10-Q 1 fy2013_q1x10qxdoc.htm FORM 10-Q FY2013_Q1_10Q_DOC


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
 
Commission File Number 1-11605
December 29, 2012
 
 
 
 
 
 
 
 
Incorporated in Delaware
 
I.R.S. Employer Identification
 
 
No. 95-4545390
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).
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer (do not check if smaller reporting company)
 
¨

Smaller reporting company
 
¨
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 1,805,436,313 shares of common stock outstanding as of January 30, 2013.




PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per share data)
 
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Revenues
$
11,341

 
$
10,779

Costs and expenses
(9,249
)
 
(8,587
)
Restructuring and impairment charges

 
(6
)
Other income/(expense), net
(102
)
 

Net interest expense
(72
)
 
(90
)
Equity in the income of investees
110

 
145

Income before income taxes
2,028

 
2,241

Income taxes
(590
)
 
(720
)
Net income
1,438

 
1,521

Less: Net income attributable to noncontrolling interests
(56
)
 
(57
)
Net income attributable to The Walt Disney Company (Disney)
$
1,382

 
$
1,464

 
 
 
 
Earnings per share attributable to Disney:
 
 
 
Diluted
$
0.77

 
$
0.80

Basic
$
0.78

 
$
0.81

 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
Diluted
1,800

 
1,824

Basic
1,777

 
1,798

See Notes to Condensed Consolidated Financial Statements

2



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
 
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Net income
$
1,438

 
$
1,521

Other comprehensive income (loss), net of tax:
 
 
 
Market value adjustments for investments
17

 
2

Market value adjustments for hedges
59

 
30

Pension and postretirement medical plan adjustments
73

 
55

Foreign currency translation and other
2

 
(37
)
Other comprehensive income (loss)
151

 
50

Comprehensive income
1,589

 
1,571

Less: Net income attributable to noncontrolling interests
(56
)
 
(57
)
Less: Other comprehensive (income) loss attributable to noncontrolling interests
(13
)
 
6

Comprehensive income attributable to Disney
$
1,520

 
$
1,520

See Notes to Condensed Consolidated Financial Statements





3


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
December 29,
2012
 
September 29,
2012
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
3,207

 
$
3,387

Receivables
7,315

 
6,540

Inventories
1,440

 
1,537

Television costs and advances
864

 
676

Deferred income taxes
762

 
765

Other current assets
734

 
804

Total current assets
14,322

 
13,709

Film and television costs
4,811

 
4,541

Investments
2,622

 
2,723

Parks, resorts and other property, at cost
 
 
 
Attractions, buildings and equipment
39,351

 
38,582

Accumulated depreciation
(21,186
)
 
(20,687
)
 
18,165

 
17,895

Projects in progress
2,336

 
2,453

Land
1,170

 
1,164

 
21,671

 
21,512

Intangible assets, net
7,532

 
5,015

Goodwill
27,433

 
25,110

Other assets
2,251

 
2,288

Total assets
$
80,642

 
$
74,898

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
6,767

 
$
6,393

Current portion of borrowings
4,815

 
3,614

Unearned royalties and other advances
2,916

 
2,806

Total current liabilities
14,498

 
12,813

 
 
 
 
Borrowings
12,633

 
10,697

Deferred income taxes
2,854

 
2,251

Other long-term liabilities
7,287

 
7,179

Commitments and contingencies (Note 11)

 

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 billion shares
32,662

 
31,731

Retained earnings
43,022

 
42,965

Accumulated other comprehensive loss
(3,128
)
 
(3,266
)
 
72,556

 
71,430

Treasury stock, at cost, 1.0 billion shares
(31,540
)
 
(31,671
)
Total Disney Shareholders' equity
41,016

 
39,759

Noncontrolling interests
2,354

 
2,199

Total equity
43,370

 
41,958

Total liabilities and equity
$
80,642

 
$
74,898

See Notes to Condensed Consolidated Financial Statements

4



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
OPERATING ACTIVITIES
 
 
 
Net income
$
1,438

 
$
1,521

Depreciation and amortization
514

 
485

Gain on disposition
(219
)
 

Deferred income taxes
(236
)
 
(14
)
Equity in the income of investees
(110
)
 
(145
)
Cash distributions received from equity investees
192

 
161

Net change in film and television costs and advances
(187
)
 
(256
)
Equity-based compensation
100

 
100

Other
86

 
148

Changes in operating assets and liabilities:
 
 
 
Receivables
(934
)
 
(643
)
Inventories
95

 
52

Other assets
42

 
23

Accounts payable and other accrued liabilities
(314
)
 
(373
)
Income taxes
677

 
675

Cash provided by operations
1,144

 
1,734

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(545
)
 
(634
)
Proceeds from disposition
335

 

Acquisitions
(2,265
)
 
