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Walt Disney Company 10-Q 2012
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

December 31, 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 1,792,360,533 shares of common stock outstanding as of January 31, 2012.


PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited; in millions, except per share data)

 

     Quarter Ended  
     December 31,  
2011   
      January 1,  
   2011
 

Revenues

    $ 10,779          $ 10,716      

Costs and expenses

     (8,587)          (8,776)     

Restructuring and impairment charges

     (6)          (12)     

Other income

     –           75      

Net interest expense

     (90)          (95)     

Equity in the income of investees

     145           156      
  

 

 

   

 

 

 

Income before income taxes

     2,241           2,064      

Income taxes

     (720)          (730)     
  

 

 

   

 

 

 

Net income

     1,521           1,334      

Less: Net income attributable to noncontrolling interests

     (57)          (32)     
  

 

 

   

 

 

 

Net income attributable to The Walt Disney Company (Disney)

    $ 1,464          $ 1,302      
  

 

 

   

 

 

 

Earnings per share attributable to Disney:

    

Diluted

    $ 0.80          $ 0.68      
  

 

 

   

 

 

 

Basic

    $ 0.81          $ 0.69      
  

 

 

   

 

 

 

Weighted average number of common and common equivalent shares outstanding:

    

Diluted

     1,824           1,927      
  

 

 

   

 

 

 

Basic

     1,798           1,891      
  

 

 

   

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

2


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)

 

ASSETS       December 31,   
2011
           October 1,       
2011
 

Current assets

    

Cash and cash equivalents

     $ 3,766              $ 3,185         

Receivables

     6,787              6,182         

Inventories

     1,523              1,595         

Television costs

     880              674         

Deferred income taxes

     1,489              1,487         

Other current assets

     615              634         
  

 

 

   

 

 

 

Total current assets

     15,060              13,757         

Film and television costs

     4,519              4,357         

Investments

     2,685              2,435         

Parks, resorts and other property, at cost

    

Attractions, buildings and equipment

     35,462              35,515         

Accumulated depreciation

     (19,761)             (19,572)        
  

 

 

   

 

 

 
     15,701              15,943         

Projects in progress

     2,899              2,625         

Land

     1,160              1,127         
  

 

 

   

 

 

 
     19,760              19,695         

Intangible assets, net

     5,063              5,121         

Goodwill

     24,170              24,145         

Other assets

     2,620              2,614         
  

 

 

   

 

 

 

Total assets

     $ 73,877              $ 72,124         
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities

    

Accounts payable and other accrued liabilities

     $ 7,671              $ 6,362         

Current portion of borrowings

     3,160              3,055         

Unearned royalties and other advances

     2,693              2,671         
  

 

 

   

 

 

 

Total current liabilities

     13,524              12,088         

Borrowings

     11,226              10,922         

Deferred income taxes

     2,879              2,866         

Other long-term liabilities

     6,825              6,795         

Commitments and contingencies

    

Disney Shareholders’ equity

    

Preferred stock, $.01 par value

    

Authorized – 100 million shares, Issued – none

     –              –         

Common stock, $.01 par value

    

Authorized – 4.6 billion shares, Issued – 2.8 billion shares

     30,525              30,296         

Retained earnings

     38,762              38,375         

Accumulated other comprehensive loss

     (2,574)             (2,630)        
  

 

 

   

 

 

 
     66,713              66,041         

Treasury stock, at cost, 961.1 million shares at December 31, 2011 and 937.8 million shares at October 1, 2011

     (29,456)             (28,656)        
  

 

 

   

 

 

 

Total Disney Shareholders’ equity

     37,257              37,385         

Noncontrolling interests

     2,166              2,068         
  

 

 

   

 

 

 

Total equity

     39,423              39,453         
  

 

 

   

 

 

 

Total liabilities and equity

     $ 73,877              $ 72,124         
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

3


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)

 

     Quarter Ended  
       December 31,  
2011  
        January 1,    
  2011
 

OPERATING ACTIVITIES

    

Net income

    $ 1,521           $ 1,334      

Depreciation and amortization

     485           447      

Gains on dispositions

     –           (75)     

Deferred income taxes

     (14)          (61)     

Equity in the income of investees

     (145)          (156)     

Cash distributions received from equity investees

     161           170      

Net change in film and television costs

     (256)          94      

Equity-based compensation

     100           99      

Impairment charges

     4           12      

Other

     144           113      

Changes in operating assets and liabilities:

    

 Receivables

     (643)          (1,313)     

 Inventories

     52           13      

 Other assets

     23           58      

 Accounts payable and other accrued liabilities

     (373)          (290)     

 Income taxes

     675           674      
  

 

 

   

 

 

 

Cash provided by operations

     1,734           1,119      
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Investments in parks, resorts and other property

     (634)          (1,213)     

Proceeds from dispositions

     –           556      

Acquisitions

     (361)          (163)     

Other

     17           (61)     
  

 

 

   

 

 

 

Cash used in investing activities

     (978)          (881)     
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Commercial paper (repayments)/borrowings, net

     (976)          496      

Borrowings

     1,590           –      

Reduction of borrowings

     (49)          (42)     

Repurchases of common stock

     (800)          (797)     

Proceeds from exercise of stock options

     114           404      

Other

     (9)          38      
  

 

 

   

 

 

 

Cash (used)/provided by financing activities

     (130)          99      
  

 

 

   

 

 

 

Impact of exchange rates on cash and cash equivalents

     (45)          (20)     
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     581           317      

Cash and cash equivalents, beginning of period

     3,185           2,722      
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $ 3,766           $ 3,039      
  

 

 

   

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)

 

     Quarter Ended  
     December 31, 2011      January 1, 2011  
     Disney
  Shareholders  
     Non-
    controlling     
Interests
     Total
   Equity   
     Disney
  Shareholders  
     Non-
  controlling  
Interests
     Total
   Equity   
 

Beginning Balance

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

Net income

     1,464              57              1,521              1,302              32              1,334        

Other comprehensive income/(loss):

                 

Market value adjustments for hedges and investments

     32              –              32              (33)             –              (33)       

Pension and postretirement medical adjustments

     55              –              55              36              –              36        

Foreign currency translation and other

     (31)             (6)             (37)             (9)             (8)             (17)       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income

     56              (6)             50              (6)             (8)             (14)       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     1,520              51              1,571              1,296              24              1,320        

Equity compensation activity

     230              –              230              535              –              535        

Dividends

     (1,076)             –              (1,076)             (756)             –              (756)       

Common stock repurchases

     (800)             –              (800)             (797)             –              (797)       

Distributions and other

     (2)             47              45              –              95              95        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

     $   37,257              $   2,166              $     39,423              $ 37,797              $   1,942              $    39,739        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5


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 ended December 31, 2011 are not necessarily indicative of the results that may be expected for the year ending September 29, 2012. Certain reclassifications have been made in the prior year financial statements to conform to the current year presentation.

