The Walt Disney Co. Reported Earnings For The Quarter and Six Months Ended March 31, 2001.
The Walt Disney Co. Reports Higher Earnings Before Restructuring and Impairment Charges for the Quarter and Six Months Ended March 31, 2001
The Walt Disney Co. today reported earnings for the quarter and six months ended March 31, 2001.
Pro forma revenues for the quarter decreased 4% to $6.0 billion, while segment operating income increased 14% to $1.0 billion. Excluding the restructuring and impairment charges discussed below, net income and earnings per share for the quarter increased 33% and 36% to $391 million and $0.19, respectively.
For the six months, pro forma revenues increased 2% to $13.5 billion and segment operating income increased 15% to $2.3 billion. Excluding restructuring and impairment charges and the cumulative effect of accounting changes, net income increased 31% to $908 million and earnings per share increased 30% to $0.43.
"We are pleased with our company's strong performance, especially given the recent softness of the American economy," said Michael D. Eisner, chairman and chief executive officer of The Walt Disney Co. "We are taking appropriate action to remain on our growth track while we weather the current market conditions and to ensure the long-term growth and strength of the company.
"Accordingly, we have revamped our Internet strategy to focus on our valuable branded sites and accelerate our path to profitability in this business; we opened a spectacular new theme park, Disney's California Adventure; and we announced the scaling back of our workforce.
"So, as the American and international economies continue to adjust throughout the rest of the year, we will continue to strive to be prudent managers while also supplying an ongoing stream of promising new entertainment product, such as the phenomenally successful Dimension Films release, 'Spy Kids,' and upcoming projects like 'Pearl Harbor,' 'Atlantis,' Disney/Pixar's 'Monsters, Inc.,' the Tokyo DisneySea theme park and '100 Years of Magic' at Walt Disney World commemorating the 100th anniversary of Walt Disney's birth.
"Of course, economic downturns are never good news, but historically, our company has always emerged from them stronger than ever. With this in mind, we remain confident in meeting or exceeding our fiscal goals for this year and about the long-term prospects for The Walt Disney Company."
Basis of Presentation
The company acquired Infoseek, created the Internet Group and disposed of Fairchild Publications in November 1999. In January 2001, the company announced the closure of the GO.com portal business and the conversion of Internet Group common stock into Disney common stock.
To enhance comparability, the company has presented operating results on a pro forma basis, which assumes these transactions occurred at the beginning of fiscal 2000, excluding the one-time impacts of those events. Additionally, prior-year pro forma operating results for the Studio Entertainment segment have been restated to reflect the impact of the Film Accounting change discussed below.
The company believes that pro forma results provide additional information useful in analyzing underlying business results. However, pro forma results are not necessarily indicative of the combined results that would have occurred had these events actually occurred at the beginning of fiscal 2000, nor are they necessarily indicative of future results.
On an as-reported basis, results for the quarter and six months include restructuring and impairment charges totaling $1.0 billion and $1.2 billion, respectively. Included in each of these amounts is $862 million associated with the closure of GO.com. On a pro forma basis, restructuring and impairment charges exclude the impact of the GO.com closure and, as a result, amount to $134 million and $328 million, for the quarter and six-month periods, respectively. See Table C below for details of these charges. In addition, as-reported results for the prior-year six months include a $243 million pre-tax gain on the sale of Fairchild Publications.
On an as-reported basis, revenues for the quarter and six months were $6.0 billion and $13.5 billion, respectively. Including the restructuring and impairment charges, as-reported net loss attributed to Disney common stock was $548 million (or $0.26 per share) for the quarter and $486 million (or $0.23 per share) for the six months including the cumulative effect of the accounting changes ($0.13 per share). On a pro forma basis, including the restructuring and impairment charges, but excluding the cumulative effect of accounting changes, net income was $307 million (or $0.15 per share) for the quarter and $702 million (or $0.33 per share) for the six months.
Unless otherwise noted, the following discussion reflects pro forma results.
Parks & Resorts
Parks & Resorts revenues for the quarter increased 5% to $1.6 billion and segment operating income remained flat at $331 million.
Parks & Resorts results reflect increased theme park attendance and guest spending at the Disneyland Resort, growth at Disney Cruise Line and reduced costs at Walt Disney World, partially offset by pre-opening and other cost increases at the Disneyland Resort and decreased theme park attendance at Walt Disney World. At the Disneyland Resort, increased theme park attendance and higher guest spending and pre-opening and other cost increases were driven by the opening of Disney's California Adventure, Downtown Disney District and the Grand Californian Hotel during the quarter. At Walt Disney World, decreased attendance reflects the prior-year success of the Millennium Celebration, which concluded in December 2000. Reduced costs at Walt Disney World also reflect the Millennium Celebration in the prior year, as well as current period cost reduction initiatives.
Disney Cruise Line's continued success reflects the strength of the 7-day cruise package, which was introduced in the fourth quarter of the prior year.
Media Networks
Media Networks revenues for the quarter decreased 8% to $2.2 billion and segment operating income decreased 9% to $489 million.