(361
)
Other
10

 
17

Cash used in investing activities
(2,465
)
 
(978
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper borrowings/(repayments), net
994

 
(976
)
Borrowings
3,037

 
1,590

Reduction of borrowings
(776
)
 
(49
)
Dividends
(1,300
)
 

Repurchases of common stock
(1,044
)
 
(800
)
Proceeds from exercise of stock options
124

 
114

Other
101

 
(9
)
Cash provided by/(used in) financing activities
1,136

 
(130
)
 
 
 
 
Impact of exchange rates on cash and cash equivalents
5

 
(45
)
 
 
 
 
Increase/(decrease) in cash and cash equivalents
(180
)
 
581

Cash and cash equivalents, beginning of period
3,387

 
3,185

Cash and cash equivalents, end of period
$
3,207

 
$
3,766

See Notes to Condensed Consolidated Financial Statements

5



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
December 29, 2012
 
December 31, 2011
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning Balance
$
39,759

 
$
2,199

 
$
41,958

 
$
37,385

 
$
2,068

 
$
39,453

Comprehensive income
1,520

 
69

 
1,589

 
1,520

 
51

 
1,571

Equity compensation activity
252

 

 
252

 
230

 

 
230

Dividends
(1,324
)
 

 
(1,324
)
 
(1,076
)
 

 
(1,076
)
Common stock repurchases
(1,044
)
 

 
(1,044
)
 
(800
)
 

 
(800
)
Acquisition of Lucasfilm
1,853

 
6

 
1,859

 

 

 

Distributions and other

 
80

 
80

 
(2
)
 
47

 
45

Ending Balance
$
41,016

 
$
2,354

 
$
43,370

 
$
37,257

 
$
2,166

 
$
39,423

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 ended December 29, 2012 are not necessarily indicative of the results that may be expected for the year ending September 28, 2013. 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 2012 Annual Report on Form 10-K.
The Company enters into relationships or investments with other entities in which it does not have majority ownership or control. 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 (collectively the "International Theme Parks"), they are VIEs, and given the nature of the Company’s relationships with these entities, which include management agreements, the Company has consolidated the International Theme Parks 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. Equity in the income of investees included in segment operating results is as follows:
 
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Media Networks
 
 
 
Cable Networks
$
177

 
$
150

Broadcasting
(13
)
 
(6
)
Equity in the income of investees included in segment operating income
$
164

 
$
144


During the quarter, the Company recorded a $55 million charge for our share of expense related to an equity redemption at Hulu LLC (Hulu Equity Redemption). This charge is recorded in equity in the income of investees in the Condensed Consolidated Statements of Income but has been excluded from segment operating income. See Note 3 for further discussion of the transaction.

7

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Revenues (1):
 
 
 
Media Networks
$
5,101

 
$
4,779

Parks and Resorts
3,391

 
3,155

Studio Entertainment
1,545

 
1,618

Consumer Products
1,013

 
948

Interactive
291

 
279

 
$
11,341

 
$
10,779

Segment operating income (loss) (1):
 
 
 
Media Networks
$
1,214

 
$
1,193

Parks and Resorts
577

 
553

Studio Entertainment
234

 
413

Consumer Products
346

 
313

Interactive
9

 
(28
)
 
$
2,380

 
$
2,444


(1) Studio Entertainment segment revenues and operating income include an allocation of Consumer Products and Interactive revenues which is meant to reflect royalties on sales of merchandise based on certain film properties. The increases/(decreases) related to these allocations on segment revenues and operating income as reported in the above table are as follows:
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Studio Entertainment
$
55

 
$
76

Consumer Products
(55
)
 
(76
)
Interactive

 

 
$

 
$

A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Segment operating income
$
2,380

 
$
2,444

Corporate and unallocated shared expenses
(123
)
 
(107
)
Restructuring and impairment charges

 
(6
)
Other income/(expense), net
(102
)
 

Net interest expense
(72
)
 
(90
)
Hulu Equity Redemption charge
(55
)
 

Income before income taxes
$
2,028

 
$
2,241


 
3.
Acquisitions
Lucasfilm
On December 21, 2012, the Company acquired Lucasfilm Ltd. LLC (“Lucasfilm”), a privately held entertainment company. This acquisition will allow Disney to utilize Lucasfilm's content across our multiple platforms, businesses, and markets, which we believe will generate growth as well as significant long-term value.
Under the terms of the merger agreement, Disney issued 37.1 million shares and made a cash payment of $2.2 billion.  Based upon the closing price of Disney shares on December 21, 2012 at $50.00, the transaction has a value of $4.1 billion.
The Company is required to allocate the purchase price to the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the purchase price over those fair values is recorded as goodwill. The Company is in the process of finalizing the valuation of the assets acquired and liabilities assumed.

