The Walt Disney Company (NYSE: DIS) today reported
quarterly earnings for its first fiscal quarter ended
December 31, 2016. Diluted earnings per share (EPS) for the
quarter decreased 10% to $1.55 from $1.73 in the prior-year
quarter. The decrease was driven by a $0.13 per share gain in the
prior year related to the Company’s investment in A+E Television
Networks. Excluding this gain and certain other items affecting
comparability(1), EPS for the quarter decreased 5% to $1.55 from
$1.63 in the prior-year quarter.
“We’re very pleased with our financial performance in the first
quarter. Our Parks and Resorts delivered excellent results and,
coming off a record year, our Studio had three global hits
including our first billion-dollar film of fiscal 2017, Rogue One:
A Star Wars Story,” said Robert A. Iger, Chairman and Chief
Executive Officer, The Walt Disney Company. “With our proven
strategy and unparalleled collection of brands and franchises, we
are extremely confident in our ability to continue to drive
significant value over the long term.”
The following table summarizes the first quarter results for
fiscal 2017 and 2016 (in millions, except per share amounts):
Quarter Ended December 31,2016 January 2,2016
Change Revenues $ 14,784 $ 15,244 (3) % Segment operating income
(1) $ 3,956 $ 4,267 (7) % Net income (2)(3) $ 2,479 $ 2,880 (14) %
Diluted EPS (2)(3) $ 1.55 $ 1.73 (10) % EPS excluding certain items
affecting comparability (1) $ 1.55 $ 1.63 (5) % Cash provided by
operations $ 1,260 $ 2,456 (49) % Free cash flow (1) $ 220 $ 1,050
(79) %
(1)
EPS excluding certain items affecting comparability, segment
operating income and free cash flow are non-GAAP financial
measures. See the discussion on pages 7 through 9.
(2)
Reflects amounts attributable to shareholders of The Walt Disney
Company, i.e. after deduction of noncontrolling interests.
(3)
Includes an income tax benefit related to the adoption of new
accounting rules for the tax effects of employee share-based awards
(see further discussion under Income Taxes on page 5).
SEGMENT RESULTS
The following table summarizes the first quarter segment
operating results for fiscal 2017 and 2016 (in millions):
Quarter Ended December 31,2016 January 2,2016
Change Revenues: Media Networks $ 6,233 $ 6,332 (2)% Parks and
Resorts 4,555 4,281 6 % Studio Entertainment 2,520 2,721 (7)%
Consumer Products & Interactive Media 1,476 1,910
(23)% $ 14,784 $ 15,244 (3)% Segment operating
income: Media Networks $ 1,362 $ 1,412 (4)% Parks and Resorts 1,110
981 13 % Studio Entertainment 842 1,014 (17)% Consumer Products
& Interactive Media 642 860 (25)% $ 3,956
$ 4,267 (7)%
Media Networks
Media Networks revenues for the quarter decreased 2% to $6.2
billion and segment operating income decreased 4% to $1.4
billion.
The following table provides further detail of the Media
Networks results (in millions):
Quarter Ended December 31,2016 January 2,2016
Change Revenues: Cable Networks $ 4,428 $ 4,521 (2)%
Broadcasting 1,805 1,811 — % $ 6,233 $ 6,332
(2)% Segment operating income: Cable Networks $ 864 $ 975
(11)% Broadcasting 379 295 28 % Equity in the income of investees
119 142 (16)% $ 1,362 $ 1,412 (4)%
Cable Networks
Cable Networks revenues for the quarter decreased 2% to $4.4
billion and operating income decreased 11% to $0.9 billion. The
decrease in operating income was due to a decrease at ESPN.
The decrease at ESPN was due to higher programming costs and
lower advertising revenue, partially offset by affiliate revenue
growth. The programming cost increase was driven by contractual
rate increases for NBA and NFL programming, partially offset by the
shift in timing of College Football Playoff (CFP) bowl games
relative to our fiscal quarter end. Six CFP games were aired in the
first quarter of the prior year, whereas three CFP games were aired
in the current quarter. Lower advertising revenue was due to lower
impressions and rates, both of which were negatively impacted by
the shift of CFP games. Lower impressions reflected a decrease in
average viewership, partially offset by an increase in units
delivered. Affiliate revenue growth was due to contractual rate
increases, partially offset by a decline in subscribers.
