/(decrease) in cash and cash equivalents

     372            (342)     

Cash and cash equivalents, beginning of period

     2,722            3,417      
                 

Cash and cash equivalents, end of period

     $ 3,094            $       3,075      
                 

See Notes to Condensed Consolidated Financial Statements

 

4


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)

 

     Quarter Ended  
     April 2, 2011      April 3, 2010  
     Disney
Shareholders
     Non-
controlling
Interests
     Total
Equity
     Disney
Shareholders
     Non-
controlling
Interests
     Total
Equity
 

Beginning Balance

     $       37,797          $ 1,942            $       39,739            $       36,180            $       1,778            $       37,958      

Net income

     942            68            1,010            953            45            998      

Other comprehensive income:

                 

Market value adjustments for hedges and investments

     (21)           —            (21)           4            —            4      

Pension and postretirement medical adjustments

     42            —            42            63            —            63      

Foreign currency translation and other

     29            16            45            (29)           (11)           (40)     
                                                     

Other comprehensive income

     50            16            66            38            (11)           27      
                                                     

Comprehensive income

     992            84            1,076            991            34            1,025      

Equity compensation activity

     667            —            667            526            —            526      

Common stock repurchases

     (805)           —            (805)           (215)           —            (215)     

Distributions and other

     (1)           (364)           (365)           (2)           (323)           (325)     
                                                     

Ending Balance

     $       38,650            $       1,662            $       40,312            $       37,480            $       1,489            $       38,969      
                                                     

 

See Notes to Condensed Consolidated Financial Statements

5


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (cont’d)

(unaudited; in millions)

 

     Quarter Ended  
     April 2, 2011      April 3, 2010  
     Disney
Shareholders
     Non-
controlling
Interests
     Total
Equity
     Disney
Shareholders
     Non-
controlling
Interests
     Total
Equity
 

Beginning Balance

     $       37,519            $       1,823            $       39,342            $       33,734            $       1,691            $       35,425      

Net income

     2,244            100            2,344            1,797            45            1,842      

Other comprehensive income:

                 

Market value adjustments for hedges and investments

     (54)           —            (54)           20            —            20      

Pension and postretirement medical adjustments

     78            —            78            90            —            90      

Foreign currency translation and other

     20            8            28            (25)           (14)           (39)     
                                                     

Other comprehensive income

     44            8            52            85            (14)           71      
                                                     

Comprehensive income

     2,288            108            2,396            1,882            31            1,913      

Equity compensation activity

     1,202            —            1,202            870            —            870      

Dividends

     (756)           —            (756)           (653)           —            (653)     

Common stock repurchases

     (1,602)           —            (1,602)           (240)           —            (240)     

Acquisition of Marvel

     —            —            —            1,887            90            1,977      

Distributions and other

     (1)           (269)           (270)           —            (323)           (323)     
                                                     

Ending Balance

     $       38,650            $       1,662            $       40,312            $       37,480            $       1,489            $       38,969      
                                                     

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 six months ended April 2, 2011 are not necessarily indicative of the results that may be expected for the year ending October 1, 2011. 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 2010 Annual Report on Form 10-K.

In December 1999, DVD Financing, Inc. (DFI), a subsidiary of Disney Vacation Development, Inc. and an indirect subsidiary of the Company, completed a receivables sale transaction that established a facility that permitted DFI to sell receivables arising from the sale of vacation club memberships on a periodic basis. In connection with this facility, DFI prepares separate financial statements, although its separate assets and liabilities are also consolidated in these financial statements. DFI’s ability to sell new receivables under this facility ended on December 4, 2008. (See Note 13 for further discussion of this facility)

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 qualify as 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. Euro Disney and Hong Kong Disneyland are VIEs, and given the nature of the Company’s relationships with these entities, which include management agreements, the Company has consolidated Euro Disney and Hong Kong Disneyland 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 consists primarily of cable businesses included in the Media Networks segment.

Beginning with the first quarter of fiscal 2011, the Company made changes to certain transfer pricing arrangements between its business units. The most significant change was to the allocation of home video revenue and distribution costs between the Media Networks and Studio Entertainment segments for home video titles produced by the Media Networks segment and distributed by the Studio Entertainment segment. These changes will generally result in higher revenues, expenses and operating income at our Media Networks segment with offsetting declines at our Studio Entertainment segment.

 

7


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

     Quarter Ended      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Revenues(1):

           

Media Networks

     $     4,322             $     3,844             $ 8,967             $ 8,019       

Parks and Resorts

     2,630             2,449             5,498             5,111       

Studio Entertainment

     1,340             1,536             3,272             3,471       

Consumer Products

     626             596             1,548             1,342       

Interactive Media

     159             155             508             376       
                                   
     $ 9,077             $ 8,580             $     19,793             $     18,319       
                                   

Segment operating income (loss)(1):

           

Media Networks

     $ 1,524             $ 1,306             $ 2,590             $ 2,030       

Parks and Resorts

     145             150             613             525       

Studio Entertainment

     77             223             452             466       

Consumer Products

     142             133             454             376       

Interactive Media

     (115)            (55)            (128)            (65)      
                                   
     $ 1,773             $ 1,757             $ 3,981             $ 3,332       
                                   
(1) 

Studio Entertainment segment revenues and operating income include an allocation of Consumer Products and Interactive Media 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      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Studio Entertainment

   $   45           $   45           $   118           $   85       

Consumer Products

     (44)            (41)            (116)            (79)      

Interactive Media

     (1)            (4)            (2)            (6)      
                                   
   $   —           $   —           $   —           $   —       
                                   

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

 

     Quarter Ended      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Segment operating income

   $   1,773           $   1,757           $   3,981           $   3,332       

Corporate and unallocated shared expenses

     (122)            (91)            (234)            (163)      

Restructuring and impairment charges

     —             (71)            (12)            (176)      

Other income

     —             70             75             97       

Net interest expense

     (83)            (130)            (178)            (233)      
                                   

Income before income taxes

   $   1,568           $   1,535           $   3,632           $   2,857       
                                   

 

3. Acquisitions

Playdom

On August 27, 2010, the Company acquired Playdom, Inc. (Playdom), a company that develops online social games. This acquisition is designed to strengthen the Company’s digital gaming portfolio and provide access to a new customer base. Total consideration was approximately $563 million, subject to certain conditions and adjustments, of which approximately $115 million will be paid subject to vesting

 

8


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

conditions and recognized as post-close compensation expense. Additional consideration of up to $200 million may be paid if Playdom achieves predefined revenue and earnings targets for calendar year 2012. The Company has recognized the fair value (determined by a probability weighting of the potential payouts) of the additional consideration as a liability and subsequent fair value changes, measured quarterly, up to the ultimate amount paid, will be recognized in earnings.

The Company is in the process of finalizing the valuation of the assets acquired and liabilities assumed.

Goodwill

The changes in the carrying amount of goodwill for the six months ended April 2, 2011, are as follows:

 

    Media
    Networks     
        Parks and    
Resorts
    Studio
    Entertainment     
        Consumer    
Products
        Interactive    
Media
        Total      

Balance at Oct. 2, 2010

    $   15,737            $   171            $   5,268            $   1,805            $   1,119            $   24,100       

Acquisitions

    3            —            —            —            10            13       

Disposition

    (17)           —            —            —            —            (17)      

Other, net

    3            —            7            (8)           29            31       
                                               

Balance at April 2, 2011

    $   15,726            $   171            $   5,275            $   1,797            $   1,158            $   24,127       
                                               

The carrying amount of goodwill at April 2, 2011 and October 2, 2010 includes accumulated impairments of $29 million at Interactive Media.