8

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The following table summarizes our initial allocation of the purchase price, which is subject to adjustment once the valuations are completed:
(in billions)
  Estimated 
Fair Value
Intangible assets
$
2.6

Goodwill
2.3

Deferred income taxes
(0.8
)
 
$
4.1

Intangible assets primarily consist of intellectual property based on the Star Wars franchise with an estimated useful life of approximately 40 years. The goodwill reflects the value to Disney from leveraging Lucasfilm intellectual property across our distribution channels, taking advantage of Disney's established global reach. The goodwill recorded as part of this acquisition is not deductible for tax purposes.

The amounts of revenue and net income of Lucasfilm included in the Company's Condensed Consolidated Statement of Income from the closing date through December 29, 2012 are not material.

Hulu
On October 5, 2012, Hulu LLC (Hulu) redeemed Providence Equity Partners' 10% equity interest in Hulu for $200 million, increasing the Company's ownership interest from 29% to 32%.  In connection with the transaction, Hulu incurred a charge of approximately $174 million primarily related to employee equity-based compensation. The Company's share of the charge totaled $55 million and was recorded in equity in the income of investees in the first quarter of fiscal 2013.  The Company has guaranteed $107 million of a $338 million five-year term loan which was used by Hulu to finance the transaction. The Company will continue to account for its interest in Hulu as an equity method investment.

Goodwill
The changes in the carrying amount of goodwill for the quarter ended December 29, 2012, are as follows:
 
Media
Networks
 
Parks and
Resorts
 
Studio
Entertainment
 
Consumer
Products
 
Interactive
 
Unallocated
 
Total
Balance at Sept. 29, 2012
$
16,131

 
$
172

 
$
5,680

 
$
1,794

 
$
1,333

 
$

 
$
25,110

Acquisitions
34

 

 

 

 
22

 
2,315

 
2,371

Dispositions

 

 

 

 

 

 

Other, net
(20
)
 

 
(21
)
 

 
(7
)
 

 
(48
)
Balance at Dec. 29, 2012
$
16,145

 
$
172

 
$
5,659

 
$
1,794

 
$
1,348

 
$
2,315

 
$
27,433

The carrying amount of goodwill at December 29, 2012 and September 29, 2012 includes accumulated impairments of $29 million at Interactive.
During the quarter ended December 29, 2012, the Company completed the acquisition of Lucasfilm resulting in $2.3 billion of goodwill. The Company is in the process of allocating the goodwill to its operating segments. See the discussion above on the Lucasfilm acquisition.


4.
Dispositions and Other Income/(Expense)
ESPN STAR Sports
On November 7, 2012, the Company sold its 50% equity interest in ESPN STAR Sports (ESS) to the joint venture partner of ESS for $335 million resulting in a gain of $219 million ($125 million after tax and allocation to noncontrolling interests).  ESPN had previously jointly guaranteed approximately $0.8 billion in programming rights obligations of ESS. As a result of the sale, ESPN no longer guarantees these obligations.


9

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)



Other Income/(Expense)
 
Quarter Ended
 
December 29, 2012
 
December 31, 2011
Celador litigation (see Note 11)
$
(321
)
 
$

Gain on sale of equity interest in ESS
219

 

Other income/(expense), net
$
(102
)
 
$



5.
Borrowings
During the quarter ended December 29, 2012, the Company’s borrowing activity was as follows: 
 
September 29,
2012
 
Additions
 
Payments
 
Other
Activity
 
December 29,
2012
Commercial paper borrowings
$
2,050

 
$
994

 
$

 
$

 
$
3,044

U.S. medium-term notes
10,117

 
2,978

 
(750
)
 
3

 
12,348

European medium-term notes and other foreign currency denominated borrowings (1)
1,315

 
59

 
(21
)
 
(90
)
 
1,263

Other
562

 

 
(12
)
 
(26
)
 
524

Hong Kong Disneyland borrowings
267

 

 

 
2

 
269

Total
$
14,311

 
$
4,031

 
$
(783
)
 
$
(111
)
 
$
17,448


(1) The other activity is primarily the impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Japanese yen.

6.
International Theme Park Investments
The Company has a 51% effective ownership interest in the operations of Disneyland Paris, a 48% ownership interest in the operations of Hong Kong Disneyland Resort and a 43% ownership interest in the operations of Shanghai Disney Resort, all of which are VIEs consolidated in the Company’s financial statements. See Note 1 for the Company's policy on consolidating VIEs.

10

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The following tables present summarized balance sheet information for the Company as of December 29, 2012 and September 29, 2012, reflecting the impact of consolidating the International Theme Parks balance sheets.
 