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

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

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

 

2. Segment Information

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

 

6


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

     Quarter Ended  
       December 31,  
2011
        January 1,    
2011
 

Revenues(1):

    

Media Networks

    $ 4,779           $ 4,645        

Parks and Resorts

     3,155            2,868        

Studio Entertainment

     1,618            1,932        

Consumer Products

     948            922        

Interactive Media

     279            349        
  

 

 

   

 

 

 
    $ 10,779           $ 10,716        
  

 

 

   

 

 

 

Segment operating income (loss) (1):

    

Media Networks

    $ 1,193           $ 1,066        

Parks and Resorts

     553            468        

Studio Entertainment

     413            375        

Consumer Products

     313            312        

Interactive Media

     (28 )          (13 )      
  

 

 

   

 

 

 
    $ 2,444            $ 2,208         
  

 

 

   

 

 

 

 

(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  
         Dec. 31, 2011             Jan. 1, 2011      

Studio Entertainment

    $ 76           $ 73      

Consumer Products

     (76 )          (72)     

Interactive Media

     –             (1)     
  

 

 

   

 

 

 
    $–              $ –       
  

 

 

   

 

 

 

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

 

     Quarter Ended  
       December 31,  
2011
        January 1,    
2011
 

Segment operating income

    $ 2,444          $ 2,208       

Corporate and unallocated shared expenses

     (107 )         (112 )     

Restructuring and impairment charges

     (6 )         (12 )     

Other income

     –            75       

Net interest expense

     (90)          (95)      
  

 

 

   

 

 

 

Income before income taxes

    $ 2,241          $ 2,064       
  

 

 

   

 

 

 

 

7


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

3. Acquisitions

Seven TV

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

UTV

On May 9, 2008, the Company acquired a 24% interest (bringing its undiluted interest to 37%) in UTV Software Communications Limited (UTV), a media company headquartered and publicly traded in India, for approximately $197 million. In accordance with Indian securities regulations, the Company was required to make an open tender offer to purchase up to an additional 23% of UTV’s publicly traded voting shares for a price equivalent to the May 9th, 2008 Indian rupee purchase price. In November 2008, the Company completed the open offer and acquired an incremental 23% of UTV’s voting shares for approximately $138 million bringing its undiluted interest to 60%. Pursuant to a shareholder agreement, UTV’s founder had a four-year option to buy all or a portion of the shares acquired by the Company during the open-offer period at a price no less than the Company’s open-offer price. Under this agreement, the Company did not have the right to vote the shares subject to the option until the expiration of the option and accordingly the Company’s ownership interest in voting shares was 48%. In January 2010, UTV issued additional shares in exchange for the outstanding noncontrolling interest of one of its subsidiaries diluting the Company’s direct interest in UTV to 50% (39% voting interest). In addition to the acquisition of UTV, on August 5, 2008, the Company invested $28 million in a UTV subsidiary, UTV Global Broadcasting Limited (along with UTV, the “UTV Group”).

Pursuant to a delisting offer process, on February 2, 2012, the Company purchased publicly held shares and all of the shares held by the founder of UTV for $375 million. Upon completion, the Company’s interest in UTV increased to 93% and will result in the consolidation of the UTV Group in the Company’s financial statements in the second quarter of fiscal 2012. In addition, the four-year option held by the founder and limitations on the Company’s rights to vote certain shares subject to the option were eliminated.

Upon consolidation, the Company expects to recognize a non-cash pre-tax gain on its currently held interest in the UTV Group of approximately $200 million based on a preliminary estimate of the fair value of the Company’s currently held interest.

In accordance with Indian securities regulations, the Company expects to delist the UTV shares in the second quarter of fiscal 2012. Upon delisting and for a one year period, the Company can be required to purchase any outstanding UTV shares at the election of each remaining UTV shareholder for 1,100 Indian rupees per share for a cost of approximately $85 million for the additional shares.

 

8


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Goodwill

The changes in the carrying amount of goodwill for the quarter ended December 31, 2011, are as follows:

 

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

Balance at Oct. 1, 2011

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

Acquisitions

    –            –            –             –             29             29       

Disposition

    –            –            –             –             –             –       

Other, net

    (4 )          –            –             –             –             (4 )     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at Dec. 31, 2011

    $ 15,724            $ 172            $ 5,284             $ 1,797             $ 1,193             $   24,170       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The carrying amount of goodwill at December 31, 2011 and October 1, 2011 includes accumulated impairments of $29 million at Interactive Media.

 

4. Dispositions and Other Income

Miramax

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

 

5. Borrowings

During the quarter ended December 31, 2011, the Company’s borrowing activity was as follows:

 

        October 1,    
2011
      Additions         Payments       Other
    Activity     
     December 31, 
2011
 

Commercial paper borrowings

      $ 1,583         $ –         $ (976)         $ –           $ 607      

U.S. medium-term notes

    8,400          1,590          –            1          9,991      

Other foreign currency denominated borrowings

    1,020          –          –            (3)          1,017      

Other

    663          –          (29)          (8)          626      

Disneyland Paris borrowings (1)

    1,981          –          (37)          (83)          1,861      

Hong Kong Disneyland borrowings (2)

    330          –          –            (46)          284      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 13,977         $ 1,590         $ (1,042)         $ (139)         $ 14,386      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

(2)

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.

 

6. International Theme Park Investments

The Company has a 51% effective ownership interest in the operations of Disneyland Paris, a 47% ownership interest in the operations of Hong Kong Disneyland Resort and a 43% ownership interest in the operations of Shanghai Disney Resort (collectively the “International Theme Parks”), all of which are consolidated in the Company’s financial statements.

 

9


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following tables present summarized balance sheet information for the Company as of December 31, 2011 and October 1, 2011, reflecting the impact of consolidating the balance sheets of the International Theme Parks.

 

    As of December 31, 2011  
    Before International
Theme Parks
Consolidation
    International
Theme Parks and
Adjustments
          Total        

Cash and cash equivalents

   $ 3,141               $ 625               $ 3,766       

Other current assets

    11,072                222                11,294       
 

 

 

   

 

 

   

 

 

 

Total current assets

    14,213                847                15,060       

Investments

    4,046                (1,361)              2,685       

Fixed assets

    15,520                4,240                19,760       

Other assets

    36,287                85                36,372       
 

 

 

   

 

 

   

 

 

 

Total assets

   $ 70,066               $ 3,811               $ 73,877       
 

 

 

   

 

 

   

 

 

 

Current portion of borrowings

   $ 2,943               $ 217               $ 3,160       

Other current liabilities

    9,920                444                10,364       
 

 

 

   

 

 

   

 

 

 

Total current liabilities

    12,863                661                13,524       

Borrowings

    9,298                1,928                11,226       

Deferred income taxes and other long-term liabilities

    9,564                140                9,704       

Equity

    38,341                1,082                        39,423       
 

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 70,066               $ 3,811               $ 73,877       
 