The Disney Stores Japan

On March 31, 2010, the Company acquired all of the outstanding shares of Retail Networks Company Limited (The Disney Stores Japan) in exchange for a $17 million note. At the time of the acquisition, the Disney Store Japan had a cash balance of $13 million. In connection with the acquisition, the Company recognized a $22 million non-cash gain from the deemed termination of the existing licensing arrangement. The gain is reported in “Other income” in the fiscal 2010 Condensed Consolidated Statements of Income.

 

4. Dispositions

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.

Other Dispositions

On January 27, 2010, the Company sold its investment in a pay television service in Europe for $78 million, resulting in a pre-tax gain of $48 million reported in “Other income” in the fiscal 2010 Condensed Consolidated Statements of Income.

On November 25, 2009, the Company sold its investment in a television service in Europe for $37 million, resulting in a pre-tax gain of $27 million reported in “Other income” in the fiscal 2010 Condensed Consolidated Statement of Income.

 

9


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

5. Borrowings

During the six months ended April 2, 2011, the Company’s borrowing activity was as follows:

 

         October 2,    
2010
         Additions              Payments          Other
    Activity     
         April 2,    
2011
 

Commercial paper borrowings

     $   1,190             $   470             $   —             $   —             $   1,660       

U.S. medium-term notes

     6,815             —             —             2             6,817       

European medium-term notes

     273             —             —             1             274       

Other foreign currency denominated debt

     965             —             —             22             987       

Other(1)

     651             —             (34)            (97)            520       

Euro Disney borrowings(2)

     2,113             —             (62)            90             2,141       

Hong Kong Disneyland borrowings(3)

     473             —             —             (100)            373       
                                            

Total

     $   12,480             $   470             $   (96)            $   (82)            $   12,772       
                                            
(1) 

The other activity is primarily market value adjustments for debt with qualifying hedges.

(2) 

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

(3)

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

In February 2011, the Company entered into a new four-year $2.25 billion bank facility with a syndicate of lenders. This facility, in combination with an existing facility that matures in 2013, is used to support commercial paper borrowings. The new facility allows the Company to issue up to $800 million of letters of credit. 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 0.33% to 4.50%.

 

6. International Theme Park Investments

The Company has a 51% effective ownership interest in the operations of Euro Disney and a 47% ownership interest in the operations of Hong Kong Disneyland, both of which are consolidated in the Company’s financial statements.

The following table presents summarized balance sheet information for the Company as of April 2, 2011, reflecting the impact of consolidating the balance sheets of Euro Disney and Hong Kong Disneyland.

 

     Before Euro
Disney and
Hong Kong
Disneyland
      Consolidation      
     Euro Disney,
Hong Kong
    Disneyland and    
Adjustments
             Total          

Cash and cash equivalents

     $   2,518                 $   576                 $   3,094           

Other current assets

     9,875                 251                 10,126           
                          

Total current assets

     12,393                 827                 13,220           

Investments

     3,598                 (1,099)                2,499           

Fixed assets

     14,627                 4,271                 18,898           

Other assets

     35,856                 115                 35,971           
                          

Total assets

     $   66,474                 $   4,114                 $   70,588           
                          

Current portion of borrowings

     $   3,895                 $   189                 $   4,084           

Other current liabilities

     8,145                 574                 8,719           
                          

Total current liabilities

     12,040                 763                 12,803           

Borrowings

     6,363                 2,325                 8,688           

Deferred income taxes and other long-term liabilities

     8,632                 153                 8,785           

Equity

     39,439                 873                 40,312           
                          

Total liabilities and equity

     $   66,474                 $   4,114                 $   70,588           
                          

 

10


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 income statement information of the Company for the six months ended April 2, 2011, reflecting the impact of consolidating the income statements of Euro Disney and Hong Kong Disneyland.

 

     Before Euro
Disney and
Hong Kong
Disneyland
      Consolidation      
     Euro Disney,
Hong Kong
    Disneyland and    
Adjustments
             Total          

Revenues

     $   18,828                 $   965                 $   19,793           

Cost and expenses

     (15,312)                (1,013)                (16,325)          

Restructuring and impairment charges

     (12)                —                 (12)          

Other income

     75                 —                 75           

Net interest expense

     (128)                (50)                (178)          

Equity in the income of investees

     230                 49                 279           
                          

Income before income taxes

     3,681                 (49)                3,632           

Income taxes

     (1,287)                (1)                (1,288)          
                          

Net income

     $   2,394                 $   (50)                $   2,344           
                          

The following table presents summarized cash flow statement information of the Company for the six months ended April 2, 2011, reflecting the impact of consolidating the cash flow statements of Euro Disney and Hong Kong Disneyland.

 

     Before Euro
Disney and
Hong Kong
Disneyland
      Consolidation      
     Euro Disney,
Hong Kong
    Disneyland and    
Adjustments
             Total          

Cash provided by operations

     $   3,072                 $   (4)                $   3,068           

Investments in parks, resorts and other property

     (1,714)                (131)                (1,845)          

Cash provided by other investing activities

     191                 98                 289           

Cash used by financing activities

     (1,145)                (62)                (1,207)          

Impact of exchange rates on cash and cash equivalents

     49                 18                 67           
                          

Decrease in cash and cash equivalents

     453                 (81)                372           

Cash and cash equivalents, beginning of period

     2,065                 657                 2,722           
                          

Cash and cash equivalents, end of period

     $   2,518                 $   576                 $   3,094           
                          

On April 8, 2011, the Company and its partner in China announced that the Chinese central government in Beijing had approved an agreement to build and operate a Disney resort in the Pudong district of Shanghai (Shanghai Disney Resort) that will be operated through a joint venture between the Company and its Chinese partner. Shanghai Disney Resort is scheduled to open in approximately five years. There will be a phased investment in the project totaling approximately $3.7 billion over the construction period (24.5 billion yuan) to build the theme park and an additional $0.7 billion (4.5 billion yuan) to build other properties for the resort, including two hotels and a retail, dining and entertainment area. The Company will finance 43%

 

11


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

of the initial investment in accordance with its equity ownership percentage. The Company anticipates consolidating Shanghai Disney Resort for financial statement reporting purposes due to the Company’s involvement in the management of the resort.

 

7. Pension and Other Benefit Programs

The components of net periodic benefit cost are as follows:

 

    Pension Plans     Postretirement Medical Plans  
    Quarter Ended     Six Months Ended     Quarter Ended     Six Months Ended  
        April 2,    
2011
        April 3,    
2010
        April 2,    
2011
        April 3,    
2010
        April 2,    
2011
        April 3,    
2010
        April 2,    
2011
        April 3,    
2010
 

Service cost

    $   73            $   66            $   147            $   132            $   5            $   6            $   10            $   11       

Interest cost

    104            99            207            198            16            18            33            35       

Expected return on plan assets

    (110)           (103)           (220)           (207)           (6)           (7)           (12)           (13)      

Amortization of prior year service costs

    4            4            7            7            —            (1)           (1)           (1)      

Recognized net actuarial loss

    57            38            114            77            2            1            4            3       
                                                               

Net periodic benefit cost

    $   128            $   104            $   255          $   207              $   17            $   17            $   34            $   35       
                                                               

During the six months ended April 2, 2011, the Company made contributions to its pension and postretirement medical plans totaling $169 million, which included discretionary contributions above the minimum requirements. The Company expects additional pension and postretirement medical plan contributions in fiscal 2011 of approximately $280 million which are expected to include discretionary contributions above the minimum requirements. Final minimum funding requirements for fiscal 2011 will be determined based on a January 1, 2011 funding actuarial valuation which will be available late in fiscal 2011.

