|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Walt Disney Company 10-Q 2012
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 March 31, 2012 Commission File Number 1-11605
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).
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 1,787,364,734 shares of common stock outstanding as of May 1, 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)
See Notes to Condensed Consolidated Financial Statements
2
THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited; in millions, except per share data)
See Notes to Condensed Consolidated Financial Statements
3
THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited; in millions)
See Notes to Condensed Consolidated Financial Statements
4
THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited; in millions)
See Notes to Condensed Consolidated Financial Statements
5
THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (cont’d) (unaudited; in millions)
See Notes to Condensed Consolidated Financial Statements
6
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
1. Principles of Consolidation These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair statement of the results for the interim period. Operating results for the quarter and six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending September 29, 2012. Certain reclassifications have been made in the prior year financial statements to conform to the current year presentation. These financial statements should be read in conjunction with the Company’s 2011 Annual Report on Form 10-K. 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.
7
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
A reconciliation of segment operating income to income before income taxes is as follows:
8
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
3. Acquisitions UTV Pursuant to a delisting offer process governed by Indian law, on February 2, 2012, the Company purchased additional publicly held shares and all of the shares held by the founder of UTV Software Communications Limited (UTV), a media and entertainment company headquartered and publicly traded in India, for $377 million. The purchase increased the Company’s ownership interest to 93% from 50%. As a result, the Company changed its accounting for UTV from an investment under the equity method to consolidation of UTV as a subsidiary. The acquisition of UTV supports the Company’s strategic priority of increasing its brand presence and reach in key international markets. Upon consolidation, the Company recognized a non-cash gain of $184 million ($116 million after tax) as a result of adjusting the carrying value of the 50% equity investment to its estimated fair value of $405 million. The gain was recorded in “Other Income” in the Condensed Consolidated Statement of Income. The fair value was determined based on the Company’s internal valuation of the UTV business using an income approach (discounted cash flow model) which the Company believes provides the most appropriate indicator of fair value. The Company has performed a preliminary allocation of the purchase price to the estimated fair value of the tangible and intangible assets acquired and liabilities assumed. The majority of the purchase price along with the debt assumed and fair value of our 50% equity investment has been allocated to goodwill, which is not amortizable for tax purposes. The goodwill reflects the synergies and increased Indian market penetration expected from combining the operations of UTV and the Company. In accordance with Indian securities regulation, the Company can be required to purchase any outstanding UTV shares at the election of each remaining UTV shareholder for 1,100 Indian rupees per share until March 16, 2013 (approximately $85 million in total for the remaining shares). To date, the Company has paid $54 million to acquire an incremental 5% interest. Seven TV On November 18, 2011, the Company acquired a 49% ownership interest in Seven TV, a broadcast television network in Russia for $300 million. Seven TV was converted to an ad-supported, free-to-air Disney Channel in Russia. The Company accounts for its interest in Seven TV as an equity method investment. AETN On March 26, 2012, NBCUniversal exercised an option that requires A&E Television Networks LLC (AETN) to redeem a substantial portion of NBCUniversal’s 15.8% equity interest in AETN. The transaction is expected to close following determination of the value of NBCUniversal’s equity interest. The Company expects that it will continue to account for its interest in AETN as an equity method investment.
9
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
Goodwill The changes in the carrying amount of goodwill for the six months ended March 31, 2012, are as follows:
The carrying amount of goodwill at March 31, 2012 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 six months ended March 31, 2012, the Company’s borrowing activity was as follows:
10
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
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. The following tables present summarized balance sheet information for the Company as of March 31, 2012 and October 1, 2011, reflecting the impact of consolidating the balance sheets of the International Theme Parks.
11
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
The following table presents summarized income statement information of the Company for the six months ended March 31, 2012, reflecting the impact of consolidating the income statements of the International Theme Parks.
The following table presents summarized cash flow statement information of the Company for the six months ended March 31, 2012, reflecting the impact of consolidating the cash flow statements of the International Theme Parks.
12
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:
During the six months ended March 31, 2012, the Company made contributions to its pension and postretirement medical plans totaling $99 million. The Company expects total pension and postretirement medical plan contributions in fiscal 2012 of approximately $325 million to $375 million including discretionary contributions above the minimum requirements. 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.