As of December 29, 2012
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
2,887

 
$
320

 
$
3,207

Other current assets
10,873

 
242

 
11,115

Total current assets
13,760

 
562

 
14,322

Investments
5,885

 
(3,263
)
 
2,622

Fixed assets
16,992

 
4,679

 
21,671

Other assets
42,021

 
6

 
42,027

Total assets
$
78,658

 
$
1,984

 
$
80,642

 
 
 
 
 
 
Current portion of borrowings
$
4,815

 
$

 
$
4,815

Other current liabilities
9,300

 
383

 
9,683

Total current liabilities
14,115

 
383

 
14,498

Borrowings
12,364

 
269

 
12,633

Deferred income taxes and other long-term liabilities
10,024

 
117

 
10,141

Equity
42,155

 
1,215

 
43,370

Total liabilities and equity
$
78,658

 
$
1,984

 
$
80,642

 
 
As of September 29, 2012
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
2,839

 
$
548

 
$
3,387

Other current assets
10,066

 
256

 
10,322

Total current assets
12,905

 
804

 
13,709

Investments
6,065

 
(3,342
)
 
2,723

Fixed assets
17,005

 
4,507

 
21,512

Other assets
36,949

 
5

 
36,954

Total assets
$
72,924

 
$
1,974

 
$
74,898

 
 
 
 
 
 
Current portion of borrowings
$
3,614

 
$

 
$
3,614

Other current liabilities
8,742

 
457

 
9,199

Total current liabilities
12,356

 
457

 
12,813

Borrowings
10,430

 
267

 
10,697

Deferred income taxes and other long-term liabilities
9,325

 
105

 
9,430

Equity
40,813

 
1,145

 
41,958

Total liabilities and equity
$
72,924

 
$
1,974

 
$
74,898



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 quarter ended December 29, 2012, reflecting the impact of consolidating the International Theme Parks income statements.
 
Before 
International
Theme Parks
Consolidation(1)
 
International
Theme Parks
and Adjustments
 
Total
Revenues
$
10,815

 
$
526

 
$
11,341

Cost and expenses
(8,700
)
 
(549
)
 
(9,249
)
Restructuring and impairment charges

 

 

Other income/(expense), net
(102
)
 

 
(102
)
Net interest expense
(56
)
 
(16
)
 
(72
)
Equity in the income of investees
91

 
19

 
110

Income before income taxes
2,048

 
(20
)
 
2,028

Income taxes
(590
)
 

 
(590
)
Net income
$
1,458

 
$
(20
)
 
$
1,438

 
(1) 
These amounts include the International Theme Parks under the equity method of accounting. As such, royalty and management fee income from these operations is included in Revenues and our share of their net income/(loss) is included in Equity in the income of investees. There were $37 million of royalties and management fees recognized for the quarter ended December 29, 2012.
 
The following table presents summarized cash flow statement information of the Company for the quarter ended December 29, 2012, reflecting the impact of consolidating the International Theme Parks cash flow statements. 
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash provided by operations
$
1,326

 
$
(182
)
 
$
1,144

Investments in parks, resorts and other property
(369
)
 
(176
)
 
(545
)
Cash (used in)/provided by other investing activities
(1,973
)
 
53

 
(1,920
)
Cash provided by financing activities
1,065

 
71

 
1,136

Impact of exchange rates on cash and cash equivalents
(1
)
 
6

 
5

Increase/(decrease) in cash and cash equivalents
48

 
(228
)
 
(180
)
Cash and cash equivalents, beginning of period
2,839

 
548

 
3,387

Cash and cash equivalents, end of period
$
2,887

 
$
320

 
$
3,207

 
7.
Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows: 
 
Pension Plans
 
Postretirement
Medical Plans
 
December 29, 2012
 
December 31, 2011
 
December 29, 2012
 
December 31, 2011
Service costs
$
86

 
$
70

 
$
4

 
$
5

Interest costs
109

 
110

 
17

 
19

Expected return on plan assets
(151
)
 
(128
)
 
(8
)
 
(6
)
Amortization of prior-year service costs
2

 
3

 
(1
)
 
(1
)
Recognized net actuarial loss
104

 
77

 
10

 
8

Net periodic benefit cost
$
150

 
$
132

 
$
22

 
$
25

During the quarter ended December 29, 2012, the Company did not make any material contributions to its pension and postretirement medical plans. The Company expects total pension and postretirement medical plan contributions in fiscal 2013 of approximately $425 million to $475 million. Final minimum pension plan funding requirements for fiscal 2013 will be

12

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


determined based on our January 1, 2013 funding actuarial valuation that we expect to receive during the fourth quarter of fiscal 2013.

