The Walt Disney Company Reports Third Quarter and Nine Month Earnings for Fiscal 2014

  The Walt Disney Company Reports Third Quarter and Nine Month Earnings for   Fiscal 2014  Business Wire  BURBANK, Calif. -- August 5, 2014  The Walt Disney Company (NYSE: DIS) today reported third quarter earnings, which are a record for any quarter. Diluted earnings per share (EPS) for the third quarter increased 27% to $1.28 from $1.01 in the prior-year quarter. Excluding certain items affecting comparability^(1), EPS for the quarter increased 24% to $1.28 from $1.03 in the prior-year quarter. Diluted EPS for the nine months ended June28, 2014 increased 30% to $3.40 compared to $2.61 in the prior-year period. Excluding certain items affecting comparability, EPS for the nine months increased 31% to $3.43.  “Our strategy of building strong brands and franchises continues to create great value across our company,” said Robert A. Iger, chairman and CEO of The Walt Disney Company. “This quarter we delivered the highest EPS in the company’s history, and we’ve now generated greater EPS in the first three quarters of FY 2014 than we have in any previous full fiscal year. We’re extremely pleased with these results and we are also thrilled with the spectacular performance of Guardians of the Galaxy, which holds great promise as a new franchise for our company and once again reinforces the tremendous value of Marvel.”  The following table summarizes the third quarter and nine-month results for fiscal 2014 and 2013 (in millions, except per share amounts):               Quarter Ended                    Nine Months Ended               June 28,   June 29,   Change    June 28,   June 29,   Change               2014        2013                  2014        2013 Revenues      $ 12,466    $ 11,578    8   %     $ 36,424    $ 33,473    9    % Segment operating     $ 3,857     $ 3,351     15  %     $ 10,230    $ 8,240     24   % income ^(2) Net income    $ 2,245     $ 1,847     22  %     $ 6,002     $ 4,742     27   % ^(3) Diluted EPS   $ 1.28      $ 1.01      27  %     $ 3.40      $ 2.61      30   % ^(3) Cash                                      )                                  ) provided by   $ 2,936     $ 3,413     (14 %     $ 6,675     $ 6,717     (1   % operations Free cash     $ 2,047     $ 2,723     (25 )     $ 4,427     $ 4,908     (10  ) flow ^(2)                                 %                                  %                                                                                ^(1) See reconciliation of reported EPS to EPS excluding certain items affecting comparability on page 8. ^(2) Aggregate segment operating income and free cash flow are non-GAAP financial measures. See the discussion of non-GAAP financial measures that follows. ^(3) Reflects amounts attributable to shareholders of The Walt Disney Company, i.e. after deduction of noncontrolling interests.  SEGMENT RESULTS  The following table summarizes the third quarter and nine-month segment operating results for fiscal 2014 and 2013 (in millions):                 Quarter Ended                    Nine Months Ended                        June 28,    June 29,     Change   June 28,    June 29,     Change                 2014         2013                  2014         2013 Revenues: Media           $ 5,511      $ 5,352      3   %    $ 15,935     $ 15,410     3   % Networks Parks and       3,980        3,678        8   %    11,139       10,371       7   % Resorts Studio          1,807        1,590        14  %    5,500        4,473        23  % Entertainment Consumer        902          775          16  %    2,913        2,551        14  % Products Interactive     266         183         45  %    937         668         40  %                 $ 12,466    $ 11,578    8   %    $ 36,424    $ 33,473    9   %                                                                                   Segment operating income (loss): Media           $ 2,296      $ 2,300      —   %    $ 5,884      $ 5,376      9   % Networks Parks and       848          689          23  %    1,976        1,649        20  % Resorts Studio          411          201        >100 %     1,295        553          >100 % Entertainment Consumer        273          219          25  %    977          765          28  % Products Interactive     29          (58      )   nm       98          (103     )   nm                 $ 3,857     $ 3,351     15  %    $ 10,230    $ 8,240     24  %                                                                                    Media Networks  Media Networks revenues for the quarter increased 3% to $5.5 billion and segment operating income was relatively flat at $2.3 billion. The following table provides further detail of the Media Networks results (in millions):                Quarter Ended                  Nine Months Ended                       June 28,   June 29,    Change   June 28,    June 29,     Change                2014        2013                 2014         2013 Revenues:                 Cable          $ 3,942     $ 3,884     1   %    $ 11,334     $ 10,880     4   % Networks Broadcasting   1,569      1,468      7   %    4,601       4,530       2   %                $ 5,511    $ 5,352    3   %    $ 15,935    $ 15,410    3   % Segment operating income: Cable          $ 1,942     $ 2,087     (7  )    $ 5,193      $ 4,763      9   % Networks                                   % Broadcasting   354        213        66  %    691         613         13  %                $ 