 

 

   

 

 

   

 

 

 
    As of October 1, 2011  
     Before International
Theme Parks

Consolidation
    International
Theme Parks and
Adjustments
    Total  

Cash and cash equivalents

  $ 2,407              $ 778            $ 3,185       

Other current assets

    10,323                249              10,572       
 

 

 

   

 

 

   

 

 

 

Total current assets

    12,730                1,027              13,757       

Investments

    3,791                (1,356)             2,435       

Fixed assets

    15,386                4,309              19,695       

Other assets

    36,137                100              36,237       
 

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

 

Current portion of borrowings

  $ 2,866              $ 189            $ 3,055       

Other current liabilities

    8,459                574              9,033       
 

 

 

   

 

 

   

 

 

 

Total current liabilities

    11,325                763              12,088       

Borrowings

    8,800                2,122              10,922       

Deferred income taxes and other long-term liabilities

    9,507                154              9,661       

Equity

    38,412                1,041              39,453       
 

 

 

   

 

 

   

 

 

 

Total liabilities and equity

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

 

 

   

 

 

   

 

 

 

 

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 quarter ended December 31, 2011, reflecting the impact of consolidating the income statements of the International Theme Parks.

 

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

Revenues

   $ 10,218               $ 561               $ 10,779       

Cost and expenses

    (8,053)               (534)               (8,587)      

Restructuring and impairment charges

    (6)               –                 (6)      

Other income

    –                 –                 –        

Net interest expense

    (71)               (19)               (90)      

Equity in the income of investees

    151                (6)               145       
 

 

 

   

 

 

   

 

 

 

Income before income taxes

    2,239                2                        2,241       

Income taxes

    (720)               –                 (720)      
 

 

 

   

 

 

   

 

 

 

Net income

   $ 1,519                $ 2               $ 1,521        
 

 

 

   

 

 

   

 

 

 

 

(1) 

These amounts include the International Theme Parks under the equity method of accounting. As such, royalty and management fee income from these operations is included in Revenues and our share of their net income/(loss) is included in Equity in the income of investees. There were no royalties and management fees recognized for the quarter ended December 31, 2011.

The following table presents summarized cash flow statement information of the Company for the quarter ended December 31, 2011, reflecting the impact of consolidating the cash flow statements of the International Theme Parks.

 

    Before International
Theme Parks
Consolidation
    International
Theme Parks and
Adjustments
        Total      

Cash provided by operations

   $ 1,725               $ 9                $ 1,734       

Investments in parks, resorts and other property

    (511)               (123 )               (634)      

Other investing activities

    (392)               48                 (344)      

Cash used by financing activities

    (66)               (64 )               (130)      

Impact of exchange rates on cash and cash equivalents

    (22)               (23 )               (45)      
 

 

 

   

 

 

   

 

 

 

Increase/(decrease) in cash and cash equivalents

    734                (153 )               581       

Cash and cash equivalents, beginning of period

    2,407                778                         3,185       
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 3,141               $ 625                $ 3,766       
 

 

 

   

 

 

   

 

 

 

 

11


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7. Pension and Other Benefit Programs

The components of net periodic benefit cost are as follows:

 

     Pension Plans      Postretirement Medical Plans  
       December 31,  
2011
         January 1,    
2011
       December 31,  
2011
         January 1,    
2011
 

Service cost

     $ 70            $ 74            $ 5            $ 5      

Interest cost

     110            103            19            17      

Expected return on plan assets

     (128)           (110)           (6)           (6)     

Amortization of prior year service costs

     3            3            (1)           (1)     

Recognized net actuarial loss

     77            57            8            2      
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

     $ 132            $ 127            $ 25            $ 17      
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended December 31, 2011, the Company did not make any material contributions to its pension and postretirement medical plans. The Company expects pension and postretirement medical plan contributions in fiscal 2012 of approximately $325 million to $375 million. Final minimum funding requirements for fiscal 2012 will be determined based on our January 1, 2012 funding actuarial valuation which will be available in late fiscal 2012.

 

8. Earnings Per Share

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

 

     Quarter Ended  
     December 31,
2011
        January 1,      
2011
 

Shares (in millions):

    

Weighted average common shares outstanding (basic)

     1,798           1,891      

Weighted average dilutive impact of Awards

     26           36      
  

 

 

   

 

 

 

Weighted average common and common equivalent shares outstanding (diluted)

     1,824           1,927      
  

 

 

   

 

 

 

Awards excluded from diluted earnings per share

     10           –      
  

 

 

   

 

 

 

 

9. Equity

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

During the quarter ended December 31, 2011, the Company repurchased 23 million shares of its common stock for $800 million. As of December 31, 2011, the Company had remaining authorization in place to repurchase 282 million additional shares. The repurchase program does not have an expiration date.

 

12


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

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

 

      December 31,  
2011
        October 1,     
2011
 

Market value adjustments for investments and hedges

    $ (16)            $ (48)      

Foreign currency translation and other

    12             43        

Unrecognized pension and postretirement medical expense

    (2,570)            (2,625)      
 

 

 

   

 

 

 

Accumulated other comprehensive income (loss) (1)

    $ (2,574)            $ (2,630)      
 

 

 

   

 

 

 

 

(1) 

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

 

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  
     December 31,
2011
        January 1,    
2011
 

Stock options/rights (1)

     $ 31        $ 36     

RSUs

     73          67     
  

 

 

   

 

 

 

Total equity-based compensation expense (2)

     $ 104        $ 103     
  

 

 

   

 

 

 

Equity-based compensation expense capitalized during the period

     $ 13        $ 17     
  

 

 

   

 

 

 

 

(1) Includes stock appreciation rights issued in connection with acquisition of Playdom
(2) Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. Amortization of previously capitalized equity-based compensation totaled $9 million and $29 million during the quarters ended December 31, 2011 and January 1, 2011, respectively.

Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $153 million and $539 million, respectively, as of December 31, 2011.

The weighted average grant date fair values of options issued during the quarters ended December 31, 2011, and January 1, 2011 were $9.42 and $10.13, respectively.

In January 2012, the Company made equity compensation grants, which included its regular annual grant, consisting of 9.8 million stock options and 8.6 million RSUs, of which 0.5 million RSUs included market and performance conditions.