13
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
8. Earnings Per Share Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period and are calculated using the treasury stock method for equity-based compensation awards (Awards). A reconciliation of the weighted average number of common and common equivalent shares outstanding and Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, is as follows:
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 six months ended March 31, 2012, the Company repurchased 45 million shares of its common stock for $1,669 million. As of March 31, 2012, the Company had remaining authorization in place to repurchase 260 million additional shares. The repurchase program does not have an expiration date. The par value of the Company’s outstanding common stock totaled approximately $28 million. Accumulated other comprehensive income (loss), net of tax, is as follows:
14
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
10. Equity-Based Compensation The amount of compensation expense related to stock options, stock appreciation rights and restricted stock units (RSUs) is as follows:
Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $217 million and $734 million, respectively, as of March 31, 2012. The weighted average grant date fair values of options issued during the six months ended March 31, 2012, and April 2, 2011 were $10.58 and $10.96, respectively. During the six months ended March 31, 2012, the Company made equity compensation grants totaling 18.8 million units, which included its regular annual grant issued in January, 2012, consisting of 9.8 million stock options and 8.6 million RSUs, of which 0.5 million RSUs included market and performance conditions. In March 2012, shareholders of the Company approved the amended 2011 Stock Incentive Plan, which increased the number of shares authorized to be awarded as grants by an incremental 15 million shares. Following this amendment, the maximum number of shares available for issuance (assuming all the awards are in the form of stock options) was approximately 131 million shares and the number available for issuance assuming all awards are in the form of restricted stock units was approximately 66 million shares. 11. Commitments and Contingencies Legal Matters Celador International Ltd. v. American Broadcasting Companies, Inc. On May 19, 2004, an affiliate of the creator and licensor of the television program, “Who Wants to be a Millionaire,” filed an action against the Company and certain of its subsidiaries, including American Broadcasting Companies, Inc. and Buena Vista Television, LLC, alleging it was damaged by defendants improperly engaging in certain intra-company transactions and charging merchandise distribution expenses, resulting in an underpayment to the plaintiff. On July 7, 2010, the jury returned a verdict for breach of contract against certain subsidiaries of the Company, awarding plaintiff damages of $269.4 million. The Company has stipulated with the plaintiff to an award of prejudgment interest of $50 million, which amount will be reduced pro rata should the Court of Appeals reduce the damages amount. On December 21, 2010, the Company’s 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,
15
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
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 March 31, 2012, the remaining debt service obligation guaranteed by the Company was $355 million, of which $84 million was principal. To the extent that tax revenues exceed the debt service payments in subsequent periods, the Company would be reimbursed for any previously funded shortfalls. To date, tax revenues have exceeded the debt service payments for the Anaheim bonds. ESPN STAR Sports, a joint venture in which ESPN owns a 50% equity interest, has 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 $0.6 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 $0.9 billion as of March 31, 2012. The activity in the current period related to the allowance for credit losses was not material. The Company estimates the allowance for credit losses related to receivables for sales of its vacation ownership units based primarily on historical collection experience. Projections of uncollectible amounts are also based on consideration of the economic environment and the age of receivables. The balance of mortgage receivables recorded in other non-current assets, net of a related allowance for credit losses of approximately 4%, was approximately $0.5 billion as of March 31, 2012. The activity in the period related to the allowance for credit losses was not material. Income Taxes During the six months ended March 31, 2012, the Company settled certain tax matters with various jurisdictions. As a result of these settlements, the Company reduced its unrecognized tax benefits by $93 million, including interest and penalties.
16
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
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:
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis are summarized by level in the following tables:
17
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
The fair value of Level 2 investments is primarily determined by reference to market prices based on recent trading activity and other relevant information including pricing for similar securities as determined by third-party pricing services. The fair values of Level 2 derivatives, which consist 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 relate to securitized vacation ownership mortgage receivables and are valued using a discounted cash flow model that considers estimated interest rates, discount rates, prepayment, and defaults. There were no material changes in the residual interests in the first six months of fiscal 2012. The Company also has assets and liabilities that are required to be recorded at fair value on a non-recurring basis when certain circumstances occur. During the six months ended March 31, 2012 and April 2, 2011, the Company recorded impairment charges of $117 million and $23 million, respectively, on film productions. These impairment charges are reported in “Costs and expenses” in the Condensed Consolidated Statements of Income. The film impairment charges reflected the excess of the unamortized cost of the films over the estimated fair value using discounted cash flows. The discounted cash flow analysis is a level 3 valuation technique. The aggregate carrying values of the films for which we prepared the fair value analyses were $119 million and $55 million as of March 31, 2012 and April 2, 2011, respectively. Fair Value of Financial Instruments In addition to the financial instruments disclosed in the footnote 12 tables, the Company’s financial instruments also include cash, cash equivalents, receivables, accounts payable and borrowings. The fair values of cash and cash equivalents, receivables, and accounts payable approximated the carrying values. The estimated fair value of the Company’s total borrowings (current and noncurrent) was $16.3 billion and $14.2 billion at March 31, 2012 and October 1, 2011, respectively. Borrowings primarily consist of U.S. medium term notes, commercial paper, and International Theme Parks borrowings. The fair value classification for borrowings are summarized as follows:
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 March 31, 2012, the outstanding principal amount for sold mortgage receivables was $204 million, and the carrying value of the Company’s residual interest, which is recorded in other long-term assets, was $33 million.