2,296    $ 2,300    —   %    $ 5,884     $ 5,376     9   %                                                                                 Cable Networks  Operating income at Cable Networks decreased 7% to $1.9 billion for the quarter due to a decrease at ESPN, partially offset by an increase at ABC Family. The decrease at ESPN was due to higher programming and production costs, decreased recognition of previously deferred revenue and the absence of ESPN UK, which was sold in the fourth quarter of the prior year. These decreases were partially offset by affiliate fee contractual rate increases and higher advertising revenue. Programming and production costs increases were driven by a contractual rate increase for Major League Baseball and the addition of FIFA World Cup soccer, partially offset by the absence of X Games events in the current quarter. ESPN recognized $98 million less of previously deferred revenue during the quarter as a result of changes in contractual provisions related to annual programming commitments. ESPN advertising revenue increased due to higher rates and more units sold. Higher rates reflected the benefit of FIFA World Cup soccer in the current quarter, partially offset by two less NBA finals games this year. The increase at ABC Family was driven by lower programming costs, reflecting fewer hours of original scripted programming due to the timing of premieres, and higher affiliate fees due to rate increases.  Broadcasting  Operating income at Broadcasting increased 66% to $354 million for the quarter due to an increase in affiliate fees and higher income from program sales. The increase in affiliate revenues was due to contractual rate increases and new contractual provisions. Increased operating income from program sales was driven by a lower average expense amortization rate and higher revenues led by Marvel's Agents of S.H.I.E.L.D.  Parks and Resorts  Parks and Resorts revenues for the quarter increased 8% to $4.0 billion and segment operating income increased 23% to $848 million. Operating income growth for the quarter was driven by an increase at our domestic operations, partially offset by a decrease at Disneyland Paris. Parks and Resorts results include a favorable impact due to a shift in the timing of the Easter holiday relative to our fiscal periods.  Higher operating income at our domestic operations was due to increased guest spending and higher attendance, partially offset by higher costs. Guest spending growth reflected higher average ticket prices for admissions at our theme parks and for sailings at our cruise line and increased food, beverage and merchandise spending. Higher costs were driven by MyMagic+ and labor and other cost inflation, partially offset by lower pension and postretirement medical costs.  The decrease in operating income at Disneyland Paris was due to higher operating costs, decreased attendance and occupied room nights and lower special event revenue, partially offset by higher average ticket prices.  Studio Entertainment  Studio Entertainment revenues for the quarter increased 14% to $1.8 billion and segment operating income increased to $411 million from $201 million. Higher operating income was due to increases in worldwide home entertainment and international theatrical distribution, partially offset by a decrease in domestic theatrical distribution.  The increase in worldwide home entertainment was driven by lower per unit costs, higher net effective pricing and unit sales growth reflecting the success of Frozen.  Higher international theatrical distribution results reflected the performance of Frozen, Captain America 2: The Winter Soldier and Maleficent in the current quarter compared to Iron Man 3, Wreck-It-Ralph, Oz The Great and Powerful and Monsters University in the prior-year quarter.  Lower results in domestic theatrical distribution were due to the success of Iron Man 3 and Monsters University in the prior-year quarter compared to Captain America 2: The Winter Soldier, Maleficent and Million Dollar Arm in the current quarter.  Consumer Products  Consumer Products revenues for the quarter increased 16% to $902 million and segment operating income increased 25% to $273 million. Higher operating income was due to increases at our Retail and Merchandise Licensing businesses.  At our Retail business, higher operating income for the quarter was driven by comparable store sales growth in all of our key markets.  The increase in operating income at Merchandise Licensing was due to the performance of merchandise based on Frozen, Disney Channel properties, Spider-Man and Planes partially offset by lower Monsters University revenue. Additionally, Merchandise Licensing results benefited from lower acquisition accounting impacts, which reduced revenue recognition in the prior-year quarter. These increases were partially offset by higher third-party royalties.  Interactive  Interactive revenues for the quarter increased 45% to $266 million and segment operating results improved from a loss of $58 million to income of $29 million. Improved results were due to strong game sales growth, lower product development costs and higher licensing fees from our mobile phone business in Japan. The increase in game sales was driven by Disney Infinity, which was released in the fourth quarter of the prior year, and the success of the Tsum Tsum and Frozen Free Fall mobile games. The decrease in product development costs was due to fewer titles in development and the benefit of restructuring activities.  