Operating income at our other Cable networks was essentially
flat as a decrease in income from program sales was offset by lower
programming costs and higher affiliate fees. Affiliate revenue
growth was due to contractual rate increases, partially offset by a
decline in subscribers.
Broadcasting
Broadcasting revenues for the quarter were flat at $1.8 billion
and operating income increased 28% to $379 million. The increase in
operating income was due to affiliate revenue growth and decreased
programming cost write-downs for network programming. Affiliate
revenue growth was primarily due to contractual rate increases.
Advertising revenues were flat as higher political advertising at
our owned television stations and higher network rates were offset
by a decrease in network impressions. The decrease in impressions
was due to lower average viewership and, to a lesser extent, fewer
units delivered.
Equity in the Income of Investees
Equity in the income of investees decreased 16% to $119 million
due to lower equity income from A+E Television Networks (A+E) and
equity losses from BAMTech, which was acquired in August 2016. The
decrease at A+E was due to lower advertising revenue and higher
programming costs, partially offset by higher affiliate fees and
lower intangible amortization. The decrease also reflected the
impact from the conversion of the H2 channel to Viceland in
November 2015. Results at Hulu were comparable to the prior-year
quarter.
Parks and Resorts
Parks and Resorts revenues for the quarter increased 6% to $4.6
billion and segment operating income increased 13% to $1.1 billion.
Operating income growth for the quarter was due to increases at our
domestic and international operations. The growth in the quarter
was unfavorably impacted by Hurricane Matthew at our domestic
operations and a shift in the timing of the New Year’s holiday
relative to our fiscal periods.
The increase in operating income at our domestic operations was
primarily due to growth at our parks and resorts and cruise line.
Higher operating income at our parks and resorts was driven by
guest spending growth, partially offset by lower attendance and
occupied room nights. The increase in guest spending was due to
higher average ticket prices, food and beverage spending and
average hotel room rates. Attendance reflected the prior-year
benefit of the 60th Anniversary celebration at Disneyland Resort,
the impact in the current quarter from Hurricane Matthew at Walt
Disney World Resort and the impact of the New Year’s holiday shift.
Costs at our parks and resorts were flat, as labor and other cost
inflation and costs for new guest experiences were essentially
offset by cost efficiency initiatives. At our cruise line, growth
was due to higher average ticket prices and lower dry-dock
expenses. A portion of the dry-dock costs for the Disney Wonder
were incurred in the current quarter whereas all of the dry-dock
costs for the Disney Dream were incurred in the prior-year first
quarter.
Growth at our international operations was due to the opening of
Shanghai Disney Resort in the third quarter of the prior fiscal
year and higher results at both Disneyland Paris and Hong Kong
Disneyland Resort. Disneyland Paris benefited from a full period of
operations, whereas the park was closed for four days in the
prior-year quarter. At Hong Kong Disneyland Resort, the increase
was due to cost efficiency initiatives.
Studio Entertainment
Studio Entertainment revenues for the quarter decreased 7% to
$2.5 billion and segment operating income decreased 17% to $842
million. Lower operating income was due to decreases in home
entertainment and theatrical distribution and a lower revenue share
from the Consumer Products & Interactive Media segment,
partially offset by growth in TV/SVOD distribution.
Lower home entertainment results were primarily due to lower
unit sales driven by Star Wars Classic titles and Frozen, as well
as the timing of Disney Classic releases. Aladdin Diamond Edition
was released in the prior-year quarter, whereas the Beauty and the
Beast Signature Collection Edition was released in the fourth
quarter of fiscal 2016.