 

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, are as follows:

 

     Quarter Ended      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Shares (in millions):

           

Weighted average number of common shares outstanding (basic)

     1,899             1,940             1,895             1,903       

Weighted average dilutive impact of equity-based compensation awards

     35             33             35             35       
                                   

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

     1,934             1,973             1,930             1,938       
                                   

Awards excluded from diluted earnings per share

     11             30             6             52       
                                   

 

12


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

9. Equity

On December 1, 2010, the Company declared a $0.40 per share dividend ($756 million) related to fiscal 2010 for shareholders of record on December 13, 2010, which was paid on January 18, 2011. The Company paid a $0.35 per share dividend ($653 million) during the second quarter of fiscal 2010 related to fiscal 2009.

During the six months ended April 2, 2011, the Company repurchased 42 million shares of its common stock for approximately $1.6 billion. On March 22, 2011, the Company’s Board of Directors increased the repurchase authorization to a total of 400 million shares as of that date. As of April 2, 2011, the Company had remaining authorization in place to repurchase approximately 398 million additional shares. The repurchase program does not have an expiration date.

The Company received proceeds of $1.0 billion and $748 million from the exercise of 38 million and 32 million employee stock options during the first six months of fiscal 2011 and 2010, respectively.

The par value of the Company’s outstanding common stock totaled approximately $27 million.

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

 

         April 2,    
2011
         October 2,    
2010
 

Market value adjustments for investments and hedges

     $   (149)            $   (95)      

Foreign currency translation and other

     100             80       

Unrecognized pension and postretirement medical expense

     (1,788)            (1,866)      
                 

Accumulated other comprehensive income (loss)(1)

     $   (1,837)            $   (1,881)      
                 
(1)

Accumulated other comprehensive income (loss) and components of other comprehensive income (loss) are recorded net of tax using a 37% estimated tax rate

 

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      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Stock options/rights

     $   45             $   55             $   100             $   122       

RSUs

     79             82             156             150       
                                   

Total equity-based compensation expense

     $   124             $   137             $   256             $   272       
                                   

 

13


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $281 million and $828 million, respectively, as of April 2, 2011.

In January 2011, the Company made equity compensation grants, which included its regular annual grant, consisting of 10.4 million stock options and 12.5 million RSUs, of which 0.4 million RSUs included market and/or performance conditions.

In March 2011, shareholders of the Company approved the 2011 Stock Incentive Plan, which increased the number of shares authorized to be awarded as grants by 64 million shares.

The weighted average grant date fair values of options issued during the six months ended April 2, 2011, and April 3, 2010, were $10.96 and $9.42, respectively.

 

11.  Commitments and Contingencies

Legal Matters

Celador International Ltd. v. The Walt Disney Company. 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 prorata should the Court of Appeals reduce the damages amount. On December 21, 2010, the Company’s 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 intends to vigorously pursue 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 April 2, 2011, the remaining debt service obligation guaranteed by the Company was $362 million, of which $90 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 an agreement for global programming rights to International Cricket Council events from 2007 through 2015. Under

 

14


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

the terms of the agreement, ESPN and the other joint-venture partner have jointly guaranteed the programming rights obligation of approximately $0.7 billion over the remaining term of the agreement.

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 was approximately $0.7 billion, net of an immaterial allowance for credit losses as of April 2, 2011. The activity in the current period related to the allowance for credit losses was also 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 was approximately $0.4 billion, net of a related allowance for credit losses of approximately 8%, as of April 2, 2011. The activity in the period related to the allowance for credit losses was not material.

Income Taxes

During the six months ended April 2, 2011, the Company settled certain tax matters and as a result reduced its unrecognized tax benefits by $70 million.

In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to resolutions of certain open tax matters which would reduce our unrecognized tax benefits by $39 million.

 

12.  New Accounting Pronouncements

Revenue Arrangements with Multiple Deliverables

In October 2009, the Financial Accounting Standards Board (FASB) issued guidance on revenue arrangements with multiple deliverables effective for the Company’s 2011 fiscal year. The guidance revises the criteria for separating, measuring, and allocating arrangement consideration to each deliverable in a multiple element arrangement. The guidance requires companies to allocate revenue using the relative selling price of each deliverable, which must be estimated if the Company does not have a history of selling the deliverable on a stand-alone basis or third-party evidence of selling price. The Company adopted the provisions of this guidance at the beginning of fiscal year 2011, and the adoption did not have a material impact on the Company’s financial statements.

Transfers and Servicing of Financial Assets

In June 2009, the FASB issued guidance on transfers and servicing of financial assets to eliminate the concept of a qualifying special-purpose entity, change the requirements for off balance sheet accounting for financial assets including limiting the circumstances where off balance sheet treatment for a portion of a financial asset is allowable, and require additional disclosures. The Company adopted the provisions of this guidance at the beginning of fiscal year 2011, and the adoption did not have a material impact on the Company’s financial statements.

 

15


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Variable Interest Entities

In June 2009, the FASB issued guidance to revise the approach to determine when a variable interest entity (VIE) should be consolidated. The new consolidation model for VIEs considers whether an entity has the power to direct the activities that most significantly impact a VIE’s economic performance and shares in the significant risks and rewards of the VIE. The guidance on VIE’s requires companies to continually reassess VIEs to determine if consolidation is appropriate and requires additional disclosures. The Company adopted the provisions of this guidance at the beginning of fiscal year 2011, and the adoption did not have a material impact on the Company’s financial statements.

 

13.  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 are unobservable

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

 

     Fair Value Measurement at April 2, 2011  
         Level 1              Level 2              Level 3              Total      

Assets

           

Investments

     $   49             $   25             $   3             $   77       

Derivatives (1)

           

Interest rate

     —             154             —             154       

Foreign exchange

     —             349             —             349       

Other derivatives

     —             3             —             3       

Residual Interests

     —             —             42             42       

Liabilities

           

Derivatives(1)

           

Interest rate

     —             (15)            —             (15)      

Foreign exchange

     —             (422)            —             (422)      
                                   

Total

     $   49             $   94             $   45             $   188       
                                   

 

     Fair Value Measurements at October 2, 2010  
         Level 1              Level 2              Level 3              Total      

Assets

           

Investments

     $   42             $   42             $   2             $   86       

Derivatives (1)

           

Interest rate

     —             231             —             231       

Foreign exchange

     —             404             —             404       

Residual Interests

     —             —             54             54       

Liabilities

           

Derivatives(1)

           

Interest rate

     —             (22)            —             (22)      

Foreign exchange

     —             (490)            —             (490)      

Other

     —             —             (1)            (1)      
                                   

Total

     $   42             $   165             $   55             $   262       
                                   
(1) 

The Company has master netting arrangements with counterparties to certain derivative contracts. Contracts in a liability position totaling $154 million and $206 million have been netted against contracts in an asset position in the Condensed Consolidated Balance Sheet at April 2, 2011 and October 2, 2010, respectively.

 

16


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The fair value of Level 2 investments is 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, which consist primarily of interest rate and foreign currency financial instrument contracts, 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 3 residual interests consist of our residual interests in securitized vacation ownership mortgage receivables and are valued using a discounted cash flow model that considers estimated interest rates, discount rates, prepayments, and defaults. There were no material changes in the residual interests in the first six months of fiscal 2011.

Fair Value of Financial Instruments

In addition to the financial instruments listed above, the Company’s financial instruments also include cash, cash equivalents, receivables, accounts payable and borrowings.

The fair values of cash, cash equivalents, receivables, and accounts payable approximated the carrying values. The estimated fair values of the Company’s total borrowings (current and noncurrent), primarily determined based on broker quotes, quoted market prices, interest rates for the same or similar instruments are $12.7 billion and $13.7 billion at April 2, 2011 and October 2, 2010, 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 continues to service the sold receivables and has a residual interest in those receivables. As of April 2, 2011, the outstanding principal amount for sold mortgage receivables was $271 million, and the carrying value of the Company’s residual interest, which is recorded in other long-term assets, was $42 million.