OTHER FINANCIAL INFORMATION  Corporate and Unallocated Shared Expenses  Corporate and unallocated shared expenses increased $22 million to $137 million primarily due to higher incentive compensation costs, the timing of allocations to operating segments and higher charitable contributions.  Interest Income/(Expense), net  Interest income/(expense), net was as follows (in millions):                                  Quarter Ended                                         June 28,  June 29,   Change                                  2014       2013 Interest expense                 $  (74 )   $  (93 )   20  % Interest and investment income   24        10        >100 % Interest income/(expense), net   $  (50 )   $  (83 )   40  %                                                              The decrease in interest expense for the quarter was primarily due to lower effective interest rates, partially offset by higher average debt balances. The increase in interest and investment income for the quarter was primarily due to gains on sales of investments.  Income Taxes  The effective income tax rate was as follows:                             Quarter Ended                                    June 28,  June 29,   Change                             2014       2013 Effective Income Tax Rate   34.1  %    34.2  %    0.1  ppt                                                           Noncontrolling Interests                                                   Quarter Ended                                                          June 28,  June 29,   Change                                                   2014       2013 Net income attributable to noncontrolling         $  174     $  187     7   % interests                                                                               The decrease in net income attributable to noncontrolling interests for the quarter was driven by a decrease in operating results at ESPN.  Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes.  Cash Flow  Cash provided by operations and free cash flow were as follows (in millions):                                               Nine Months Ended                                                    June 28,   June 29,    Change                                               2014        2013 Cash provided by operations                   $ 6,675     $ 6,717     $ (42  ) Investments in parks, resorts and other       (2,248  )   (1,809  )   (439   ) property Free cash flow ^(1)                           $ 4,427    $ 4,908    $ (481 )                                                                                ^(1) Free cash flow is not a financial measure defined by GAAP. See the discussion of non-GAAP financial measures that follows.  Cash provided by operations for the first nine months of fiscal 2014 was comparable to the first nine months of fiscal 2013 at $6.7 billion. The benefit from higher segment operating results was offset by higher television programming and production spending, increased income tax payments and a larger build in receivables at Studio Entertainment and Media Networks. The increase in receivables at Studio Entertainment was driven by higher revenues due to Frozen while the increase at Media Networks was due to the timing of collections.  Capital Expenditures and Depreciation Expense  Investments in parks, resorts and other property were as follows (in millions):                                                          Nine Months Ended                                                          June 28,   June 29,                                                          2014        2013 Media Networks Cable Networks                                           $ 101       $  111 Broadcasting                                             52         43 Total Media Networks                                     153        154 Parks and Resorts Domestic                                                 809         752 International                                            1,056      623 Total Parks and Resorts                                  1,865      1,375 Studio Entertainment                                     44          41 Consumer Products                                        23          27 Interactive                                              3           11 Corporate                                                160        201 Total investments in parks, resorts and other property   $ 2,248    $  1,809                                                                           Capital expenditures increased from $1.8 billion to $2.2 billion due to higher construction spending for the Shanghai Disney Resort.  Depreciation expense was as follows (in millions):                              Nine Months Ended                              June 28,   June 29,                              2014        2013 Media Networks Cable Networks               $ 101       $  105 Broadcasting                 70         74 Total Media Networks         171        179 Parks and Resorts Domestic                     832         781 International                259        242 Total Parks and Resorts      1,091      1,023 Studio Entertainment         37          39 Consumer Products            47          43 Interactive                  7           13 Corporate                    177        161 Total depreciation expense   $ 1,530    $  1,458                                               Non-GAAP Financial Measures  This earnings release presents EPS excluding the impact of certain items affecting comparability, free cash flow and aggregate segment operating income, all of which are important financial measures for the Company, but are not financial measures defined by GAAP.  