 

13


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

11. Commitments and Contingencies

Legal Matters

Celador International Ltd. v. American Broadcasting Companies, Inc. On May 19, 2004, an affiliate of the creator and licensor of the television program, “Who Wants to be a Millionaire,” filed an action against the Company and certain of its subsidiaries, including American Broadcasting Companies, Inc. and Buena Vista Television, LLC, alleging it was damaged by defendants improperly engaging in certain intra-company transactions and charging merchandise distribution expenses, resulting in an underpayment to the plaintiff. On July 7, 2010, the jury returned a verdict for breach of contract against certain subsidiaries of the Company, awarding plaintiff damages of $269.4 million. The Company has stipulated with the plaintiff to an award of prejudgment interest of $50 million, which amount will be reduced pro rata should the Court of Appeals reduce the damages amount. On December 21, 2010, the Company’s alternative motions for a new trial and for judgment as a matter of law were denied. Although we cannot predict the ultimate outcome of this lawsuit, the Company believes the jury’s verdict is in error and is vigorously pursuing its position on appeal, notice of which was filed by the Company on January 14, 2011. On or about January 28, 2011, plaintiff filed a notice of cross-appeal. The Company has determined that it does not have a probable loss under the applicable accounting standard relating to probability of loss for recording a reserve with respect to this litigation and therefore has not recorded a reserve.

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

Contractual Guarantees

The Company has guaranteed bond issuances by the Anaheim Public Authority that were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the Disneyland Resort. Revenues from sales, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of December 31, 2011, the remaining debt service obligation guaranteed by the Company was $359 million, of which $87 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 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, net of an immaterial allowance for credit losses, was $0.8 billion as of December 31, 2011. The activity in the current period related to the allowance for credit losses was not material.

 

14


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company estimates the allowance for credit losses related to receivables for sales of its vacation ownership units based primarily on historical collection experience. Projections of uncollectible amounts are also based on consideration of the economic environment and the age of receivables. The balance of mortgage receivables recorded in other non-current assets, net of a related allowance for credit losses of approximately 5%, was approximately $0.5 billion as of December 31, 2011. The activity in the period related to the allowance for credit losses was not material.

Income Taxes

During the quarter, the Company settled certain tax matters with various jurisdictions. As a result of these settlements, the Company reduced its unrecognized tax benefits by $64 million.

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

 

12. Fair Value Measurements

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

 

   

Level 1 – Quoted prices for identical instruments in active markets

   

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets

   

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable

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

 

     Fair Value Measurement at December 31, 2011  
           Level 1                  Level 2                  Level 3                    Total          

Assets

           

 Investments

     $ 137             $ 41             $ –               $ 178       

 Derivatives (1)

           

   Interest rate

     –             210             –             210       

   Foreign exchange

     –             461             –             461       

 Residual Interests

     –             –              35             35       

Liabilities

           

 Derivatives (1)

           

   Interest rate

     –             (17 )           –             (17 )     

   Foreign exchange

     –             (207 )           –             (207 )     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 137             $ 488             $ 35               $ 660       
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

Assets

       

  Investments

      $ 143            $ 43              $ –            $ 186       

  Derivatives (1)

       

    Interest rate

    –            214            –            214       

    Foreign exchange

    –            498            –            498       

  Residual Interests

    –            –            40            40       

Liabilities

       

  Derivatives (1)

       

    Interest rate

    –            (18)           –            (18)      

    Foreign exchange

    –            (262)           –            (262)      

    Other derivatives

    –            (1)           –            (1)      
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 143            $ 474              $ 40            $ 657       
 

 

 

   

 

 

   

 

 

   

 

 

 

 

      (1)

The Company has a master netting arrangement by counterparty with respect to certain derivative contracts. Contracts in a liability position totaling $120 million and $167 million have been netted against contracts in an asset position in the Condensed Consolidated Balance Sheet at December 31, 2011 and October 1, 2011, respectively.

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 of interest rate and foreign currency hedges, 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, prepayment, and defaults. There were no material changes in the residual interests in the first quarter of fiscal 2012.

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 and cash equivalents, receivables, available-for-sale investments, derivative contracts and accounts payable approximated the carrying values. The estimated fair values of the Company’s total borrowings (current and noncurrent) subject to fair value disclosures, determined based on broker quotes or quoted market prices or interest rates for the same or similar instruments are $14.7 billion and $14.2 billion at December 31, 2011 and October 1, 2011, respectively.

Transfers of Financial Assets

Through December 4, 2008, the Company sold mortgage receivables arising from sales of its vacation ownership units under a facility that expired on December 4, 2008 and was not renewed. The Company continues to service the sold receivables and has a residual interest in those receivables. As of December 31, 2011, the outstanding principal amount for sold mortgage receivables was $220 million, and the carrying value of the Company’s residual interest, which is recorded in other long-term assets, was $35 million.

 

16


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company repurchases defaulted mortgage receivables at their outstanding balance. The Company did not make material repurchases in the quarters ended December 31, 2011 or January 1, 2011. 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.

 

13. Derivative Instruments

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

The following table summarizes the gross fair value of the Company’s derivative positions as of December 31, 2011:

 

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

Derivatives designated as hedges

           

  Foreign exchange

     $             141             $         42             $     (95)            $ (74)      

  Interest rate

     –             210             –             –       

Derivatives not designated as hedges

           

  Foreign exchange

     57             221             (37)            (1)      

  Interest rate

     –             –             –             (17)      
  

 

 

    

 

 

    

 

 

    

 

 

 

   Gross fair value of derivatives

     198             473             (132)              (92)      

Counterparty netting

     (84)            (36)            84             36       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives (1)

     $ 114             $ 437             $ (48)            $ (56)      
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the gross fair value of the Company’s derivative positions as of October 1, 2011:

 

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

Derivatives designated as hedges

           

  Foreign exchange

     $             133             $         33             $ (100)            $ (90)      

  Interest rate

     1             213             –             –       

  Other

     –             –             (1)            –       

Derivatives not designated as hedges

           

  Foreign exchange

     103             229             (51)            (21)      

  Interest rate

     –             –             –             (18)      
  

 

 

    

 

 

    

 

 

    

 

 

 

   Gross fair value of derivatives

     237             475             (152)            (129)      

Counterparty netting

     (111)            (56)            111             56       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives (1)

     $ 126             $ 419             $ (41)            $ (73)      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

17


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Interest Rate Risk Management

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

The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of December 31, 2011 and October 1, 2011, the total notional amount of the Company’s pay-floating interest rate swaps was $2.2 billion and $1.2 billion, respectively. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Condensed Consolidated Statements of Income.

 

     Quarter Ended  
       December 31,  
2011
           January 1,      
2011
 

Gain (loss) on interest rate swaps

    $      (4)                $      (53)           

Gain (loss) on hedged borrowings

        4                     53            

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 December 31, 2011 nor at October 1, 2011.

Foreign Exchange Risk Management

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

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

The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of December 31, 2011 and October 1, 2011, the notional amounts of the Company’s net foreign exchange cash flow hedges were $3.7 billion and $3.6 billion, respectively. Mark to market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the quarters ended December 31, 2011 and January 1, 2011 were not material. Net deferred gains recorded in AOCI

 

18


THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

for contracts that will mature in the next twelve months totaled $46 million. The following table summarizes the pre-tax adjustments to AOCI for foreign exchange cash flow hedges.