The Company repurchases defaulted mortgage receivables at their outstanding balance. The Company did not make material repurchases in the six months ended April 2, 2011 or April 3, 2010. The Company generally has been able to sell the repurchased vacation ownership units for amounts that exceed the amounts at which they were repurchased.

The Company also provides credit support for up to 70% of the outstanding balance of the sold mortgage receivables which the mortgage receivable acquirer may draw on in the event of losses under the facility. The Company maintains a reserve for estimated credit losses related to these receivables.

 

17


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

14. Derivative Instruments

The Company manages its exposure to various risks relating to 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 table summarizes the fair value of the Company’s derivative positions as of April 2, 2011:

 

         Current    
Assets
         Other    
Assets
     Other
Accrued
    Liabilities    
     Other
    Long-Term    
Liabilities
 

Derivatives designated as hedges

           

Foreign exchange

     $     101             $     10             $     (215)            $     (106)      

Interest rate

     7             147             —             —       

Other

     2             —             —             —       

Derivatives not designated as hedges

           

Foreign exchange

     68             170             (99)            (2)      

Interest rate

     —             —             —             (15)      

Other

     1             —             —             —       
                                   

Gross fair value of derivatives

     179             327             (314)            (123)      

Counterparty netting

     (123)            (31)            123             31       
                                   

Total Derivatives(1)

     $     56             $     296             $     (191)            $     (92)      
                                   

The following table summarizes the fair value of the Company’s derivative positions as of October 2, 2010:

 

         Current    
Assets
         Other    
Assets
     Other
Accrued
    Liabilities    
     Other
    Long-Term    
Liabilities
 

Derivatives designated as hedges

           

Foreign exchange

     $     78             $     65             $     (210)            $     (104)      

Interest rate

     13             218             —             —       

Derivatives not designated as hedges

           

Foreign exchange

     80             181             (140)            (36)      

Interest rate

     —             —             —             (22)      
                                   

Gross fair value of derivatives

     171             464             (350)            (162)      

Counterparty netting

     (121)            (85)            130             76       
                                   

Total Derivatives(1)

     $     50             $     379             $     (220)            $     (86)      
                                   
(1) 

Refer to Note 13 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.

 

18


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

As of both April 2, 2011 and October 2, 2010, the total notional amount of the Company’s pay-floating interest rate swaps was $1.5 billion. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Consolidated Statements of Income.

 

     Quarter Ended      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Gain (loss) on interest rate swaps

     $     (24)            $     3             $     (77)            $     (40)      

Gain (loss) on hedged borrowings

     24             (3)            77             40       

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 April 2, 2011 nor at October 2, 2010.

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.

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, British pound, Japanese yen and Canadian dollar. 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 April 2, 2011 and October 2, 2010, the notional amounts of the Company’s net foreign exchange cash flow hedges were $3.8 billion and $2.8 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 six months ended April 2, 2011 and April 3, 2010 were not material. Net deferred losses recorded in AOCI for contracts that will mature in the next twelve months totaled $112 million. The following table summarizes the pre-tax adjustments to AOCI for foreign exchange cash flow hedges.

 

     Quarter Ended      Six Months Ended  
         April 2,    
2011
         April 3,    
2010
         April 2,    
2011
         April 3,    
2010
 

Gain (loss) recorded in AOCI

     $     (59)            $     (2)            $     (135)            $     (7)      

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

     32             6             57             34       
                                   

Net change in AOCI

     $     (27)            $     4             $     (78)            $     27       
                                   

 

19


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 amount of these foreign exchange contracts at April 2, 2011 and October 2, 2010 was $2.7 billion and $2.2 billion, respectively. During the quarters ended April 2, 2011 and April 3, 2010, the Company recognized a net loss of $91 million and a net gain of $57 million, respectively, in costs and expenses on these foreign exchange contracts which offset a net gain of $81 million and a net loss of $114 million on the related economic exposures for the three months ended April 2, 2011 and April 3, 2010, respectively. During the six months ended April 2, 2011 and April 3, 2010, the Company recognized a net loss of $64 million and a net gain of $52 million, respectively, in costs and expenses on these foreign exchange contracts which offset a net gain of $56 million and a net loss of $104 million on the related economic exposures for the six months ended April 2, 2011 and April 3, 2010, respectively.

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 was not material at April 2, 2011 nor at October 2, 2010.

Risk Management – Derivatives Not Designated as Hedges

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

The notional amount of these contracts at April 2, 2011 and October 2, 2010 was $201 million and $218 million, respectively. For the six months ended April 2, 2011 and April 3, 2010, the gain and loss on these contracts recognized in income 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 Disney’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 $283 million and $306 million on April 2, 2011 and October 2, 2010, respectively.

 

15.  Restructuring and Impairment Charges

The Company recorded $12 million of restructuring and impairment charges in the current six months. In the prior-year six months, the Company recorded $176 million of restructuring and impairment charges related to organizational and cost structure initiatives primarily at our Studio Entertainment and Media Networks segments. Impairment charges were $96 million, of which $57 million were recorded in the second quarter of the prior year, and consisted of write-offs of capitalized costs primarily related to abandoned film projects and the closure of a studio production facility. Restructuring charges were $80 million, of which $14 million were recorded in the second quarter of the prior year, and reflected primarily severance and related costs.

 

20


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

Six-Month Results

Other Financial Information

Financial Condition

Commitments and Contingencies

Other Matters

Market Risk

OVERVIEW

Our summary consolidated results are presented below:

 

     Quarter Ended             Six Months Ended         
(in millions, except per share data)      April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
       April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
 

Revenues

     $ 9,077            $ 8,580            6   %             $ 19,793            $ 18,319            8   %       

Costs and expenses

     (7,549)           (7,068)           (7)  %             (16,325)           (15,393)           (6)  %       

Restructuring and impairment charges

     —            (71)           nm                   (12)           (176)           93   %       

Other income

     —            70            nm                   75            97            (23)  %       

Net interest expense

     (83)           (130)           36   %             (178)           (233)           24   %       

Equity in the income of investees

     123            154            (20)  %             279            243            15   %       
                                         

Income before income taxes

     1,568            1,535            2   %             3,632            2,857            27   %       

Income taxes

     (558)           (537)           (4)  %             (1,288)           (1,015)           (27)  %       
                                         

Net income

     1,010            998            1   %             2,344            1,842            27   %       

Less: Net income attributable to noncontrolling interests

     (68)           (45)           (51)  %             (100)           (45)           (>100)   %       
                                         

Net income attributable to Disney

     $ 942            $ 953            (1)  %             $ 2,244            $ 1,797            25   %       
                                         

Diluted earnings per share

     $ 0.49            $ 0.48            2   %             $ 1.16            $ 0.93            25   %       
                                         

Quarter Results

Diluted earnings per share (EPS) increased 2% for the quarter driven by improved operating results. Improved operating results reflected higher advertising revenues and increased fees from Multi-channel Video Service Providers (MVSP) (Affiliate Fees) at ESPN and increased guest spending at our domestic parks and resorts. These increases were partially offset by higher programming costs at ESPN, increased operating expenses at our domestic parks and resorts, lower unit sales at our worldwide home entertainment business, lower results at our theatrical business reflecting the performance of Mars Needs Moms in the current quarter and the inclusion of results for Playdom in the current quarter, which included the impact of acquisition accounting.

 

21


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

The prior-year quarter included restructuring and impairment charges of $71 million, a gain on the sale of an investment in a pay television service in Europe of $48 million, and an accounting gain related to the acquisition of the Disney Stores in Japan of $22 million, which collectively had no impact on EPS.

Six-Month Results

Diluted EPS increased 25% for the six months driven by improved operating results. Improved operating results reflected higher advertising revenues at ESPN and the owned television stations, increased Affiliate Fees, increased guest spending and volumes at our domestic and international parks and resorts and higher licensing revenue due to the strength of Toy Story and Marvel merchandise. These increases were partially offset by higher programming costs at ESPN, increased operating expenses at our domestic parks and resorts and the inclusion of results for Playdom in the current six months, which included the impact of acquisition accounting.