Broadcasting results for the quarter reflect declines at the company's owned television stations, radio operations and in the ABC television network primetime division, driven by the soft advertising market and lower ratings, partially offset by strong upfront network advertising sales and increases at the ABC television network sports division. The increase at the ABC television network sports division was primarily due to lower sports programming expense in the current quarter compared with the higher costs related to the Super Bowl broadcast in the prior year.
Operating income from cable television activities, which consists of Disney's cable networks and Disney's share of operating income of its cable equity investments, increased 9% to $353 million for the quarter.
Cable television results for the quarter reflected profit increases from cable equity investments and higher affiliate revenues at the cable networks driven by strong subscriber growth and annual contractual rate adjustments, partially offset by the soft advertising market, higher programming costs and start-up costs at International Disney Channels.
Studio Entertainment
Studio Entertainment revenues for the quarter decreased 5% to $1.6 billion, while segment operating income increased to $164 million compared with $46 million in the prior-year quarter.
Studio Entertainment results for the quarter were driven by improvements in domestic home video and domestic theatrical motion picture distribution, partially offset by declines in international theatrical motion picture distribution.
Growth in domestic home video reflected the successful releases of "Lady and the Tramp II: Scamp's Adventure," "Remember the Titans" and "Dinosaur" in both VHS and DVD, as well as general strength in DVD sales. Improvements in domestic theatrical motion picture distribution reflect the performances of current-period titles, including "O Brother, Where Art Thou?" and Disney's "Recess: School's Out" compared with the prior-year quarter, which included "Mission to Mars" and "Cradle Will Rock." In international theatrical motion picture distribution, the current-period performances of "Unbreakable," "Dinosaur" and "102 Dalmatians" faced difficult comparisons to the prior-year quarter, which included Disney/Pixar's "Toy Story 2," "Tarzan" and "The Sixth Sense."
Consumer Products
Consumer Products revenues for the quarter decreased 7% to $568 million and segment operating income increased 30% to $90 million.
Consumer Products results for the quarter were driven by cost savings and improvements at Disney Interactive, reflecting the continued success of the "Aladdin" and "The Emperor's New Groove" action games.
Internet Group
Internet Group revenues for the quarter decreased 2% to $47 million and segment operating loss improved by 49% to $37 million.
Internet Group results for the quarter reflect improved operating performance at the Disney-branded sites, elimination of operating losses at toysmart.com, due to its closure in June 2000, and the impact of cost-reduction efforts.
Corporate and Unallocated Shared Expenses
Corporate and unallocated shared expense increased 8% to $109 million for the quarter, reflecting start-up costs for the Disney Club, which was launched in the first quarter of 2001, and costs associated with several strategic initiatives designed to improve overall company-wide efficiency.
Net Interest Expense and Other
Net interest expense and other decreased 19% to $98 million for the quarter, driven by lower average debt balances and lower interest rates.
Equity in the Income of Investees
Income from equity investees increased 5% to $66 million for the quarter, driven by improvements in the earnings at certain domestic and international cable equity investments, partially offset by start-up losses incurred in connection with new investments.
Stock Repurchases
During the quarter, the company repurchased 1.1 million Disney shares for approximately $31 million. For the six months, the company purchased a total of 8.4 million Disney shares for $256 million. The purchases were effected through open market transactions under the company's existing stock repurchase program. As of March 31, 2001, the company was authorized to repurchase approximately 386 million additional Disney shares.
Conversion of Internet Group Common Stock
On Jan. 29, 2001, the company announced the conversion of all of its outstanding Internet Group common stock into Disney common stock. This conversion was effected on March 30, 2001. Each outstanding share of Internet Group common stock was converted into 0.19353 of a share of Disney common stock, resulting in the issuance of approximately 8.6 million shares of Disney common stock. For the quarter and six months ended March 31, 2001, as-reported earnings attributed to Disney common stock reflect approximately 72% of Internet Group losses from Oct. 1, 2000, through Jan. 28, 2001 (the last date prior to the announcement of the conversion of the Internet Group common stock), and 100% thereafter.
In addition, the company has ceased operations of the GO.com portal business, which resulted in restructuring charges in the current quarter and six months.
Restructuring and Impairment Charges
During the quarter on an as-reported basis, the company recorded restructuring and impairment charges totaling $1.0 billion, related to the closure of GO.com and approximately 70 Disney Stores domestically, an impairment write-down of themed entertainment fixed assets and leasehold improvements, and an impairment write-down for certain Internet investments.
The charge for closure of the GO.com portal business includes a non-cash write-off of intangible assets totaling $820 million. The Disney Store closure charge consists of lease termination costs, fixed assets, leasehold improvements and inventory write-downs and other related closure costs. Restructuring and impairment charges on a pro forma basis exclude the impact of the GO.com closure. See Table C for details of the restructuring and impairment charges on both a pro forma and as-reported basis.
Workforce Reduction
In March 2001, the company announced that due to the challenges of the softening economic environment it would eliminate 4,000 full-time jobs through a combination of voluntary and involuntary reductions.
Accounting Changes
Effective Oct. 1, 2000, the company adopted AICPA Statement of Position No. 00-2, Accounting by Producers or Distributors of Films (SOP 00-2), and FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and recorded one-time after-tax charges for the adoption of the standards totaling $228 million (or $0.11 per share) and $50 million (or $0.02 per share), respectively.