18
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 six months ended March 31, 2012 or April 2, 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 March 31, 2012:
The following table summarizes the gross fair value of the Company’s derivative positions as of October 1, 2011:
19
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 March 31, 2012 and October 1, 2011, the total notional amount of the Company’s pay-floating interest rate swaps was $3.1 billion and $1.2 billion, respectively. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Condensed Consolidated Statements of Income.
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 March 31, 2012 nor at October 1, 2011. Foreign Exchange Risk Management The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges. 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.
20
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of March 31, 2012 and October 1, 2011, the notional amounts of the Company’s net foreign exchange cash flow hedges were $4.8 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 six months ended March 31, 2012 and April 2, 2011 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $25 million. The following table summarizes the pre-tax adjustments to AOCI for foreign exchange cash flow hedges.
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 March 31, 2012 and October 1, 2011 were $2.8 billion and $2.6 billion, respectively. During the quarters ended March 31, 2012 and April 2, 2011, the Company recognized net losses of $105 million and $91 million, respectively, in costs and expenses on these foreign exchange contracts which offset net gains of $92 million and $81 million on the related economic exposures for the three months ended March 31, 2012 and April 2, 2011, respectively. During the six months ended March 31, 2012 and April 2, 2011, the Company recognized net losses of $52 million and $64 million, respectively, in costs and expenses on these foreign exchange contracts which offset net gains of $27 million and $56 million on the related economic exposures for the six months ended March 31, 2012 and April 2, 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 March 31, 2012 nor at October 1, 2011. Risk Management – Other Derivatives Not Designated as Hedges The Company enters into certain other risk management contracts that are not designated as hedges and do not 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 March 31, 2012 and October 1, 2011 were $168 million and $184 million, respectively. For the six months ended March 31, 2012 and April 2, 2011, gains and losses on these contracts recognized in income were not material. Contingent Features The Company’s derivative financial instruments may require the Company to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. If the Company’s credit ratings were to fall below investment grade,
21
THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)
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 $75 million and $114 million on March 31, 2012 and October 1, 2011, respectively. 14. Restructuring and Impairment Charges The Company recorded $44 million of restructuring and impairment charges in the current six months related to organizational and cost structure initiatives. In the prior-year six months, the Company recorded $12 million of restructuring and impairment charges.
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations ORGANIZATION OF INFORMATION Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections: Overview Seasonality Business Segment Results Quarter Results Six-Month Results Other Financial Information Financial Condition Commitments and Contingencies Other Matters Market Risk OVERVIEW Our summary consolidated results are presented below:
Quarter Results Diluted earnings per share (EPS) increased 29% for the quarter driven by improved segment performance and a decrease in weighted average shares outstanding as well as the gain on an acquisition discussed below. Improved segment 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 programming commitments at Cable Networks and higher advertising revenues at both the Cable Networks and the ABC Television Network. Improvements also reflected higher attendance and guest spending at our domestic theme parks and resorts and an increase at Tokyo Disney Resort which was impacted by the March 2011 earthquake and tsunami in Japan in the prior-year. These increases were partially offset by lower worldwide theatrical results and higher film cost write-downs at our Studio driven by the performance of John Carter, increased operating expenses at our domestic parks and resorts and higher programming and production costs at ESPN.