These measures should be reviewed in conjunction with the relevant GAAP financial measures and are not presented as alternative measures of EPS, cash flow or net income as determined in accordance with GAAP. EPS excluding certain items affecting comparability, free cash flow and aggregate segment operating income as we have calculated them may not be comparable to similarly titled measures reported by other companies.  EPS excluding certain items affecting comparability – The Company uses EPS excluding certain items to evaluate the performance of the Company’s operations exclusive of certain items affecting comparability of results from period to period. The Company believes that information about EPS exclusive of these impacts is useful to investors, particularly where the impact of the excluded items is significant in relation to reported earnings, because the measure allows for comparability between periods of the operating performance of the Company’s business and allows investors to evaluate the impact of these items separately from the impact of the operations of the business.  The following table reconciles reported EPS to EPS excluding certain items affecting comparability:                     Quarter Ended                 Nine Months Ended                        June 28,  June 29,   Change  June 28,  June 29,   Change                     2014       2013                2014       2013 Diluted EPS as      $ 1.28     $ 1.01     27  %    $ 3.40     $ 2.61     30  % reported Exclude: Restructuring and impairment          —          0.02       nm       0.03       0.04       (25 )% charges ^(1) Favorable tax adjustments related to          —          —          nm       —          (0.06  )   nm pre-tax earnings of prior years Tax benefit from prior-year foreign earnings indefinitely        —          —          nm       —          (0.04  )   nm reinvested outside the United States ^(2) Hulu Equity Redemption charge   —          —          nm       —          0.02       nm ^(3) Other income/(expense),            —         nm       0.01      0.04      (75  )% net ^(4) Diluted EPS excluding certain   $ 1.28    $ 1.03    24  %    $ 3.43    $ 2.62    31   % items affecting comparability^(5)                                                                                 ^(1) Charges for the current quarter and nine-month period totaled $0 million and $67 million (pre-tax), respectively, driven by severance costs. Charges for the prior-year quarter and nine-month period totaled $60 million and $121 million (pre-tax), respectively, driven by severance costs. ^(2) The prior-year nine-month period includes a tax benefit due to an increase in prior-year earnings from foreign operations indefinitely reinvested outside the United States and subject to tax rates lower than the federal statutory income tax rate ($64 million). ^(3) Our share of expense associated with an equity redemption at Hulu LLC ($55 million pre-tax). ^(4) Significant items in the current nine-month period include a loss from Venezuelan foreign currency translation ($143 million pre-tax and before noncontrolling interest), a gain on the sale of property ($77 million pre-tax) and income related to a portion of a settlement of an affiliate contract dispute ($29 million pre-tax). Significant items in the prior-year nine-month period include the Celador litigation charge ($321 million pre-tax) and a gain on the sale of our interest in ESPN STAR Sports ($219 million pre-tax and before noncontrolling interest). ^(5) May not equal the sum of the rows due to rounding.  Free cash flow – The Company uses free cash flow (cash provided by operations less investments in parks, resorts and other property), among other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures. Management believes that information about free cash flow provides investors with an important perspective on the cash available to service debt, make strategic acquisitions and investments and pay dividends or repurchase shares.  Aggregate segment operating income – The Company evaluates the performance of its operating segments based on segment operating income, and management uses aggregate segment operating income as a measure of the performance of operating businesses separate from non-operating factors. The Company believes that information about aggregate segment operating income assists investors by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect net income, thus providing separate insight into both operations and the other factors that affect reported results.  