In the current six months, the Company recorded $12 million of restructuring and impairment charges and gains on the sale of Miramax and BASS totaling $75 million. The table below shows the pretax and after tax impact of these items.

 

     Benefit / (Expense)  
     Pretax     Tax
Effect
    After
Tax
 

Restructuring and impairment charges

   $ (12   $ 31      $ 19   

Gains on sales of businesses

     75        (107     (32
                        
   $ 63      $ (76   $ (13
                        

These restructuring and impairment charges include an impairment of assets that had tax basis significantly in excess of book value resulting in a $31 million tax benefit on the restructuring and impairment charges. In addition, the book value of Miramax included $217 million of allocated goodwill which is not tax deductible. Accordingly, the taxable gain on the sales of these businesses exceeded the $75 million book gain resulting in tax expense of $107 million. These items collectively had a $0.01 negative impact on EPS.

The prior-year six months included restructuring and impairment charges, gains on the sales of investments in pay television services in Europe and an accounting gain related to the acquisition of the Disney Stores in Japan, which together had a $0.02 negative impact on EPS.

SEASONALITY

The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and six months ended April 2, 2011 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.

 

22


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods.

Studio Entertainment revenues fluctuate due to the timing and performance of releases in the theatrical, home entertainment, and television markets. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods.

Consumer Products revenues are influenced by seasonal consumer purchasing behavior, 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 Media revenues fluctuate due to the timing and performance of video game releases which are determined by several factors, including theatrical releases and cable programming broadcasts, competition and the timing of holiday periods. Revenues from 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             Six Months Ended         
(in millions)      April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
       April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
 

Revenues:

                 

Media Networks

     $ 4,322              $ 3,844              12   %             $ 8,967              $ 8,019              12   %       

Parks and Resorts

     2,630              2,449              7   %             5,498              5,111              8   %       

Studio Entertainment

     1,340              1,536              (13)  %             3,272              3,471              (6)  %       

Consumer Products

     626              596              5   %             1,548              1,342              15   %       

Interactive Media

     159              155              3   %             508              376              35   %       
                                         
     $ 9,077              $ 8,580              6   %             $ 19,793              $ 18,319              8   %       
                                         

Segment operating income (loss):

                 

Media Networks

     $ 1,524              $ 1,306              17   %             $ 2,590              $ 2,030              28   %       

Parks and Resorts

     145              150              (3)  %             613              525              17   %       

Studio Entertainment

     77              223              (65)  %             452              466              (3)  %       

Consumer Products

     142              133              7   %             454              376              21   %       

Interactive Media

     (115)             (55)             (>100)  %             (128)             (65)             (97)  %       
                                         
     $ 1,773              $ 1,757              1   %             $ 3,981              $ 3,332              19   %       
                                         

 

23


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             Six Months Ended         
(in millions)      April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
       April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
 

Segment operating income

     $ 1,773              $ 1,757              1   %             $ 3,981              $ 3,332              19   %       

Corporate and unallocated shared expenses

     (122)             (91)             (34)  %             (234)             (163)             (44)  %       

Restructuring and impairment charges

     —                (71)             nm                    (12)             (176)             93   %       

Other income

     —                70              nm                    75              97              (23)  %       

Net interest expense

     (83)             (130)             36   %             (178)             (233)             24   %       
                                         

Income before income taxes

     $ 1,568              $ 1,535              2   %             $ 3,632              $ 2,857              27   %       
                                         

Depreciation expense is as follows:

 

     Quarter Ended             Six Months Ended         
(in millions)      April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
       April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
 

Media Networks

                 

Cable Networks

     $ 34              $ 27              (26)  %             $ 65              $ 58              (12)  %       

Broadcasting

     27              25              (8)  %             51              48              (6)  %       
                                         

Total Media Networks

     61              52              (17)  %             116              106              (9)  %       
                                         

Parks and Resorts

                 

Domestic

     203              198              (3)  %             409              409              —     %       

International

     79              83              5   %             158              171              8   %       
                                         

Total Parks and Resorts

     282              281              —     %             567              580              2   %       
                                         

Studio Entertainment

     13              14              7   %             30              28              (7)  %       

Consumer Products

     13              8              (63)  %             25              14              (79)  %       

Interactive Media

     4              6              33   %             9              13              31   %       

Corporate

     36              33              (9)  %             74              64              (16)  %       
                                         

Total depreciation expense

     $ 409              $ 394              (4)  %             $ 821              $ 805              (2)  %       
                                         

Amortization of intangible assets is as follows:

 

     Quarter Ended             Six Months Ended         
(in millions)      April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
       April 2,  
2011
       April 3,  
2010
       % Change  
Better/
(Worse)
 

Media Networks

     $ 2              $ 2              —     %             $ 4              $ 4              —     %       

Parks and Resorts

     —                —                —     %             —                —                —     %       

Studio Entertainment

     21              8              (>100)  %             31              11              (>100)  %       

Consumer Products

     14              14              —     %             28              16              (75)  %       

Interactive Media

     10              6              (67)  %             19              11              (73)  %       
                                         

Total amortization of intangible assets

     $ 47              $ 30              (57)  %             $ 82              $ 42              (95)  %       
                                         

 

24


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)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Affiliate Fees

     $ 1,952              $ 1,774              10   %       

Advertising

     1,728              1,507              15   %       

Other

     642              563              14   %       
                    

Total revenues

     4,322              3,844              12   %       

Operating expenses

     (2,260)             (2,072)             (9)  %       

Selling, general, administrative and other

     (598)             (565)             (6)  %       

Depreciation and amortization

     (63)             (54)             (17)  %       

Equity in the income of investees

     123              153              (20)  %       
                    

Operating Income

     $ 1,524              $ 1,306              17   %       
                    

Revenues

The 10% increase in Affiliate Fees was driven by increases of 6% from contractual rate increases and 2% from subscriber growth at Cable Networks and an increase of 1% at Broadcasting due to new contractual provisions.

Higher advertising revenues were due to increases of $185 million at Cable Networks (from $566 million to $751 million) and $36 million at Broadcasting (from $941 million to $977 million). Higher Cable Networks advertising revenue was driven by a 23% increase due to higher rates and a 7% increase due to higher units sold. The increase at Broadcasting reflected improvements of 7% due to higher network advertising rates and 1% due to higher local television advertising, partially offset by a 2% decrease due to lower primetime ratings and a decrease at sports due to a shift of the BCS National Championship game to ESPN.

The increase in other revenues reflected the impact of a change in the transfer pricing arrangement between Studio Entertainment and Media Networks for distribution of Media Networks home entertainment product (see Note 2 to the Condensed Consolidated Financial Statements) and higher sales of ABC Studios productions driven by Criminal Minds and Army Wives, partially offset by the absence of Lost.

Costs and Expenses

Operating expenses include programming and production costs which increased $127 million from $1,718 million to $1,845 million. At Cable Networks, an increase in programming and production spending of $163 million was driven by higher sports rights costs due to the addition of college football Bowl Championship Series games. At Broadcasting, programming and production spending decreased $36 million driven by lower news production costs due to cost savings initiatives and decreased sports programming costs due to the shift of the BCS National Championship game to ESPN, partially offset by a higher cost mix of primetime programming. Operating costs also increased 1% due to higher labor costs and 1% due to the change in the transfer pricing arrangement for distribution of Media Networks home entertainment product.

The increase in selling, general and administrative and other costs and expenses was driven by the absence of recoveries of previously reserved receivables which occurred in the prior-year quarter and higher marketing expenses.

Equity in the Income of Investees

Income from equity investees was $123 million for the current quarter compared to $153 million in the prior-year quarter. The decrease in income from equity investees was due to programming costs for the Cricket World Cup at our ESPN Star Sports joint venture.