23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
The Company recorded a $184 million ($116 million after tax) non-cash gain in connection with the Company’s acquisition of an incremental interest in UTV Software Communication Limited (UTV Gain) and $38 million ($24 million after tax) of restructuring and impairment charges in the current quarter. See Note 3 to the Condensed Consolidated Financial Statements for discussion of the UTV Gain. Six-Month Results Diluted EPS increased 23% for the six months driven by improved segment performance and a decrease in weighted average shares outstanding as well as the UTV Gain. Improved segment results were driven by increased Media Networks performance, higher attendance and guest spending at our domestic parks and resorts, and an increase at Tokyo Disney Resort. Media Networks results were driven by increased Affiliate Fees including a benefit from a decrease in revenue deferrals related to annual programming commitments at Cable Networks and higher advertising revenues at both the Cable Networks and the ABC Television Network. These increases were partially offset by higher film cost write-downs and lower worldwide theatrical results at our Studio driven by the performance of John Carter, increased operating expenses at our domestic parks and resorts, higher programming and production costs at ESPN and lower political advertising revenues at our local television stations. In the current six months, the Company recorded the UTV Gain and $44 million ($28 million after tax) of restructuring and impairment charges. In the prior-year six months, the Company recorded $12 million of restructuring and impairment charges and gains on the sale of Miramax and BASS totaling $75 million. Restructuring and impairment charges in the prior-year quarter included an impairment related to assets that had tax basis in excess of the book value resulting in a $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 Miramax and BASS exceeded the $75 million book gain resulting in tax expense of $107 million. The table below shows the pretax and after tax impact of the prior year items.
SEASONALITY The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter and six months ended March 31, 2012 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year. Media Networks revenues are subject to seasonal advertising patterns and changes in viewership levels. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Affiliate revenues are typically collected ratably throughout the year. Certain affiliate revenues at ESPN are deferred until annual programming commitments are met, and these commitments are typically satisfied during the second half of the Company’s fiscal year which generally results in higher revenue recognition during that period.
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods. Studio Entertainment revenues fluctuate due to the timing and performance of releases in the theatrical, home entertainment, and television markets. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods. Consumer Products revenues are influenced by seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first fiscal quarter, and by the timing and performance of theatrical releases and cable programming broadcasts. Interactive Media revenues fluctuate due to the timing and performance of video game releases which are determined by several factors, including theatrical releases and cable programming broadcasts, competition and the timing of holiday periods. Revenues from certain of our internet and mobile operations are subject to similar seasonal trends. BUSINESS SEGMENT RESULTS The Company evaluates the performance of its operating segments based on segment operating income, which is shown below along with segment revenues:
25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
The following table reconciles segment operating income to income before income taxes:
Depreciation expense is as follows:
Amortization of intangible assets is as follows:
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
Media Networks Operating results for the Media Networks segment are as follows:
Revenues The 10% increase in Affiliate Fees was driven by increases of 6% from contractual rates and 4% from a change in the provisions related to annual programming commitments in an MVSP contract at Cable Networks. Higher advertising revenues were due to increases of $99 million at Cable Networks from $751 million to $850 million and $25 million at Broadcasting from $977 million to $1,002 million. The increase at Cable Networks included a 16% increase due to higher rates driven by a shift in the timing of the Rose and Fiesta Bowls and certain NBA games, relative to our fiscal period end, at ESPN. The increase at Broadcasting reflected a 5% increase due to higher ABC Television Network advertising revenues, partially offset by a 2% decrease due to lower local television advertising revenues. The increase at the ABC Television Network was due to an increase in rates and units sold, partially offset by a decrease due to lower daytime ratings. The increase in other revenues reflected higher royalties from MVSP distribution of our programs, sales of ABC Family and Disney Channel programs and inclusion of UTV’s operations following the acquisition of UTV in the current quarter, partially offset by lower sales of ABC Studios’ productions driven by Criminal Minds: Suspect Behavior. Costs and Expenses Operating expenses include programming and production costs which increased $98 million from $1,884 million to $1,982 million. At Cable Networks, an increase in programming and production costs of $137 million was primarily due to the timing shift related to the two college bowl games and higher costs due to contractual rate increases for college basketball. At Broadcasting, programming and production costs decreased $39 million driven by the absence of The Oprah Winfrey Show at our local television stations, lower sales of ABC Studios’ productions and lower news and daytime production costs at the ABC Television Network. The increase in selling, general and administrative and other costs and expenses includes higher marketing costs at ESPN, the ABC Television Network and the international Disney Channels and the inclusion of UTV’s operations following the acquisition of UTV in the current quarter.
27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
Equity in the Income of Investees Income from equity investees was $138 million for the current quarter compared to $123 million in the prior-year quarter. The increase in income from equity investees was due to increased affiliate and advertising revenues at A&E Television Networks, partially offset by higher programming and marketing costs at Hulu. Segment Operating Income Segment operating income increased 13%, or $205 million, to $1.7 billion. The increase was primarily due to increases at ESPN, the ABC Television Network and the domestic Disney Channels. The following table provides supplemental revenue and segment operating income detail for the Media Networks segment:
Restructuring and impairment charges The Company recorded charges of $9 million and credits totaling $4 million related to Media Networks in the current and prior-year quarters, respectively, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. Parks and Resorts Operating results for the Parks and Resorts segment are as follows:
Revenues Parks and Resorts revenues increased 10%, or $269 million due to an increase of $238 million at our domestic operations and an increase of $31 million at our international operations.