 

     Quarter Ended  
       December 31,  
2011
           January 1,      
2011
 

Gain (loss) recorded in AOCI

    $      53                 $      (75)           

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

        7                     24            
  

 

    

 

 

Net change in AOCI

    $      60                 $      (51)           
  

 

    

 

 

Foreign exchange risk management contracts with respect to foreign currency assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at December 31, 2011 and October 1, 2011 were $2.7 billion and $2.6 billion, respectively. During the quarters ended December 31, 2011 and January 1, 2011, the Company recognized a net gain of $54 million and $20 million, respectively, in costs and expenses on these foreign exchange contracts which offset a net loss of $66 million and $25 million on the related economic exposures for the quarters ended December 31, 2011 and January 1, 2011, 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 December 31, 2011 nor at October 1, 2011.

Risk Management – Other Derivatives Not Designated as Hedges

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

The notional amounts of these contracts at December 31, 2011 and October 1, 2011 were $176 million and $184 million, respectively. The gains or losses recognized in income for the quarters ended December 31, 2011 and January 1, 2011 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 $103 million and $114 million on December 31, 2011 and October 1, 2011, respectively.

 

19


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

Other Financial Information

Financial Condition

Commitments and Contingencies

Other Matters

Market Risk

OVERVIEW

Our summary consolidated results are presented below:

 

     Quarter Ended      % Change
Better/
(Worse)
 
(in millions, except per share data)    December 31,
2011
     January 1,
2011
    

Revenues

    $          10,779               $          10,716                1          

Costs and expenses

        (8,587)                  (8,776)               2          

Restructuring and impairment charges

        (6)                  (12)               50          

Other income

        –                   75                nm     

Net interest expense

        (90)                  (95)               5          

Equity in the income of investees

        145                   156                (7       
  

 

    

 

      

Income before income taxes

        2,241                   2,064                9          

Income taxes

        (720)                  (730)               1          
  

 

    

 

      

Net income

        1,521                   1,334                14          

Less: Net income attributable to noncontrolling interests

        (57)                  (32)               (78       
  

 

    

 

      

Net income attributable to Disney

    $      1,464               $      1,302                12          
  

 

    

 

      

Diluted earnings per share

    $      0.80               $      0.68                18          
  

 

    

 

      

Quarter Results

Diluted earnings per share (EPS) increased 18% for the quarter reflecting improved operating results and a decrease in weighted average shares outstanding. Improved segment operating results were driven by increased fees from Multi-channel Video Service Providers (MVSP) (Affiliate Fees) including a benefit from a decrease in revenue deferrals related to annual program commitments, higher guest spending and attendance at our domestic parks and resorts, and improved results in our worldwide theatrical business, partially offset by increased operating expenses at our domestic parks and resorts and lower political advertising revenues at our owned television stations.

 

20


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

The Company recorded $6 million of restructuring and impairment charges in the current quarter. In the prior-year quarter, 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 the prior year 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)       
    

 

 

      

 

 

      

 

 

 

Restructuring and impairment charges in the prior-year quarter included an impairment related to assets that had tax basis in excess of the book value resulting in a $31 million tax benefit on the restructuring and impairment charges. The book value of Miramax included allocated goodwill totaling $217 million which is not tax deductible. Accordingly, the taxable gain on the sales of these businesses exceeded the $75 million book gain resulting in the tax expense of $107 million.

SEASONALITY

The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 31, 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.

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.

 

21


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

BUSINESS SEGMENT RESULTS

The Company evaluates the performance of its operating segments based on segment operating income, which is shown below along with segment revenues:

 

     Quarter Ended      % Change
Better/
(Worse)
 
(in millions)    December 31,
2011
     January 1,
2011
    

Revenues:

                

Media Networks

    $      4,779             $      4,645              3        %      

Parks and Resorts

        3,155                 2,868              10        %      

Studio Entertainment

        1,618                 1,932              (16     %      

Consumer Products

        948                 922              3        %      

Interactive Media

        279                 349              (20     %      
  

 

    

 

      
    $          10,779             $          10,716              1        %      
  

 

    

 

      

Segment operating income (loss):

                

Media Networks

    $      1,193             $      1,066              12        %      

Parks and Resorts

        553                 468              18        %      

Studio Entertainment

        413                 375              10        %      

Consumer Products

        313                 312                     %      

Interactive Media

        (28)                (13)             >(100     %      
  

 

    

 

      
    $      2,444             $      2,208              11        %      
  

 

    

 

      

 

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

 

     Quarter Ended      % Change
Better/
(Worse)
 
  (in millions)    December 31,
2011
     January 1,
2011
    

  Segment operating income

    $      2,444             $      2,208              11        %      

  Corporate and unallocated shared expenses

        (107)                (112)             4        %      

  Restructuring and impairment charges

        (6)                (12)             50        %      

  Other income

        –                 75                  nm     

  Net interest expense

        (90)                (95)             5        %      
  

 

    

 

      

  Income before income taxes

    $            2,241             $            2,064              9        %      
  

 

    

 

      

 

22


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

Depreciation expense is as follows:

 

000000000 000000000 000000000
    Quarter Ended         % Change      
(in millions)       December 31,    
2011
        January 1,    
2011
    Better/
(Worse)
 

Media Networks

     

Cable Networks

   $ 34             $ 31             (10 )  %     

Broadcasting

    23              24             4    %     
 

 

 

   

 

 

   

 Total Media Networks

    57              55             (4 )  %     
 

 

 

   

 

 

   

Parks and Resorts

     

Domestic

    224              206             (9 )  %     

International

    79              79             –     %     
 

 

 

   

 

 

   

 Total Parks and Resorts

    303              285             (6 )  %     
 

 

 

   

 

 

   

Studio Entertainment

    13              17             24    %     

Consumer Products

    13              12             (8 )  %     

Interactive Media

    4              5             20    %     

Corporate

    46              38             (21 )  %     
 

 

 

   

 

 

   

Total depreciation expense

   $ 436             $ 412             (6 )  %     
 

 

 

   

 

 

   

Amortization of intangible assets is as follows:

 

00000000000 00000000000 00000000000
    Quarter Ended         % Change      
(in millions)       December 31,    
2011
        January 1,    
2011
    Better/
(Worse)
 

Media Networks

   $ 2             $ 2             –    %     

Parks and Resorts

    –              –             –    %     

Studio Entertainment

    24              10             >(100 )  %     

Consumer Products

    15              14             (7 )  %     

Interactive Media

    8              9             11    %     
 

 

 

   

 

 

   

Total amortization of intangible assets

   $ 49             $ 35             (40 )  %     
 

 

 

   

 

 

   

Media Networks

Operating results for the Media Networks segment are as follows:

 

    Quarter Ended         % Change      
(in millions)       December 31,    
2011
        January 1,    
2011
    Better/
(Worse)
 

Revenues

     

Affiliate Fees

   $ 2,060             $ 1,850             11    %     

Advertising

    2,207              2,261             (2 )  %     

Other

    512              534             (4 )  %     
 

 

 

   

 

 

   

Total revenues

    4,779              4,645             3    %     

Operating expenses

    (3,046 )            (3,086)            1    %     

Selling, general, administrative and other

    (625 )            (592)            (6 )  %     

Depreciation and amortization

    (59 )            (57)            (4 )  %     

Equity in the income of investees

    144              156             (8 )  %     
 

 

 

   

 

 

   

Operating Income

   $ 1,193             $ 1,066             12    %     
 

 

 

   

 

 

   

 

23


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

Revenues

The 11% increase in affiliate revenue was driven by increases of 5% from contractual rates and 4% from a change in the provisions related to annual programming commitments in an MVSP contract at Cable Networks.

