No Cheesy Net Income for Disney- Motley Fool- 5/12/05

[dramaqueen]

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Disney (NYSE: DIS) declared earnings for its fiscal second quarter, and it wasn't mousy at all about its growth in the bottom line. Earnings per diluted share were $0.33 ($698 million), which represented a 27% increase over the $0.26 ($537 million) per diluted share the company brought in last year. Revenues jumped 9% to $7.83 billion. The Q2 earnings reflected a $61 million benefit related to the restructuring of debt involving EuroDisney (stated to be mostly non-cash in nature) and a $32 million charge for an investment writedown.

One of the performance awards should be handed to the theme parks and resorts segment. Net sales here saw a double-digit climb of 26% to $2.1 billion. Segment operating income went up an anemic 3% because of the consolidation impact of EuroDisney and Hong Kong Disneyland. If we were to disregard that, we would actually see lesser revenue growth (equal to 7%) but higher operating income growth (equal to 26%). No matter how you slice it, the parks did a good job; the company indicates that Walt Disney World was the main driver, seeing higher consumer buying during stays in addition to the better occupancy rates.

Let's move on to other operating segments. Checking in with the studio division, we see a 65% increase in operating income ($253 million) on a 5% appreciation in the revenue base ($2.3 billion), good for another award. Lower write-offs, as well as a decrease in distribution expenses, helped to bring in the coin. Oh, and one certain little film on DVD has to be mentioned as well: The Incredibles. What's good for Pixar (Nasdaq: PIXR) is certainly good for Disney. Media networks saw only a 3% increase in operating income. Revenue deferrals by the cable division (notably ESPN) helped to minimize this area's potential; nevertheless, the cable properties continued to show health in carriage fees and advertising revenues. Broadcasting operating profits nearly doubled on better ratings and lower programming costs at ABC. Consumer products were down 9% in terms of sales, but operating income jumped 48%. The business model for consumer products is much more optimally positioned, since the Disney Stores chain no longer presents a drag.

Overall, the segments did a commendable job at bringing in some value. However, cash from operations was down on a six-month basis and capital investment was up, so free cash came in at $376 million versus $2.0 billion in the similar time frame a year ago. So far this year, Disney has invested more than $1 billion more in working capital than the previous year. And here we note that The Incredibles can taketh as well as it can giveth, since its DVD release contributed heavily to the $667 million increase in accounts receivable. But it takes money to make money, and no business can survive without using capital. It's how you use it that matters.