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, are as follows: 
 
Quarter Ended
 
December 29, 2012
 
December 31, 2011
Shares (in millions):
 
 
 
Weighted average number of common shares outstanding (basic)
1,777

 
1,798

Weighted average dilutive impact of Awards
23

 
26

Weighted average number of common and common equivalent shares outstanding (diluted)
1,800

 
1,824

Awards excluded from diluted earnings per share
1

 
10

 
9.
Equity
On November 28, 2012, the Company declared a $0.75 per share dividend ($1.3 billion) related to fiscal 2012 for shareholders of record on December 10, 2012, which was paid on December 28, 2012. The Company paid a $0.60 per share dividend ($1.1 billion) during the second quarter of fiscal 2012 related to fiscal 2011.
During the quarter ended December 29, 2012, the Company repurchased 21 million shares of its common stock for $1.0 billion. As of December 29, 2012, the Company had remaining authorization in place to repurchase 211 million additional shares. The repurchase program does not have an expiration date.

The following table summarizes the changes in each component of accumulated other comprehensive income (loss) (AOCI), net of 37% estimated tax in Disney Shareholders’ equity:
 
 
 
Unrecognized
Pension and 
Post-retirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
 
Investments
 
Cash Flow
Hedges
(1)
 
Balance at Sept 29, 2012
$
3

 
$
(52
)
 
$
(3,234
)
 
$
17

 
$
(3,266
)
Unrealized gains (losses) arising during the period
17

 
65

 

 
(17
)
 
65

Reclassifications of net (gains) losses to net income

 
(6
)
 
73

 
6

 
73

Balance at Dec. 29, 2012
$
20

 
$
7

 
$
(3,161
)
 
$
6

 
$
(3,128
)
 
 
 
 
 
 
 
 
 
 
Balance at Oct 1, 2011
$
6

 
$
(54
)
 
$
(2,625
)
 
$
43

 
$
(2,630
)
Unrealized gains (losses) arising during the period
2

 
28

 

 
(31
)
 
(1
)
Reclassifications of net (gains) losses to net income

 
2

 
55

 

 
57

Balance at Dec. 31, 2011
$
8

 
$
(24
)
 
$
(2,570
)
 
$
12

 
$
(2,574
)
 
(1) Reclassifications of gains on cash flow hedges are primarily recorded in revenue.

13

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)



 

10.
Equity-Based Compensation
Compensation expense related to stock options, stock appreciation rights and restricted stock units (RSUs) is as follows:
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Stock options/rights (1)
$
25

 
$
31

RSUs
76

 
73

Total equity-based compensation expense (2)
$
101

 
$
104

Equity-based compensation expense capitalized during the period
$
14

 
$
13

 
(1) 
Includes stock appreciation rights.

(2) 
Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. Amortization of previously capitalized equity-based compensation was $24 million and $9 million for the quarters ended December 29, 2012 and December 31, 2011, respectively.
Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $129 million and $493 million, respectively, as of December 29, 2012.
The weighted average grant date fair values of options issued during the quarters ended December 29, 2012 and December 31, 2011 were $12.19 and $9.42, respectively.
In January 2013, the Company made equity compensation grants consisting of 8.5 million stock options and 6.8 million RSUs, of which 0.4 million RSUs included market and/or performance conditions.

11.
Commitments and Contingencies
Legal Matters

Beef Products, Inc. v. American Broadcasting Companies, Inc. On September 13, 2012, plaintiffs filed an action in South Dakota state court against certain subsidiaries and employees of the Company and others, asserting claims for defamation arising from alleged false statements and implications, statutory and common law product disparagement, and tortious interference with existing and prospective business relationships. The claims arise out of ABC News reports published in March and April 2012 that discussed the subject of labeling requirements for production processes related to a product one plaintiff produces that is added to ground beef before sale to consumers. Plaintiffs seek actual and consequential damages in excess of $400 million, statutory damages (including treble damages) pursuant to South Dakota's Agricultural Food Products Disparagement Act, and punitive damages. On October 24, 2012, the Company removed the action to the United States District Court for the District of South Dakota, and on October 31, 2012, the Company moved to dismiss all claims. On November 28, 2012, plaintiffs filed motion to remand the case to state court, which is pending.

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 believe that the Company has incurred a probable, material loss by reason of these actions.

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

14

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


subsidiaries of the Company, awarding plaintiff damages of $269 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. On January 4, 2011 the Company appealed and on or about January 28, 2011, plaintiff filed a notice of cross-appeal. On December 3, 2012, the Court of Appeals affirmed the judgment against the Company and dismissed plaintiff's cross-appeal. On December 31, 2012, the Company filed a petition for rehearing en banc. In light of the Court of Appeals decision, the Company has established a reserve in the amount of $321 million which is recorded in other income/(expense), net in the Condensed Consolidated Statement of Income.