Lower advertising revenues were due to an increase of $20 million at Cable Networks from $1,095 million to $1,115 million and a decrease of $74 million at Broadcasting from $1,166 million to $1,092 million. The increase at Cable Networks included a 5% increase due to higher rates and a 1% increase due to higher units sold, partially offset by a 5% decrease due to lower ratings. Advertising revenues also reflected a shift in the timing of the Rose and Fiesta Bowls and certain NBA games, relative to our fiscal period end, at ESPN. The decrease at Broadcasting reflected a 5% decrease in local television advertising revenues. Advertising revenues at the ABC Television Network were essentially flat as higher advertising rates were offset by decreased ratings and units sold.

The decline in other revenues reflected lower DVD sales of ABC Studios productions driven by Lost and Scrubs.

Costs and Expenses

Operating expenses include a decrease in programming and production costs of $52 million from $2,727 million to $2,675 million. At Cable Networks, programming and production costs were essentially flat as higher sports rights costs due to contractual rate increases for key contracts and higher programming and production costs at the worldwide Disney Channels were offset by the timing shift related to college bowl and NBA games. At Broadcasting, programming and production costs decreased $54 million driven by lower DVD sales and the absence of The Oprah Winfrey Show at our local television stations.

The increase in selling, general, administrative and other costs and expenses was driven by higher marketing costs for new series launches at the ABC Television Network.

Segment Operating Income

Segment operating income increased 12%, or $127 million, to $1.2 billion. The increase was primarily due to increases at ESPN and the worldwide Disney Channels, partially offset by a decrease at the owned television stations.

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

 

    Quarter Ended     % Change  
(in millions)       December 31,    
2011
        January 1,    
2011
    Better/
(Worse)
 
Revenues:      

Cable Networks

   $ 3,309             $ 3,068             8    %       

Broadcasting

    1,470              1,577             (7 )  %       
 

 

 

   

 

 

   
   $ 4,779             $ 4,645             3    %       
 

 

 

   

 

 

   
Segment operating income:      

Cable Networks

   $ 967             $ 771             25    %       

Broadcasting

    226              295             (23 )  %       
 

 

 

   

 

 

   
   $ 1,193             $ 1,066             12    %       
 

 

 

   

 

 

   

 

24


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

Parks and Resorts

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

 

    Quarter Ended         % Change      
(in millions)       December 31,    
2011
            January 1,        
        2011        
    Better/
(Worse)
 

Revenues

     

    Domestic

   $ 2,503             $ 2,249             11     %    

    International

    652              619             5     %    
 

 

 

   

 

 

   

Total revenues

    3,155              2,868             10     %    

Operating expenses

    (1,887)             (1,750)            (8)    %    

Selling, general, administrative and other

    (412)             (365)            (13)    %    

Depreciation and amortization

    (303)             (285)            (6)    %    
 

 

 

   

 

 

   

Operating Income

   $ 553             $ 468             18     %    
 

 

 

   

 

 

   

Revenues

Parks and Resorts revenues increased 10%, or $287 million, to $3.2 billion due to an increase of $254 million at our domestic operations and an increase of $33 million at our international operations.

Revenue growth of 11% at our domestic operations reflected a 6% increase from higher average guest spending and a 5% increase due to volume driven by passenger cruise ship days from our newest cruise ship, the Disney Dream, which was launched in January 2011 and higher theme park attendance. Higher guest spending was primarily due to higher average ticket prices, food and beverage and daily hotel room rates.

Revenue growth of 5% at our international operations reflected a 3% increase from higher attendance and a 3% increase due to higher average guest spending, partially offset by a 2% decrease due to the absence of real estate sales at Disneyland Paris which occurred in the prior-year quarter.

 

25


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

The following table presents supplemental park and hotel statistics:

 

    Domestic     International (2)     Total  
    Quarter Ended     Quarter Ended     Quarter Ended  
      December 31,    
2011
        January 1,    
2011
        December 31,    
2011
        January 1,    
2011
      December 31,    
2011
        January 1,    
2011
 

Parks

           

  Increase/ (decrease)

           

  Attendance

    3  %              2  %              8  %              3  %              4  %              2  %         

  Per Capita Guest Spending

    8  %              8  %              1  %              (5) %              6  %              5  %         

Hotels (1)

           

  Occupancy

    85  %              85  %              85  %              85  %              85  %              85  %         

  Available Room Nights (in thousands)

    2,405                   2,382                   619                   621                   3,024                   3,003              
  Per Room Guest Spending     $256                   $242                   $298                   $285                   $264                   $251              

 

  (1) 

Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverage and merchandise at the hotels. Hotel statistics include rentals of Disney Vacation Club units.

  (2) 

Per capita guest spending and per room guest spending 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 $1.35 and $1.36 for quarters ended December 31, 2011 and January 1, 2011, respectively.

Costs and Expenses

Operating expenses include operating labor which increased by $78 million from $865 million to $943 million driven by labor cost inflation across our parks and resorts businesses and higher employee benefits costs at Walt Disney World Resort. Operating expenses also include cost of sales which increased $3 million from $311 million to $314 million driven by volume, partially offset by the absence of the costs related to prior-year real estate sales at Disneyland Paris. Operating expenses also increased due to a full period of operations of the Disney Dream which launched at the end of January 2011, costs for our new hotel and vacation club resort in Hawaii, Aulani, a Disney Resort & Spa, enhancement costs including investments in systems infrastructure at Walt Disney World Resort, and new guest offerings at Disney California Adventure.

The increase in selling, general, administrative and other costs and expenses was driven by higher marketing costs at our domestic parks and resorts and labor cost inflation.

Segment Operating Income

Segment operating income increased 18%, or $85 million, to $553 million due to increases at our domestic parks and resorts and Disney Cruise Line.

 

26


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows:

 

    Quarter Ended         % Change      
(in millions)       December 31,    
2011
          January 1,        
2011
    Better/
(Worse)
 

Revenues

     

   Theatrical distribution

    $ 139             $ 329             (58 )   %     

   Home entertainment

    1,004             1,043             (4 )   %     

   Television distribution and other

    475             560             (15 )   %     
 

 

 

   

 

 

   

Total revenues

    1,618             1,932             (16 )   %     

Operating expenses

    (695)            (899)            23     %     

Selling, general, administrative and other

    (473)            (631)            25     %     

Depreciation and amortization

    (37)            (27)            (37 )   %     
 

 

 

   

 

 

   

Operating Income

    $ 413             $ 375             10     %     
 

 

 

   

 

 

   

Revenues

The decrease in theatrical distribution revenue reflected fewer Disney branded titles in wide release in the current quarter. Key titles in the prior-year quarter included Tangled and Tron: Legacy while the current quarter included The Muppets.