A reconciliation of segment operating income to net income is as follows (in millions):                                 Quarter Ended          Nine Months Ended                                 June 28,   June 29,    June 28,    June 29,                                 2014        2013        2014         2013 Segment operating income        $ 3,857     $ 3,351     $ 10,230     $ 8,240 Corporate and unallocated       (137    )   (115    )   (408     )   (367    ) shared expenses Restructuring and impairment    —           (60     )   (67      )   (121    ) charges Other income/(expense), net     —           —           (31      )   (92     ) Interest income/(expense),      (50     )   (83     )   61           (209    ) net Hulu Equity Redemption charge   —          —          —           (55     ) Income before income taxes      3,670       3,093       9,785        7,396 Income taxes                    (1,251  )   (1,059  )   (3,406   )   (2,303  ) Net income                      $ 2,419    $ 2,034    $ 6,379     $ 5,093                                                                                 CONFERENCE CALL INFORMATION  In conjunction with this release, The Walt Disney Company will host a conference call today, August5, 2014, at 5:00 PM EST/2:00 PM PST via a live Webcast. To access the Webcast go to www.disney.com/investors. The discussion will be available via replay through August 19, 2014 at 7:00 PM EDT/4:00 PM PDT.  FORWARD-LOOKING STATEMENTS  Management believes certain statements in this earnings release may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Management does not undertake any obligation to update these statements.  Actual results may differ materially from those expressed or implied.Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company’s control, including:    *changes in domestic and global economic conditions, competitive conditions     and consumer preferences;   *adverse weather conditions or natural disasters;   *health concerns;   *international, political, or military developments; and   *technological developments.  Such developmentsmay affect travel and leisure businesses generally and may, among other things, affect:    *the performance of the Company’s theatrical and home entertainment     releases;   *the advertising market for broadcast and cable television programming;   *expenses of providing medical and pension benefits;   *demand for our products; and   *performance of some or all company businesses either directly or through     their impact on those who distribute our products.  Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year ended September28, 2013 under Item1A, “Risk Factors,” and subsequent reports.  THE WALT DISNEY COMPANY  CONDENSED CONSOLIDATED STATEMENTS OF INCOME  (unaudited; in millions, except per share data)                                                                                   Quarter Ended             Nine Months Ended                              June 28,    June 29,     June 28,    June 29,                              2014         2013         2014         2013 Revenues                     $ 12,466     $ 11,578     $ 36,424     $ 33,473 Costs and expenses           (8,968   )   (8,574   )   (27,280  )   (26,182  ) Restructuring and            —            (60      )   (67      )   (121     ) impairment charges Other income/(expense),      —            —            (31      )   (92      ) net Interest income/(expense),   (50      )   (83      )   61           (209     ) net Equity in the income of      222         232         678         527       investees Income before income taxes   3,670        3,093        9,785        7,396 Income taxes                 (1,251   )   (1,059   )   (3,406   )   (2,303   ) Net income                   2,419        2,034        6,379        5,093 Less: Net income attributable to              (174     )   (187     )   (377     )   (351     ) noncontrolling interests Net income attributable to The Walt Disney Company      $ 2,245     $ 1,847     $ 6,002     $ 4,742   (Disney)                                                                               Earnings per share attributable to Disney: Diluted                      $ 1.28      $ 1.01      $ 3.40      $ 2.61    Basic                        $ 1.30      $ 1.02      $ 3.43      $ 2.64                                                                                  Weighted average number of common and common equivalent shares outstanding: Diluted                      1,748       1,821       1,767       1,816     Basic                        1,732       1,802       1,748       1,794                                                                                   Dividends declared per       $ —         $ —         $ 0.86      $ 0.75    share                                                                                THE WALT DISNEY COMPANY  CONDENSED CONSOLIDATED BALANCE SHEETS  (unaudited; in millions, except per share data)                                                                                                                    June 28,     September 28,                                                     2014         2013 ASSETS Current assets Cash and cash equivalents                           $ 4,090      $  3,931 Receivables                                         7,543        6,967 Inventories                                         1,425        1,487 Television costs and advances                       1,095        634 Deferred income taxes                               480          485 Other current assets                                572         605         Total current assets                                15,205       14,109 Film and television costs                           5,025        4,783 Investments                                         2,858        2,849 Parks, resorts and other property Attractions, buildings and equipment                41,934       41,192 Accumulated depreciation                            (23,615  )   (22,459    )                                                     18,319       18,733 Projects in progress                                3,441        2,476 