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 December 29, 2012, the remaining debt service obligation guaranteed by the Company was $351 million, of which $82 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 these bonds.
Long-Term Receivables and the Allowance for Credit Losses
The Company has accounts receivable with original maturities greater than one year related to the sale of program rights in the television syndication markets within the Media Networks segment and 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 from the sale of television programs based upon a number of factors, including historical experience, and 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 December 29, 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 from sales of its vacation ownership units based primarily on historical collection experience. Estimates of uncollectible amounts also consider 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 3%, was approximately $0.7 billion as of December 29, 2012. The activity in the period related to the allowance for credit losses was not material.
 
Income Taxes
During the quarter ended December 29, 2012, the Company settled certain tax matters with various jurisdictions. As a result of these settlements, the Company reduced its unrecognized tax benefits by $46 million, including interest and penalties.
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 $59 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 measured at fair value are classified in the following three categories:
Level 1 - Quoted prices for identical instruments in active markets
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable

15

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The Company’s assets and liabilities measured at fair value are summarized in the following table by type of inputs applicable to the fair value measurements: 
 
Fair Value Measurement at December 29, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Investments
$
121

 
$

 
$

 
$
121

Derivatives (1)
 
 
 
 
 
 
 
Interest rate

 
239

 

 
239

Foreign exchange

 
350

 

 
350

Liabilities
 
 
 
 
 
 
 
Derivatives (1)
 
 
 
 
 
 
 
Interest rate

 
(9
)
 

 
(9
)
Foreign exchange

 
(204
)
 

 
(204
)
Total recorded at fair value
$
121

 
$
376

 
$

 
$
497

Fair value of borrowings
$

 
$
16,539

 
$
1,683

 
$
18,222

 
 
Fair Value Measurement at September 29, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Investments
$
86

 
$

 
$

 
$
86

Derivatives (1)
 
 
 
 
 
 
 
Interest rate

 
239

 

 
239

Foreign exchange

 
390

 

 
390

Liabilities
 
 
 
 
 
 
 
Derivatives (1)
 
 
 
 
 
 
 
Foreign exchange

 
(235
)
 

 
(235
)
Total recorded at fair value
$
86

 
$
394

 
$

 
$
480

Fair value of borrowings
$

 
$
13,493

 
$
1,653

 
$
15,146

 
(1) 
The Company has master netting arrangements by counterparty with respect to certain derivative contracts. Contracts in a liability position totaling $173 million and $153 million have been netted against contracts in an asset position in the Condensed Consolidated Balance Sheets at December 29, 2012 and September 29, 2012, respectively.
The fair values of Level 2 derivatives 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 2 borrowings, which include commercial paper and U.S. medium-term notes, are valued based on quoted prices for similar instruments in active markets.
Level 3 borrowings, which include Hong Kong Disneyland borrowings and other foreign currency denominated borrowings, are valued based on historical market transactions, interest rates, credit risk and market liquidity.
The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.



16

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


13.
Derivative Instruments
The Company manages its exposure to various risks relating to 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 fair value of the Company’s derivative positions are summarized in the following tables: 
 
As of December 29, 2012
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
100

 
$
57

 
$
(74
)
 
$
(23
)
Interest rate
1

 
238

 
(9
)
 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
187

 
6

 
(82
)
 
(25
)
Gross fair value of derivatives
288

 
301

 
(165
)
 
(48
)
Counterparty netting
(132
)
 
(41
)
 
135

 
38

Total derivatives (1)
$
156

 
$
260

 
$
(30
)
 
$
(10
)
 
 
As of September 29, 2012
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
84

 
$
30

 
$
(94
)
 
$
(50
)
Interest rate
1

 
238

 

 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
258

 
18

 
(91
)
 

Gross fair value of derivatives
343

 
286

 
(185
)
 
(50
)
Counterparty netting
(117
)
 
(36
)
 
117

 
36

Total derivatives (1)
$
226

 
$
250

 
$
(68
)
 
$
(14
)
 
(1) 
Refer to Note 12 for further information on derivative fair values and counterparty netting.
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 December 29, 2012 and September 29, 2012, the total notional amount of the Company’s pay-floating interest rate swaps was $5.6 billion and $3.1 billion, respectively. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Condensed Consolidated Statements of Income. 
 
Quarter Ended
 
December 29,
2012
 
December 31,
2011
Gain (loss) on interest rate swaps
$
(26
)
 
$
(4
)
Gain (loss) on hedged borrowings
26

 
4


17

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


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 gains or losses from these cash flow hedges are deferred in 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 December 29, 2012 nor at September 29, 2012.
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.
The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of December 29, 2012 and September 29, 2012, the notional amounts of the Company’s net foreign exchange cash flow hedges were $4.5 billion and $4.6 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 quarters ended December 29, 2012 and December 31, 2011 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $24 million.
Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at December 29, 2012 and September 29, 2012 were $4.9 billion and $4.1 billion, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the offsetting net foreign exchange gains or losses on the related foreign exchange contracts for the quarter ended December 29, 2012 and December 31, 2011.
 