The decrease in theatrical distribution reflected the comparison
of Rogue One: A Star Wars Story in the current quarter to the
exceptional performance of Star Wars: The Force Awakens in the
prior-year quarter. This decrease was partially offset by the
success of Doctor Strange and Moana in the current quarter compared
to the performance of The Good Dinosaur in the prior-year
quarter.
The decrease in revenue share with the Consumer Products &
Interactive Media segment was due to the stronger performance of
merchandise based on Frozen and Star Wars in the prior-year
quarter.
Higher TV/SVOD distribution results were due to growth in our
pay and free television businesses including the timing of title
availabilities. Domestic pay television results also reflected an
increase from higher rates.
Consumer Products & Interactive
Media
Consumer Products & Interactive Media revenues for the
quarter decreased 23% to $1.5 billion and segment operating income
decreased 25% to $642 million. Lower operating income was due to
decreases at our merchandise licensing, games and retail
businesses.
Lower results at our merchandise licensing business were due to
higher revenue in the prior-year quarter from merchandise based on
Star Wars and Frozen and an unfavorable impact from foreign
currency translation, partially offset by higher minimum guarantee
shortfall recognition.
The decrease at our games business was due to a decrease in
licensing revenue from Star Wars: Battlefront, partially offset by
a favorable impact from the discontinuation of our Infinity console
game business in the second quarter of the prior fiscal year and
higher minimum guarantee shortfall recognition. Star Wars:
Battlefront was released in the prior-year quarter, whereas there
was no comparable title released in the current quarter.
Lower operating income at our retail business was due to lower
comparable store sales and online revenue, reflecting higher sales
of Frozen and Star Wars merchandise in the prior-year quarter. This
decrease was partially offset by sales of Moana merchandise in the
current quarter.
OTHER FINANCIAL INFORMATION
Interest expense, net
Interest expense, net was as follows (in millions):
Quarter Ended December 31,2016 January 2,2016
Change Interest expense $ (121 ) $ (66 ) (83) % Interest and
investment income 22 42 (48) % Interest expense, net
$ (99 ) $ (24 ) >(100) %
The increase in interest expense for the quarter was due to
higher average debt balances, higher average interest rates and
lower capitalized interest. Capitalized interest was lower due to
the completion of the majority of construction at Shanghai Disney
Resort in the prior-year third quarter.
The decrease in interest and investment income for the quarter
was due to gains on sales of investments in the prior-year
quarter.
Income Taxes
The effective income tax rate was as follows:
Quarter Ended December 31,2016 January 2,2016
Change Effective income tax rate 33.2 % 33.2 % — ppt
The effective income tax rate for the quarter was comparable to
the prior-year quarter as a favorable impact of an accounting
change ($38 million) was offset by an adverse impact of a tax law
change ($34 million). In the current quarter, the Company adopted
new accounting guidance, which requires that excess tax benefits or
tax deficiencies on employee share-based awards be included in
“Income taxes” in the Condensed Consolidated Statement of Income.
An excess tax benefit arises when the value of employee share-based
awards on the exercise or vesting date is higher than the fair
value on the grant date. A tax deficiency arises when the value is
lower than the fair value. These amounts were previously recorded
in “Common stock” in the Condensed Consolidated Balance Sheet.
Noncontrolling Interests
Quarter Ended (in millions) December 31,2016
January 2,2016 Change Net income attributable to noncontrolling
interests $ 9 $ 30 70 %
The decrease in net income attributable to noncontrolling
interests for the quarter was primarily due to lower net income 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):
Quarter Ended December 31,2016 January 2,2016
Change Cash provided by operations $ 1,260 $ 2,456 $ (1,196 )
Investments in parks, resorts and other property (1,040 ) (1,406 )
366 Free cash flow (1) $ 220 $ 1,050 $ (830 )
(1)
Free cash flow is not a financial measure defined by GAAP.
See the discussion on pages 7 through 9.
Cash provided by operations decreased by $1.2 billion from $2.5
billion in the prior-year quarter to $1.3 billion in the current
quarter. The decrease was due to higher pension and postretirement
medical plan contributions in the current period.