Lower home entertainment revenue reflected an 11% decrease due to a decline in unit sales, partially offset by a 6% increase due to higher net effective pricing which benefitted from a higher Blu-ray sales mix. Net effective pricing is the wholesale selling price adjusted for discounts, sales incentives and returns. The decrease in unit sales reflected the strength of Toy Story 3, Beauty and the Beast Platinum Release, A Christmas Carol and Sorcerer’s Apprentice in the prior-year quarter compared to Cars 2, The Lion King Platinum Release, Pirates of the Caribbean: On Stranger Tides and The Help in the current quarter, as well as lower sales of catalog titles.

The decrease in Television distribution and other revenue reflected fewer title availabilities domestically and an adverse impact from the timing of title availability, relative to our fiscal period end, in international markets.

Costs and Expenses

Operating expenses included a decrease of $140 million in film cost amortization, from $509 million to $369 million. The decrease was due to fewer Disney branded titles in theatrical markets and lower film cost write-downs in the current quarter. Operating expenses also include cost of sales and distribution expenses which decreased $64 million from $390 million to $326 million primarily due to lower home entertainment unit sales.

The decrease in selling, general, administrative and other expenses was primarily due to lower marketing expenses in theatrical distribution due to fewer Disney branded titles in the current quarter. The prior-year quarter included marketing for Tangled and Tron: Legacy whereas the current quarter included The Muppets.

Segment Operating Income

Segment operating income increased 10%, or $38 million, to $413 million primarily due to an increase in worldwide theatrical results and lower film cost write-downs, partially offset by decreases in television distribution and worldwide home entertainment results.

 

27


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:

 

    Quarter Ended       % Change  
Better/
(Worse)
 
(in millions)       December 31,    
2011
          January 1,      
2011
   

Revenues

     

Licensing and publishing

    $             527              $ 517             2      %    

Retail and other

    421              405             4      %    
 

 

 

   

 

 

   

Total revenues

    948              922             3      %    

Operating expenses

    (408)             (393)            (4 )    %    

Selling, general, administrative and other

    (199)             (191)            (4 )    %    

Depreciation and amortization

    (28)             (26)            (8 )    %    
 

 

 

   

 

 

   

Operating Income

    $         313              $ 312             –      %    
 

 

 

   

 

 

   

Revenues

The increase in licensing and publishing revenue reflected a 2% increase from a favorable impact of foreign currency translation primarily as a result of the weakening of the U.S. dollar against the Japanese Yen. Licensing revenue growth, which was driven by Cars merchandise in the current quarter compared to Toy Story and Tangled merchandise in the prior-year quarter, was offset by a higher revenue share with the Studio Entertainment segment.

Higher retail and other revenues reflected a 4% increase primarily due to higher sales at our retail business driven by new stores in North America and holiday season promotions.

Costs and Expenses

Operating expenses included an increase of $5 million in cost of goods sold, from $203 million to $208 million, driven by higher sales volume at our retail business. Operating expenses also included a 2% increase due to higher distribution expenses and labor costs primarily at our retail business.

The increase in selling, general, administrative and other expenses was driven by higher marketing expense and promotions at our licensing business.

Operating Income

Segment operating income for the quarter was comparable to the prior-year quarter.

 

28


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

Interactive Media

Operating results for the Interactive Media segment are as follows:

 

    Quarter Ended         % Change    
Better/
(Worse)
 
(in millions)      December 31,   
2011
          January 1,      
2011
   

Revenues

     

Game sales and subscriptions

    $ 217             $ 296             (27)    %    

Advertising and other

    62             53             17     %    
 

 

 

   

 

 

   

Total revenues

    279             349             (20)    %    

Operating expenses

    (163)            (190)            14     %    

Selling, general, administrative and other

    (132)            (158)            16     %    

Depreciation and amortization

    (12)            (14)            14     %    
 

 

 

   

 

 

   

Operating Loss

    $ (28)            $ (13)            nm             
 

 

 

   

 

 

   

Revenues

Lower game sales and subscriptions revenue reflected a 31% decrease due to a decline in console game unit sales and a 7% decrease due to lower net effective pricing of console games, reflecting the strong performance of Epic Mickey in the prior-year quarter and fewer releases in the current quarter consistent with our ongoing shift from console games to social and other interactive platforms. Significant current quarter titles included Disney Universe while the prior-year quarter included Toy Story 3 and Tron: Evolution in addition to Epic Mickey. The decrease was partially offset by a 9% increase due to higher social game revenue reflecting lower acquisition accounting impacts which were adverse to the prior-year quarter and improved title performance in the current quarter.

Higher advertising and other revenue was driven by services and handset sales revenue at our mobile phone service in Japan due to increased subscribers and the launch of two new handsets in the current quarter.

Costs and Expenses

Operating expenses for the quarter included a decrease in product development costs from $76 million to $71 million driven by decreased console game development. The decrease in operating expenses also reflected a 12% decrease in cost of sales driven by lower unit sales of console games.

The decrease in selling, general, administrative and other expenses was primarily due to lower marketing costs at our console game business driven by fewer releases in the current quarter.

Operating Loss

Segment operating loss was $28 million compared to $13 million in the prior-year quarter driven by a decrease at our console game business partially offset by improved social games results.

 

29


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

 

OTHER FINANCIAL INFORMATION

Corporate and Unallocated Shared Expenses

Corporate and unallocated shared expense is as follows:

 

    Quarter Ended         % Change    
Better/
(Worse)
 
(in millions)     December 31,  
2011
        January 1,    
2011
   

Corporate and unallocated shared expenses

   $ (107)           $ (112)            4 %         

Net Interest Expense

Net interest expense is as follows:

 

000000000000 000000000000 000000000000
    Quarter Ended       % Change  
Better/
(Worse)
 
(in millions)       December 31,  
2011
        January 1,    
2011
   

Interest expense

   $ (116)           $ (100 )            (16 )  %       

Interest and investment income

    26             5              >100    %       
 

 

 

   

 

 

   

Net interest expense

   $ (90)           $ (95 )            5    %       
 

 

 

   

 

 

   

The increase in interest expense was driven by higher average debt balances.

The increase in interest and investment income for the quarter was driven by a gain on the sale of an investment and lower investment impairments in the current quarter.