28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
Revenue growth of 11% at our domestic operations reflected a 5% increase due to volume from increased attendance, hotel occupancy and passenger cruise ship days driven by a full quarter of operations from our Disney Dream cruise ship which launched in January 2011 and a 5% increase from higher average guest spending. Higher guest spending was primarily due to higher average ticket prices, daily hotel room rates and food, beverage and merchandise spending. Revenue growth of 7% at our international operations reflected a 6% increase from higher royalty revenue from Tokyo Disney Resort, and a 3% increase from higher average guest spending and an increase of 1% from higher attendance at Hong Kong Disneyland Resort, partially offset by a 4% decrease due to lower attendance and hotel occupancy at Disneyland Paris. The increase at Tokyo Disney Resort reflected the loss of income in the prior-year quarter from the March 2011 earthquake and tsunami in Japan which resulted in a temporary suspension of operations at the resort. The following table presents supplemental park and hotel statistics:
Costs and Expenses Operating expenses include operating labor which increased by $80 million from $856 million to $936 million driven by labor cost inflation and labor associated with new guest offerings including the expansion of Disney California Adventure at Disneyland Resort. Operating expenses also include cost of sales which increased $17 million from $274 million to $291 million driven by higher volumes. Operating expenses also increased due to higher costs for resort expansions and investments in systems infrastructure. Costs for resort expansions included other operating costs for the Disney Dream and Disney Fantasy, our two newest cruise ships launched in January 2011 and March 2012, respectively, and our new hotel and vacation club resort in Hawaii, Aulani, A Disney Resort & Spa. These increases were partially offset by the collection of business interruption insurance proceeds related to the prior-year earthquake and tsunami at Tokyo Disney Resort. The increase in selling, general, administrative and other costs was driven by labor and other cost inflation. Segment Operating Income Segment operating income increased 53%, or $77 million, to $222 million due to increases at our domestic parks and resorts, Tokyo Disney Resort and Hong Kong Disneyland Resort, partially offset by a decrease at Disneyland Paris.
29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
Studio Entertainment Operating results for the Studio Entertainment segment are as follows:
Revenues The decrease in theatrical distribution revenue reflected lower performance from current-year titles. Key titles in the prior year included Tangled, Tron: Legacy and Gnomeo and Juliet while the current quarter included John Carter, The Muppets and Beauty and the Beast 3D. Lower home entertainment revenue reflected a 14% decrease due to a decline in unit sales, and a 6% decrease due to lower net effective pricing. Net effective pricing is the wholesale selling price adjusted for discounts, sales incentives and returns. These decreases reflected lower performance of current quarter titles and a higher sales mix of catalog titles, which have lower average unit sales prices. Significant current quarter titles included Lady and the Tramp Platinum Release and The Muppets while the prior-year quarter included Tangled and Bambi Platinum Release. The increase in television distribution and other revenue was driven by timing of title availabilities relative to our fiscal period end and the strength of Pirates of the Caribbean: On Stranger Tides in international markets, partially offset by a decrease in domestic markets. Significant current quarter titles in domestic markets included Thor, Pirates of the Caribbean: On Stranger Tides and The Help while the prior-year quarter included Toy Story 3 and Iron Man 2. Costs and Expenses Operating expenses included an increase of $60 million in film cost amortization, from $383 million to $443 million driven by higher film cost write-downs in the current quarter. Operating expenses also increased 2% due to higher distribution expenses driven by the inclusion of UTV’s film distribution operations following the acquisition of UTV in the current quarter. The decrease in selling, general, administrative and other expenses reflected lower marketing expenses in the current quarter and higher executive contract termination costs and bad debt expense in the prior-year quarter. Lower marketing expenses were primarily due to a decrease at our home entertainment business, partially offset by higher marketing spend on the theatrical titles including John Carter in the current quarter. Segment Operating Income Segment operating income decreased $161 million to a loss of $84 million primarily due to a decrease in worldwide theatrical results and higher film cost write-downs.
30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - (continued)
Restructuring and impairment charges The Company recorded charges of $6 million and credits of $2 million related to the Studio Entertainment segment in the current and prior-year quarters, respectively, which were reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. Consumer Products Operating results for the Consumer Products segment are as follows:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