Capital Expenditures and Depreciation
Expense
Investments in parks, resorts and other property were as follows
(in millions):
Quarter Ended December 31,2016 January 2,2016 Media
Networks Cable Networks $ 46 $ 27 Broadcasting 22 30
Total Media Networks
68 57 Parks and Resorts Domestic 609 627 International 291
607 Total Parks and Resorts 900 1,234 Studio
Entertainment 27 27 Consumer Products & Interactive Media 6 13
Corporate 39 75 Total investments in parks, resorts and
other property $ 1,040 $ 1,406
Capital expenditures decreased by $366 million to $1.0 billion
due to lower spending at Shanghai Disney Resort.
Depreciation expense was as follows (in millions):
Quarter Ended December 31,2016 January 2,2016 Media
Networks Cable Networks $ 36 $ 37 Broadcasting 21 21
Total Media Networks
57 58 Parks and Resorts Domestic 328 318 International 156
84
Total Parks and Resorts
484 402 Studio Entertainment 12 13 Consumer Products &
Interactive Media 15 14 Corporate 68 63 Total depreciation
expense $ 636 $ 550
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 items 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 for the quarter.
(in millions except EPS) Pre-Tax Income/
Loss
Tax Benefit/
Expense (1)
After-Tax Income/
Loss (2)
EPS (3) Change vs. prior year period Quarter Ended
December 31, 2016: As reported $ 3,725 $ (1,237 ) $ 2,488 $ 1.55
Quarter Ended January 2, 2016: As reported $ 4,358 $ (1,448
) $ 2,910 $ 1.73 (10 )% Exclude(4): Vice Gain (332 ) 122 (210 )
(0.13 ) Restructuring and impairment charges 81 (30 ) 51
0.03 Excluding certain items affecting
comparability(3) $ 4,107 $ (1,356 ) $ 2,751 $ 1.63
(5 )%
(1)
Tax benefit/expense adjustments are determined using the tax
rate applicable to the individual item affecting comparability.
(2)
Before noncontrolling interest share.
(3)
Net of noncontrolling interest share, where applicable. Total may
not equal the sum of the column due to rounding.
(4)
Items affecting comparability during the quarter ended January 2,
2016 included the Company’s share of a net gain recognized by A+E
Television Networks in connection with their acquisition of an
interest in Vice Group Holding, Inc. (Vice Gain) and restructuring
and impairment charges driven by an investment impairment ($54
million pre-tax) and contract termination and severance costs ($27
million pre-tax).
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
obligations, 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 December 31,2016 January 2,2016 Segment
operating income $ 3,956 $ 4,267 Corporate and unallocated shared
expenses (132 ) (136 ) Restructuring and impairment charges — (81 )
Interest expense, net (99 ) (24 ) Vice Gain — 332
Income before income taxes 3,725 4,358 Income taxes (1,237 ) (1,448
) Net income $ 2,488 $ 2,910
CONFERENCE CALL INFORMATION
In conjunction with this release, The Walt Disney Company will
host a conference call today, February 7, 2017, at 4:30 PM
EST/1:30 PM PST via a live Webcast. To access the Webcast go to
www.disney.com/investors. The
discussion will be archived.
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 developments may affect entertainment, 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;
- demand for our products and
services;
- expenses of providing medical and
pension benefits; 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 October 1, 2016 under
Item 1A, “Risk Factors,” and subsequent reports.