Land                                                1,253       1,171                                                           23,013       22,380 Intangible assets, net                              7,268        7,370 Goodwill                                            27,924       27,324 Other assets                                        2,430       2,426       Total assets                                        $ 83,723    $  81,241                                                                                LIABILITIES AND EQUITY Current liabilities Accounts payable and other accrued liabilities      $ 6,379      $  6,803 Current portion of borrowings                       3,216        1,512 Unearned royalties and other advances               3,756       3,389       Total current liabilities                           13,351       11,704                                                                              Borrowings                                          12,920       12,776 Deferred income taxes                               4,360        4,050 Other long-term liabilities                         4,480        4,561 Commitments and contingencies 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       34,123       33,440 billion shares Retained earnings                                   52,235       47,758 Accumulated other comprehensive loss                (1,169   )   (1,187     )                                                     85,189       80,011 Treasury stock, at cost, 1.1 billion shares at June 28, 2014 and                                   (39,669  )   (34,582    ) 1.0 billion shares at September 28, 2013 Total Disney Shareholders' equity                   45,520       45,429 Noncontrolling interests                            3,092       2,721       Total equity                                        48,612      48,150      Total liabilities and equity                        $ 83,723    $  81,241                                                                                 THE WALT DISNEY COMPANY  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited; in millions)                                                                                                                Nine Months Ended                                                         June 28,   June 29,                                                         2014        2013 OPERATING ACTIVITIES Net income                                              $ 6,379     $ 5,093 Depreciation and amortization                           1,698       1,633 Gains on sales of investments and dispositions          (285    )   (245    ) Deferred income taxes                                   304         163 Equity in the income of investees                       (678    )   (527    ) Cash distributions received from equity investees       538         526 Net change in film and television costs and advances    (993    )   (357    ) Equity-based compensation                               308         305 Other                                                   33          249 Changes in operating assets and liabilities: Receivables                                             (543    )   (3      ) Inventories                                             61          78 Other assets                                            (73     )   (3      ) Accounts payable and other accrued liabilities          (288    )   (328    ) Income taxes                                            214        133      Cash provided by operations                             6,675      6,717                                                                                 INVESTING ACTIVITIES Investments in parks, resorts and other property        (2,248  )   (1,809  ) Sales of investments/proceeds from dispositions         382         367 Acquisitions                                            (402    )   (2,310  ) Other                                                   (24     )   90       Cash used in investing activities                       (2,292  )   (3,662  )                                                                              FINANCING ACTIVITIES Commercial paper borrowings/(repayments), net           1,253       (2,000  ) Borrowings                                              2,180       3,900 Reduction of borrowings                                 (1,549  )   (817    ) Dividends                                               (1,508  )   (1,324  ) Repurchases of common stock                             (5,087  )   (2,694  ) Proceeds from exercise of stock options                 348         518 Other                                                   273        (19     ) Cash used in financing activities                       (4,090  )   (2,436  )                                                                              Impact of exchange rates on cash and cash equivalents   (134    )   (74     )                                                                              Increase in cash and cash equivalents                   159         545 Cash and cash equivalents, beginning of period          3,931      3,387    Cash and cash equivalents, end of period                $ 4,090    $ 3,932                                                                                Contact:  The Walt Disney Company Zenia Mucha Corporate Communications 818-560-5300 or Lowell Singer Investor Relations 818-560-6601  
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