Costs and Expenses
 
Interest Expense
 
December 29,
2012
 
December 31,
2011
 
December 29,
2012
 
December 31,
2011
Net gains (losses) on foreign currency denominated assets and liabilities
$
38

 
$
(70
)
 
$
82

 
$
5

Net gains (losses) on foreign exchange risk management contracts not designated as hedges
(48
)
 
59

 
(84
)
 
(5
)
Net gains (losses)
$
(10
)
 
$
(11
)
 
$
(2
)
 
$


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 and related gains or losses recognized in earnings were not material at December 29, 2012 nor at September 29, 2012.

18

THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


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 qualify for hedge accounting. These contracts, which include certain 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 fair value of these contracts and related gains or losses recognized in earnings were not material at December 29, 2012 nor at September 29, 2012.
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, 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 $40 million and $82 million on December 29, 2012 and September 29, 2012, respectively.
 
14.
Restructuring and Impairment Charges
In the prior-year quarter, the Company recorded $6 million of restructuring and impairment charges for severance costs related to organizational and cost structure initiatives primarily at the Interactive segment.


19



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Other Financial Information
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
OVERVIEW
Our summary consolidated results are presented below: 
 
Quarter Ended
 
% Change
(in millions, except per share data)
December 29, 2012
 
December 31, 2011
 
Better/
(Worse)
Revenues
$
11,341

 
$
10,779

 
5
 %

Costs and expenses
(9,249
)
 
(8,587
)
 
(8)
 %

Restructuring and impairment charges

 
(6
)
 
nm

 
Other income/(expense), net
(102
)
 

 
nm


Net interest expense
(72
)
 
(90
)
 
20
 %

Equity in the income of investees
110

 
145

 
(24)
 %

Income before income taxes
2,028

 
2,241

 
(10)
 %

Income taxes
(590
)
 
(720
)
 
18
 %

Net income
1,438

 
1,521

 
(5)
 %

Less: Net income attributable to noncontrolling interests
(56
)
 
(57
)
 
2
 %

Net income attributable to Disney
$
1,382

 
$
1,464

 
(6)
 %

Diluted earnings per share
$
0.77

 
$
0.80

 
(4)
 %



20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)


Quarter Results
Diluted earnings per share (EPS) for the quarter decreased 4% from $0.80 to $0.77. EPS included a charge related to the Celador litigation ($321 million) and a gain on the sale of our 50% interest in ESPN STAR Sports ($219 million), both of which were recorded in "Other Income/(Expense)." EPS also included a charge for our share of expense at our Hulu joint venture related to an equity redemption transaction (Hulu Equity Redemption) ($55 million) and a tax benefit related to an increase in prior-year foreign earnings indefinitely reinvested outside the United States ($64 million). In aggregate, these four items had an adverse impact on EPS of $0.02 as follows:
(in millions, except per share data)
Pre-Tax Income/(Loss)
 
Tax Benefit/(Expense)
 
After-Tax Income/(Loss)
 
EPS Favorable/(Adverse)
Celador Litigation Charge
$
(321
)
 
$
119

 
$
(202
)
 
$
(0.11
)
Gain on Sale of Interest in ESPN STAR Sports (1)
219

 
(64
)
 
155

 
0.07

Tax Impact for Foreign Reinvestment

 
64

 
64

 
0.04

Hulu Equity Redemption charge
(55
)
 
20

 
(35
)
 
(0.02
)
Total
$
(157
)
 
$
139

 
$
(18
)
 
$
(0.02
)
(1) EPS has been adjusted for the noncontrolling interest share of the gain.
EPS also reflected a 3% ($64 million) decrease in segment operating income which was driven by lower home entertainment results at the Studio Entertainment segment. All other segments saw operating income growth in the quarter, led by Interactive, where operating income improved by $37 million to a profit of $9 million, reflecting lower expenses related to acquisitions and improved performance at our Japan mobile business. Consumer Products operating income increased $33 million driven roughly equally by revenue growth at Retail and a lower licensing revenue share with the Studio Entertainment segment.
Segment operating income also benefited from a $24 million increase at Parks and Resorts where 9% revenue growth at our domestic operations was partially offset by higher operating costs, including investments in new guest offerings, and lower results at our international parks and resorts. Media Networks operating income increased $21 million as growth at Broadcasting from advertising and program sales was partially offset by a decline at our Cable Networks, where increased sports programming costs exceeded strong growth in revenues from multi-channel video programming distributors (MVPDs) (Affiliate Fees).
 
SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 29, 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.
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.