Segment Operating Income

Segment operating income increased 17%, or $218 million, to $1.5 billion. The increase was primarily due to higher advertising sales, increased Affiliate Fees and higher sales of ABC Studios productions, partially offset by higher programming costs, lower equity in the income of investees,

 

25


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

the absence of recoveries of previously reserved receivables and higher marketing costs.

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

 

     Quarter Ended        % Change  
Better/
(Worse)
     Six Months Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
          April 2,  
2011
       April 3,  
2010
    

Revenues:

                 

Cable Networks

     $ 2,826              $ 2,412              17   %             $ 5,894              $ 5,066              16   %       

Broadcasting

     1,496              1,432              4   %             3,073              2,953              4   %       
                                         
     $ 4,322              $ 3,844              12   %             $ 8,967              $ 8,019              12   %       
                                         

Segment operating income:

                 

Cable Networks

     $ 1,357              $ 1,183              15   %             $ 2,128              $ 1,727              23   %       

Broadcasting

     167              123              36   %             462              303              52   %       
                                         
     $ 1,524              $ 1,306              17   %             $ 2,590              $ 2,030              28   %       
                                         

Restructuring and impairment charges

The Company recorded credits totaling $4 million and charges totaling $10 million in the current and prior-year quarters, respectively, that 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)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Domestic

     $ 2,157              $ 1,989              8   %       

International

     473              460              3   %       
                    

Total revenues

     2,630              2,449              7   %       

Operating expenses

     (1,755)             (1,619)             (8)  %       

Selling, general, administrative and other

     (448)             (399)             (12)  %       

Depreciation and amortization

     (282)             (281)             —     %       
                    

Operating Income

     $ 145              $ 150              (3)  %       
                    

Revenues

Parks and Resorts revenues increased 7%, or $181 million, to $2.6 billion due to increases of $168 million at our domestic operations and $13 million at our international operations. Results at both our domestic and international parks and resorts reflected an unfavorable impact due to a shift in the timing of the Easter holiday relative to our fiscal periods. As a result, the current quarter did not include any of the two week Easter holiday, while the prior-year quarter included one week of the Easter holiday.

Revenues at our domestic operations reflected a 5% increase due to higher average guest spending and a 3% increase from higher passenger cruise days driven by the launch of our new cruise ship, the Disney Dream, in January 2011. Higher guest spending was primarily due to higher average ticket prices and daily hotel room rates.

Revenues at our international operations reflected a 6% volume increase due to higher attendance and hotel occupancy and a 2% increase from average guest spending. These improvements

 

26


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

were partially offset by a 5% decrease driven by the March 2011 earthquake and tsunami in Japan which resulted in the temporary suspension of operations at Tokyo Disney Resort.

The following table presents supplemental park and hotel statistics:

 

    Domestic     International (2)     Total  
    Quarter Ended     Quarter Ended     Quarter Ended  
        April 2,    
2011
        April 3,    
2010
        April 2,    
2011
        April 3,    
2010
        April 2,    
2011
        April 3,    
2010
 

Parks

           

Increase/(decrease)

           

Attendance

    —     %            (4)  %            9   %            (1)  %            2   %            (3)  %       

Per Capita Guest Spending

    6   %            5   %            (2)  %            8   %            4   %            6   %       

Hotels (1)

           

Occupancy

    81   %            79   %            84   %            81   %            81   %            79   %       

Available Room Nights (in thousands)

    2,419                   2,416                   609                   609                   3,028                   3,025              

Per Room Guest Spending

      $ 233                     $ 224                     $ 235                     $ 227                     $ 234                     $ 225              

 

(1) 

Hotel statistics include rentals of Disney Vacation Club units. 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.

(2) 

Per capita guest spending and per room guest spending include the impact of foreign currency translation. Guest spending statistics for Disneyland Paris were converted from Euros into US Dollars at weighted average exchange rates of $1.37 and $1.39 for the quarters ended April 2, 2011 and April 3, 2010, respectively.

Costs and Expenses

Operating expenses include operating labor, which increased $69 million from $787 million to $856 million, driven by labor cost inflation and higher pension and healthcare costs and cost of sales, which increased $24 million from $250 million to $274 million driven by volume. Operating expenses also increased due to expansion costs for Disney California Adventure at Disneyland Resort and promotional and operating costs in connection with the launch of the Disney Dream.

The increase in selling, general, administrative and other costs and expenses was driven by labor cost inflation, increased marketing costs and costs associated with the Disney Dream.

Segment Operating Income

Segment operating income decreased 3%, or $5 million, to $145 million due to decreases at Disney Cruise Line and Tokyo Disney Resort, partially offset by increases at our domestic and consolidated international parks and resorts.

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows:

 

     Quarter Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Theatrical distribution

     $ 296              $ 465              (36)  %       

Home entertainment

     536              621              (14)  %       

Television distribution and other

     508              450              13   %       
                    

Total revenues

     1,340              1,536              (13)  %       

Operating expenses

     (659)             (745)             12   %       

Selling, general, administrative and other

     (570)             (546)             (4)  %       

Depreciation and amortization

     (34)             (22)             (55)  %       
                    

Operating Income

     $ 77              $ 223              (65)  %       
                    

 

27


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Revenues

The decrease in theatrical distribution revenue reflected the strong performance of Alice in Wonderland which was in wide release worldwide in the prior-year quarter compared to the continuing performance of Tangled and Tron: Legacy which were released late in the first quarter of the current year domestically, and the performance of Gnomeo & Juliet and Mars Needs Moms which were released during the current quarter.

The decrease in home entertainment revenue reflected an 8% decrease due to lower unit sales, partially offset by a 4% increase due to higher net effective pricing driven by increased sales in Blu-ray format. Net effective pricing is the wholesale selling price adjusted for discounts, sales incentives and returns. The decreased unit sales in the current quarter reflected the strong prior-year performance of Toy Story 1 & 2 and the animated version of Alice in Wonderland domestically and Up internationally. Additionally, there was an 8% decrease due to the impact of a change in the transfer pricing arrangement between Studio Entertainment and Media Networks for distribution of Media Networks home entertainment product (see Note 2 to the Condensed Consolidated Financial Statements).

The increase in television distribution and other revenue was primarily due to growth in the domestic pay television market driven by Toy Story 3.

Costs and Expenses

Operating expenses for the current quarter include film cost amortization of $315 million which was comparable to the prior-year quarter as a decrease driven by the prior-year performance of Alice in Wonderland was offset by higher current quarter film cost write-downs, driven by Mars Needs Moms. Operating expenses also included a 10% decrease due to lower participation and distribution costs. Lower participation costs reflected the strong performance of Alice in Wonderland in the prior-year quarter while the decrease in distribution costs was due to the change in the transfer pricing arrangement for distribution of Media Networks home entertainment product.

The increase in selling, general, administrative and other costs was primarily due to higher bad debt expense and executive contract termination costs, partially offset by lower theatrical marketing expense associated with the current quarter titles compared to Alice in Wonderland in the prior-year quarter.

Segment Operating Income

Segment operating income declined by $146 million to $77 million primarily due to lower results at home entertainment and theatrical distribution and higher film cost write-downs.

Restructuring and impairment charges

The Company recorded credits totaling $2 million and charges totaling $55 million in the current and prior-year quarters, respectively, primarily related to the closure of a production facility, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income.