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per
share data)
Quarter Ended December 31,2016 January 2,2016
Revenues: Services $ 12,406 $ 12,622 Products 2,378 2,622
Total revenues 14,784 15,244 Costs and expenses: Cost of
services (exclusive of depreciation and amortization) (7,020 )
(7,056 ) Cost of products (exclusive of depreciation and
amortization) (1,386 ) (1,567 ) Selling, general, administrative
and other (1,985 ) (2,025 ) Depreciation and amortization (687 )
(607 ) Total costs and expenses (11,078 ) (11,255 ) Restructuring
and impairment charges — (81 ) Interest expense, net (99 ) (24 )
Equity in the income of investees 118 474 Income
before income taxes 3,725 4,358 Income taxes (1,237 ) (1,448 ) Net
income 2,488 2,910 Less: Net income attributable to noncontrolling
interests (9 ) (30 ) Net income attributable to The Walt Disney
Company (Disney) $ 2,479 $ 2,880 Earnings per
share attributable to Disney: Diluted $ 1.55 $ 1.73
Basic $ 1.56 $ 1.74 Weighted average
number of common and common equivalent shares outstanding: Diluted
1,603 1,668 Basic 1,592 1,654
Dividends declared per share $ 0.78 $ 0.71
THE WALT DISNEY COMPANY CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited; in millions, except
per share data) December 31,2016 October 1,2016
ASSETS Current assets Cash and cash equivalents $ 3,736 $ 4,610
Receivables 9,878 9,065 Inventories 1,299 1,390 Television costs
and advances 821 1,208 Other current assets 931 693
Total current assets 16,665 16,966 Film and television costs 6,572
6,339 Investments 4,220 4,280 Parks, resorts and other property
Attractions, buildings and equipment 49,912 50,270 Accumulated
depreciation (26,996 ) (26,849 ) 22,916 23,421 Projects in progress
2,902 2,684 Land 1,236 1,244 27,054 27,349 Intangible
assets, net 6,892 6,949 Goodwill 27,793 27,810 Other assets 2,380
2,340 Total assets $ 91,576 $ 92,033
LIABILITIES AND EQUITY Current liabilities Accounts payable
and other accrued liabilities $ 9,979 $ 9,130 Current portion of
borrowings 5,698 3,687 Unearned royalties and other advances 3,640
4,025 Total current liabilities 19,317 16,842
Borrowings 14,792 16,483 Deferred income taxes 3,888 3,679 Other
long-term liabilities 6,402 7,706 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 – 2.9 billion shares
35,906 35,859 Retained earnings 67,327 66,088 Accumulated other
comprehensive loss (3,855 ) (3,979 ) 99,378 97,968 Treasury stock,
at cost, 1.3 billion shares (56,168 ) (54,703 ) Total Disney
Shareholders’ equity 43,210 43,265 Noncontrolling interests 3,967
4,058 Total equity 47,177 47,323 Total
liabilities and equity $ 91,576 $ 92,033
THE WALT DISNEY COMPANY CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited; in millions)
Quarter Ended December 31,2016 January 2,2016 OPERATING
ACTIVITIES Net income $ 2,488 $ 2,910 Depreciation and amortization
687 607 Deferred income taxes (76 ) 551 Equity in the income of
investees (118 ) (474 ) Cash distributions received from equity
investees 203 206 Net change in film and television costs and
advances 440 705 Equity-based compensation 97 106 Other 187 211
Changes in operating assets and liabilities: Receivables (1,160 )
(2,358 ) Inventories 102 134 Other assets 126 91 Accounts payable
and other accrued liabilities (2,763 ) (891 ) Income taxes 1,047
658 Cash provided by operations 1,260 2,456
INVESTING ACTIVITIES Investments in parks, resorts
and other property (1,040 ) (1,406 ) Acquisitions — (400 ) Other 5
8 Cash used in investing activities (1,035 ) (1,798 )
FINANCING ACTIVITIES Commercial paper borrowings, net 732
1,907 Borrowings 42 382 Reduction of borrowings (194 ) (564 )
Repurchases of common stock (1,465 ) (2,352 ) Proceeds from
exercise of stock options 65 52 Other (167 ) 13 Cash used in
financing activities (987 ) (562 ) Impact of exchange rates
on cash and cash equivalents (112 ) (64 ) Change in cash and
cash equivalents (874 ) 32 Cash and cash equivalents, beginning of
period 4,610 4,269 Cash and cash equivalents, end of
period $ 3,736 $ 4,301
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The Walt Disney CompanyZenia MuchaCorporate
Communications818-560-5300orLowell SingerInvestor
Relations818-560-6601
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