Income Taxes

The effective income tax rate is as follows:

 

0000000000000 0000000000000 0000000000000
    Quarter Ended         Change    
Better/
(Worse)
      December 31,  
2011
        January 1,    
2011
   

Effective income tax rate

    32.1%          35.4%        3.3 ppt

The effective income tax rate for the quarter decreased to 32.1% from 35.4%. The prior-year quarter included a net adverse tax rate impact of 2.5 percentage points from a gain on sale of business and an impairment charge.

In the prior-year quarter we recognized a gain on the sale of Miramax, and our book value of Miramax included non-deductible goodwill such that the taxable gain on the sale of Miramax resulted in tax expense that exceeded the book gain and an increase in the effective tax rate. The prior-year impairment charge related to assets that had tax basis in excess of the book value resulting in a tax benefit that exceeded the pre-tax impairment charge and a decrease in the effective tax rate.

Noncontrolling Interests

Net income attributable to noncontrolling interests is as follows:

 

    Quarter Ended         % Change    
Better/
(Worse)
 
(in millions)     December 31,  
2011
        January 1,    
2011
   

Net income attributable to noncontrolling interests

   $ (57)           $ (32)            (78 )  %       

 

30


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

Net income attributable to noncontrolling interests increased $25 million to $57 million primarily due to higher results at ESPN. Net income attributable to noncontrolling interests is determined based on income after royalties, financing costs and income taxes.

FINANCIAL CONDITION

The change in cash and cash equivalents is as follows:

 

    Quarter Ended      Change
Better/
     (Worse)     
 
(in millions)       December 31,    
2011
          January 1,      
2011
    

Cash provided by operations

      $            1,734                  $        1,119             $ 615         

Cash used in investing activities

    (978)             (881)              (97)        

Cash (used)/provided by financing activities

    (130)             99               (229)        

Impact of exchange rates on cash and cash equivalents

    (45)             (20)              (25)        
 

 

 

   

 

 

    

 

 

 

Increase in cash and cash equivalents

      $               581                  $           317             $ 264         
 

 

 

   

 

 

    

 

 

 

Operating Activities

Cash provided by operating activities of $1.7 billion for the current quarter increased 55% as compared to the prior-year quarter. The increase was due to higher operating cash receipts primarily due to higher collections of receivable balances at our Studio Entertainment, Parks and Resorts and Media Networks businesses, and higher revenues at Parks and Resorts, partially offset by lower revenues at Studio Entertainment. Additionally, operating cash flow benefitted from decreased cash payments driven by the timing of accounts payable disbursements at Corporate and lower marketing and distribution costs at our Studio Entertainment business, partially offset by higher cash payments at Media Networks and Parks and Resorts. The increase in cash payments at Media Networks was driven by higher investment in television programming and production, while the increase in cash payments at Parks and Resorts was driven by operating costs for our newest cruise ship, Disney Dream, costs for our new hotel and vacation club resort in Hawaii, investments in systems infrastructure and labor cost inflation.

Film and Television Costs

The Company’s Studio Entertainment and Media Networks segments incur costs to acquire and produce film and television programming. Film and television production costs include all internally produced content such as live action and animated feature films, animated direct-to-video programming, television series, television specials, theatrical stage plays or other similar product. Programming costs include film or television product licensed for a specific period from third parties for airing on the Company’s broadcast and cable networks and television stations. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities. Accordingly, we analyze our programming assets net of the related liability.

The Company’s film and television production and programming activity for the quarter ended December 31, 2011 and January 1, 2011 are as follows:

 

    Quarter Ended  
(in millions)     December 31,  
2011
          January 1,      
2011
 

Beginning balances:

   

Production and programming assets

   $           5,031             $         5,451         

Programming liabilities

    (866)             (990)        
 

 

 

   

 

 

 
    4,165              4,461         
 

 

 

   

 

 

 

Spending:

   

Film and television production

    918              781         

Broadcast programming

    1,760              1,664         
 

 

 

   

 

 

 
    2,678              2,445         
 

 

 

   

 

 

 

Amortization:

   

Film and television production

    (706)             (834)        

Broadcast programming

    (1,716)             (1,705)        
 

 

 

   

 

 

 

 

31


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

 

 

 

   

 

 

 
    (2,422)             (2,539)        
 

 

 

   

 

 

 

Change in film and television production and

programming costs

    256              (94)        

Other non-cash activity

    8              (45)        

Ending balances:

   

Production and programming assets

    5,399              5,469         

Programming liabilities

    (970)             (1,147)        
 

 

 

   

 

 

 
    $           4,429            $           4,322         
 

 

 

   

 

 

 

Investing Activities

Investing activities consist principally of investments in parks, resorts, and other property and acquisition and divestiture activity.

During the quarter ended December 31, 2011 and January 1, 2011, investments in parks, resorts and other properties were as follows:

 

    Quarter Ended  
(in millions)   December 31,
2011
        January 1,    
2011
 

Media Networks

   

Cable Networks

     $              20                 $             12           

Broadcasting

    10                21           
 

 

 

   

 

 

 

Total Media Networks

    30                33           
 

 

 

   

 

 

 

Parks and Resorts

   

Domestic

    358                1,012           

International

    123                76           
 

 

 

   

 

 

 

Total Parks and Resorts

    481                1,088           
 

 

 

   

 

 

 

Studio Entertainment

    17                24           

Consumer Products

    16                13           

Interactive Media

    4                4           

Corporate

    86                51           
 

 

 

   

 

 

 

Total investment in parks, resorts and other property

     $            634                 $        1,213           
 

 

 

   

 

 

 

Capital expenditures for the Parks and Resorts segment are principally for theme park and resort expansion, new rides and attractions, cruise ships, recurring capital and capital improvements. The decrease in capital expenditures was due to the final payment on the Disney Dream which occurred during our first quarter of fiscal 2011 compared to the final payment on the Disney Fantasy which will occur in the second quarter of fiscal 2012. This decrease was partially offset by higher current year expenditures for theme park and resort expansions and new guest offerings at Walt Disney World Resort and the development of Shanghai Disney Resort.

Capital expenditures at Media Networks primarily reflect investments in facilities and equipment for expanding and upgrading broadcast centers, production facilities, and television station facilities.

Capital expenditures at Corporate primarily reflect investments in information technology and other equipment and corporate facilities. The increase was driven by investments in corporate facilities.

Other Investing Activities

During the current quarter, acquisitions totaled $361 million primarily due to the acquisition of a 49% interest in Seven TV network in Russia.

The prior-year quarter included proceeds from dispositions totaling $556 million primarily due to the sale of Miramax. Acquisitions in the prior year totaled $163 million due to payments related to the acquisition of Playdom, Inc.

 

32


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (continued)

 

Financing Activities

Cash used by financing activities was $130 million for the current quarter compared to cash provided by financing activities of $99 million for the prior-year quarter. The change of $229 million was primarily due to lower proceeds from exercises of stock options.

During the quarter ended December 31, 2011, the Company’s borrowing activity was as follows:

 

         October 1,    
    2011    
       Additions          Payments           Other   
    Activity