Consumer Products

Operating results for the Consumer Products segment are as follows:

 

     Quarter Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Licensing and publishing

     $       397            $       419            (5)  %       

Retail and other

     229            177            29   %       
                    

Total revenues

     626            596            5   %       

Operating expenses

     (295)           (268)           (10)  %       

Selling, general, administrative and other

     (162)           (173)           6   %       

Depreciation and amortization

     (27)           (22)           (23)  %       
                    

Operating Income

     $       142            $       133            7   %       
                    

 

28


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Revenues

The decrease in licensing and publishing revenue was driven by a 6% decrease due to lower recognition of minimum guarantees and other revenue related to prior quarter shipments compared to the prior-year quarter and a 2% decrease due to less significant publishing releases in the current quarter compared to the strong performance of the Percy Jackson book, Last Olympian, in the prior-year quarter. These decreases were partially offset by a 3% increase driven by strong performance of Cars and Tangled merchandise in the current quarter.

Higher retail and other revenues were driven by a $36 million increase due to the acquisition of The Disney Store Japan at the end of the second quarter of fiscal 2010 and an increase of $12 million at our North American retail business, driven by higher comparable store sales.

Costs and Expenses

Operating expenses include cost of goods sold which increased by $12 million, from $106 million to $118 million. Operating expenses also include a 4% increase due to higher labor costs and a 2% increase due to higher rent and occupancy costs. These increases were driven by the acquisition of The Disney Store Japan.

The decrease in selling, general, administrative and other was driven by favorable foreign currency exchange impacts.

Operating Income

Segment operating income increased 7% to $142 million due to improved results at our North American retail and licensing businesses, partially offset by lower results at our publishing business.

Restructuring and impairment charges

The Company recorded charges totaling $2 million in the prior-year quarter for severance and related costs which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income.

Interactive Media

Operating results for the Interactive Media segment are as follows:

 

     Quarter Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Game sales and subscriptions

     $       108            $       110            (2)  %       

Advertising and other

     51            45            13   %       
                    

Total revenues

     159            155            3   %       

Operating expenses

     (141)           (122)           (16)  %       

Selling, general, administrative and other

     (119)           (76)           (57)  %       

Depreciation and amortization

     (14)           (12)           (17)  %       
                    

Operating Income

     $       (115)           $       (55)           (>100)  %       
                    

 

29


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Revenues

Lower game sales and subscriptions revenue reflected a 14% decrease due to lower net effective pricing of self-published console games and a 5% decrease due to lower unit sales. The decrease was largely offset by higher revenues from the inclusion of Playdom in the current quarter.

Higher advertising and other revenue was driven by an increase at our mobile phone service business in Japan.

Costs and Expenses

Operating expenses include product development costs which increased $18 million from $82 million to $100 million driven by the acquisition of Playdom and increases at our mobile games and virtual worlds businesses.

The increase in selling, general, administrative and other expenses was driven by the acquisition of Playdom including the impact of acquisition accounting.

Operating Loss

Segment operating loss was $115 million compared to $55 million in the prior-year quarter driven by the inclusion of Playdom, including the impact of acquisition accounting, and increased mobile and virtual worlds product development costs in the current quarter.

Restructuring and impairment charges

The Company recorded charges totaling $6 million in the current quarter which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income.

BUSINESS SEGMENT RESULTS – Six Month Results

Media Networks

Operating results for the Media Networks segment are as follows:

 

     Six Months Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Affiliate Fees

     $       3,802            $       3,471            10   %       

Advertising

     3,989            3,457            15   %       

Other

     1,176            1,091            8   %       
                    

Total revenues

     8,967            8,019            12   %       

Operating expenses

     (5,387)           (5,040)           (7)   %       

Selling, general, administrative and other

     (1,149)           (1,081)           (6)   %       

Depreciation and amortization

     (120)           (110)           (9)   %       

Equity in the income of investees

     279            242            15   %       
                    

Operating Income

     $       2,590            $       2,030            28   %       
                    

Revenues

The increase in Affiliate Fees was driven by increases of 7% from contractual rate increases and 1% from subscriber growth at Cable Networks and a 1% increase at Broadcasting due to new contractual provisions.

Higher advertising revenues were due to an increase of $439 million at Cable Networks from $1,407 million to $1,846 million and an increase of $93 million at Broadcasting from $2,050 million to $2,143 million. The increase at Cable Networks was driven by a 20% increase due to higher rates and a 7% increase due to higher units sold. The increase at Broadcasting reflected an increase of 3% due to higher local television advertising.

The increase in other revenues was driven by a change in the transfer pricing arrangement between Studio Entertainment and Media Networks for distribution of Media Networks home entertainment product.

 

30


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Costs and Expenses

Operating expenses include programming and production costs which increased $229 million from $4,331 million to $4,560 million. At Cable Networks, an increase in programming and production spending of $364 million was driven by higher sports rights costs due to the addition of college football programming including Bowl Championship Series games. At Broadcasting, programming and production costs decreased $135 million driven by the shift of college sports programming to ESPN and lower news and daytime production costs due to cost savings initiatives. Operating expenses also reflect a 1% increase due to the change in the transfer pricing arrangement for distribution of Media Networks home entertainment product and a 1% increase due to higher labor costs.

The increase in selling, general and administrative and other costs and expenses was driven by recoveries of previously reserved receivables in the prior-year and higher marketing and sales costs at our Cable Network businesses.

Equity in the Income of Investees

Income from equity investees was $279 million for the current six month period compared to $242 million in the prior-year six month period. Higher income from equity investees was driven by higher affiliate and advertising revenue and lower programming and restructuring costs at A&E/Lifetime, partially offset by higher programming costs for the Cricket World Cup at our ESPN Star Sports joint venture.

Segment Operating Income

Segment operating income increased 28%, or $560 million, to $2.6 billion. The increase was primarily due to higher advertising sales, increased Affiliate Fees and higher equity in the income of investees, partially offset by higher programming costs, the absence of recoveries of previously reserved receivables and higher marketing and sales costs.

Restructuring and impairment charges

The Company recorded credits totaling $1 million and charges totaling $44 million for the current and prior-year six month periods, respectively. The charges in the prior-year six-month period were for severance and related costs. These charges were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income.

Parks and Resorts

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

 

     Six Months Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Domestic

     $       4,406            $       4,052            9   %       

International

     1,092            1,059            3   %       
                    

Total revenues

     5,498            5,111            8   %       

Operating expenses

     (3,505)           (3,261)           (7)  %       

Selling, general, administrative and other

     (813)           (745)           (9)  %       

Depreciation and amortization

     (567)           (580)           2   %       
                    

Operating Income

     $       613            $       525            17   %       
                    

Revenues

Parks and Resorts revenues increased 8%, or $387 million, to $5.5 billion due to an increase of $354 million at our domestic operations and an increase of $33 million at our international operations.

The increase in revenues at our domestic operations reflected a 5% increase driven by higher average guest spending and a 2% increase due to volume driven by higher passenger cruise days as a result of the launch of our new cruise ship, the Disney Dream, in January 2011 and higher hotel occupancy and theme park attendance. Higher guest spending was primarily due to higher average ticket prices and daily hotel room rates.

 

31


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Higher revenues at our international operations reflected a 4% increase driven by volume due to higher attendance and hotel occupancy and a 3% increase due to increased average guest spending. These improvements were partially offset by a decrease of 4% due to an unfavorable impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Euro. In addition, revenues decreased 2% as a result of the March 2011 earthquake and tsunami in Japan which resulted in a temporary suspension of operations at Tokyo Disney Resort.

The following table presents supplemental park and hotel statistics:

 

     Domestic      International (2)      Total  
     Six Months Ended      Six Months Ended      Six Months Ended  
     April 2,
2011
     April 3,
2010
     April 2,
2011
     April 3,
2010
     April 2,
2011
     April 3,
2010
 

Parks Increase/(decrease)

                 

Attendance

     1  %           3  %           6   %           (6)  %         2  %         —  %   

Per Capita Guest Spending

     7  %           —  %           (3)  %           9   %         5  %         2  %   

Hotels (1)

                 

Occupancy

     83  %           80  %           84   %           79   %         83  %         80  %   

Available Room Nights (in thousands)

     4,801                 4,802                1,230                  1,230               6,031               6,032        

Per Room Guest Spending

     $      238                 $      228                $      261                  $      258               $      242               $      234        

 

(1)

Hotel statistics include rentals of Disney Vacation Club units. 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.

 

(2)

Per capita guest spending and per room guest spending include the impact of foreign currency translation. Guest spending statistics for Disneyland Paris were converted from Euros into US Dollars at weighted average exchange rates of $1.36 and $1.43 for six months ended April 2, 2011 and April 3, 2010, respectively.

Costs and Expenses

Operating expenses include operating labor which increased by $109 million from $1,610 million to $1,719 million driven by labor cost inflation and higher pension and healthcare costs. Operating expenses also include cost of sales which increased $58 million from $527 million to $585 million due to increased merchandise costs driven by volume increases, higher promotional and operating costs in connection with the launch of the Disney Dream and expansion costs for 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.

The increase in selling, general, administrative and other costs and expenses was driven by labor cost inflation, increased marketing costs and costs associated with the additional cruise ship.

Segment Operating Income

Segment operating income increased 17%, or $88 million, to $613 million due to increases at our domestic parks and resorts, partially offset by a decrease at Disney Cruise Line. At our international parks and resorts, favorable results at Disneyland Paris and Hong Kong Disneyland Resort were partially offset by lower results at Tokyo Disney Resort.

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows:

 

     Six Months Ended        % Change  
Better/
(Worse)
 
(in millions)    April 2,
2011
     April 3,
2010
    

Revenues

        

Theatrical distribution

     $       625            $       897            (30)  %       

Home entertainment

     1,579            1,614            (2)  %       

Television distribution and other

     1,068            960            11   %       
                    

Total revenues

     3,272            3,471            (6)  %       

Operating expenses

     (1,558)           (1,712)           9   %       

Selling, general, administrative and other

     (1,201)           (1,254)           4   %       

Depreciation and amortization

     (61)           (39)           (56)  %       
                    

Operating Income

     $       452            $       466            (3)  %       
                    

 

32


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Revenues

The decrease in theatrical distribution revenue reflected the worldwide performance of current period titles including Tangled, Tron: Legacy and Mars Needs Moms compared to the prior-year period, which included Alice in Wonderland, A Christmas Carol and Princess and the Frog domestically and internationally and Up in international markets.

At home entertainment, 6% revenue growth due to higher unit sales and 3% growth due to higher net effective pricing were more than offset by a decrease due to the change in the transfer pricing arrangement between Studio Entertainment and Media Networks for distribution of Media Networks home entertainment product. Higher unit sales in the current period were driven by the strong international performance of Toy Story 3 compared to Up in the prior-year period as well as increased catalog sales.

The increase in television distribution and other revenue was primarily due to the inclusion of Marvel which was acquired at the beginning of the second quarter of fiscal 2010.

Costs and Expenses

Operating expenses for the current period included film cost amortization of $738 million which was comparable to the prior-year period as an increase driven by the addition of Marvel was offset by a decrease driven by lower theatrical revenues and lower film cost write-downs in the current period. Operating expenses also include distribution and participation costs which decreased by $150 million. The decrease in distribution costs was due to the change in the transfer pricing arrangement for distribution of Media Networks home entertainment product while lower participation costs were driven by the strong performance of Alice in Wonderland in the prior-year period.

The decrease in selling, general, administrative and other costs was driven by lower marketing expenses at our theatrical and home entertainment businesses including the impact of cost reduction initiatives, partially offset by the inclusion of Marvel.

Segment Operating Income

Segment operating income decreased 3%, or $14 million, to $452 million primarily due to a decrease in international theatrical distribution and the impact of the transfer pricing change, partially offset by improvements in international home entertainment.

Restructuring and impairment charges

The Company recorded credits totaling $2 million and charges totaling $122 million for the current and prior-year six month periods, respectively. The charges in the prior-year six months were primarily due to the write-off of capitalized costs related to abandoned film projects, the closure of a production facility and, severance and related costs. These credits and charges were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income.

 

33


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:

 

     Six Months Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Licensing and publishing

     $       914            $       831            10   %       

Retail and other

     634            511            24   %       
                    

Total revenues

     1,548            1,342            15   %       

Operating expenses

     (697)           (616)           (13)  %       

Selling, general, administrative and other

     (344)           (320)           (8)  %       

Depreciation and amortization

     (53)           (30)           (77)  %       
                    

Operating Income

     $       454            $       376            21   %       
                    

Revenues

The increase in licensing and publishing revenue was primarily due to an 8% increase resulting from the acquisition of Marvel at the beginning of the second quarter of fiscal 2010 and a 6% increase driven by the strong performance of Toy Story, Cars and Tangled merchandise.

Higher retail and other revenues were driven by a $78 million increase due to the acquisition of The Disney Store Japan at the end of the second quarter of fiscal 2010 and an increase of $42 million at our North American retail business driven by higher comparable store sales.

Costs and Expenses

Operating expenses included an increase of $43 million in cost of goods sold, from $280 million to $323 million, driven by the acquisition of The Disney Store Japan and Marvel publishing sales. Operating expenses also included a 3% increase due to higher labor costs and a 2% increase due to higher rent and occupancy costs, both of which were driven by the acquisition of The Disney Store Japan.

The increase in selling, general, administrative and other was driven by the inclusion of Marvel, as was the increase in depreciation and amortization.

Segment Operating Income

Segment operating income increased 21%, or $78 million, to $454 million due to an increase in our licensing business driven by the strength of Toy Story merchandise and the acquisition of Marvel and improved results at our North American retail business.

Restructuring and impairment charges

The Company recorded charges totaling $2 million in the prior-year six month period which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income.

Interactive Media

Operating results for the Interactive Media segment are as follows:

 

     Six Months Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
    

Revenues

        

Game sales and subscriptions

     $       404            $       282            43   %       

Advertising and other

     104            94            11   %       
                    

Total revenues

     508            376            35   %       

Operating expenses

     (345)           (273)           (26)  %       

Selling, general, administrative and other

     (263)           (144)           (83)  %       

Depreciation and amortization

     (28)           (24)           (17)  %       
                    

Operating Income

     $       (128)           $       (65)           (97)  %       
                    

 

34


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

 

Revenues

The increase in game sales and subscriptions revenue reflected a 17% increase due to higher net effective pricing of console games and a 16% increase due to higher console game unit sales, reflecting the strong performance of Epic Mickey and Toy Story 3. Additionally, the inclusion of Playdom in the current six months contributed to higher game sales and subscription revenues.

Higher advertising and other revenue was driven by an increase at our mobile phone service business in Japan.

Costs and Expenses

Operating expense included a $42 million increase in product development expense primarily due to the acquisition of Playdom and a $14 million increase in cost of goods sold driven by higher console game unit sales.

The increase in selling, general, administrative and other costs was primarily due to the impact of acquisition accounting relating to Playdom and higher sales and marketing costs driven by the release of Epic Mickey.

Operating Loss

Segment operating loss was $128 million compared to $65 million in the prior-year six month period as increased console game sales were more than offset by the inclusion of results for Playdom in the current period, including the impact of acquisition accounting.

Restructuring and impairment charges

The Company recorded charges totaling $6 million in the current six month period which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income.

OTHER FINANCIAL INFORMATION

Corporate and Unallocated Shared Expenses

Corporate and unallocated shared expenses are as follows:

 

     Quarter Ended        % Change  
Better/
(Worse)
     Six Months Ended        % Change  
Better/
(Worse)
 
(in millions)      April 2,  
2011
       April 3,  
2010
          April 2,  
2011
       April 3,  
2010
    

Corporate and unallocated shared expenses

     $     122           $     91           (34)  %             $     234           $     163