21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)


Interactive 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: 
 
Quarter Ended
 
% Change
(in millions)
December 29,
2012
 
December 31,
2011
 
Better/
(Worse)
Revenues:
 
 
 
 
 
 
Media Networks
$
5,101

 
$
4,779

 
7
 %
 
Parks and Resorts
3,391

 
3,155

 
7
 %
 
Studio Entertainment
1,545

 
1,618

 
(5)
 %
 
Consumer Products
1,013

 
948

 
7
 %
 
Interactive
291

 
279

 
4
 %
 
 
$
11,341

 
$
10,779

 
5
 %
 
Segment operating income (loss):
 
 
 
 
 
 
Media Networks
$
1,214

 
$
1,193

 
2
 %
 
Parks and Resorts
577

 
553

 
4
 %
 
Studio Entertainment
234

 
413

 
(43)
 %
 
Consumer Products
346

 
313

 
11
 %
 
Interactive
9

 
(28
)
 
nm

 
 
$
2,380

 
$
2,444

 
(3)
 %
 
 
The following table reconciles segment operating income to income before income taxes: 
 
Quarter Ended
 
% Change
(in millions)
December 29,
2012
 
December 31,
2011
 
Better/
(Worse)
Segment operating income
$
2,380

 
$
2,444

 
(3)
 %

Corporate and unallocated shared expenses
(123
)
 
(107
)
 
(15)
 %

Restructuring and impairment charges

 
(6
)
 
nm

 
Other income/(expense), net
(102
)
 

 
nm


Net interest expense
(72
)
 
(90
)
 
20
 %

Hulu Equity Redemption charge
(55
)
 

 
nm

 
Income before income taxes
$
2,028


$
2,241

 
(10)
 %


22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)



Depreciation expense is as follows: 
 
Quarter Ended
 
% Change
(in millions)
December 29,
2012
 
December 31,
2011
 
Better/
(Worse)
Media Networks
 
 
 
 
 
 
Cable Networks
$
32

 
$
34

 
6
 %
 
Broadcasting
24

 
23

 
(4)
 %
 
Total Media Networks
56

 
57

 
2
 %
 
Parks and Resorts
 
 
 
 


 
Domestic
255

 
224

 
(14)
 %
 
International
80

 
79

 
(1)
 %
 
Total Parks and Resorts
335

 
303

 
(11)
 %
 
Studio Entertainment
9

 
13

 
31
 %
 
Consumer Products
14

 
13

 
(8)
 %
 
Interactive
5

 
4

 
(25)
 %
 
Corporate
54

 
46

 
(17)
 %
 
Total depreciation expense
$
473

 
$
436

 
(8)
 %
 

Amortization of intangible assets is as follows:
 
Quarter Ended
 
% Change
(in millions)
December 29,
2012
 
December 31,
2011
 
Better/
(Worse)
Media Networks
$
5

 
$
2

 
>(100) %
Parks and Resorts

 

 
nm

 
Studio Entertainment
15

 
24

 
38
 %
 
Consumer Products
16

 
15

 
(7)
 %
 
Interactive
5

 
8

 
38
 %
 
Total amortization of intangible assets
$
41

 
$
49

 
16
 %
 

Media Networks
Operating results for the Media Networks segment are as follows: 
 
Quarter Ended
 
% Change

(in millions)
December 29, 2012
 
December 31, 2011
 
Better/
(Worse)
Revenues
 
 
 
 
 
 
Affiliate Fees
$
2,260

 
$
2,067

 
9
 %
 
Advertising
2,257

 
2,207

 
2
 %
 
Other
584

 
505

 
16
 %
 
Total revenues
5,101

 
4,779

 
7
 %
 
Operating expenses
(3,346
)
 
(3,052
)
 
(10)
 %
 
Selling, general, administrative and other
(644
)
 
(619
)
 
(4)
 %
 
Depreciation and amortization
(61
)
 
(59
)
 
(3)
 %
 
Equity in the income of investees
164

 
144

 
14
 %
 
Operating Income
$
1,214

 
$
1,193

 
2
 %
 

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)


Revenues
The 9% increase in Affiliate Fee revenue was driven by increases of 7% from contractual rate increases and 2% from reduced ESPN revenue deferrals due to changes in the provisions of annual programming commitments in certain MVPD contracts.

Higher advertising revenues were due to increases of $24 million at Cable Networks, from $1,115 million to $1,139 million, and $26 million at Broadcasting, from $1,092 million to $1,118 million. The increase at Cable Networks was driven by a 4% increase due to higher units sold and a 3% increase from higher rates at ESPN and ABC Family. These increases were partially offset by a 6% decrease due to lower ratings at ESPN. The increase in advertising revenues at Broadcasting was driven by the ABC Television Network and owned television stations. The increase in network advertising reflected a 4% increase due to higher rates and a 2% increase due to higher online advertising, partially offset by a 2% decrease due to lower ratings and a 2% decrease due to fewer units sold. Higher advertising revenue at the owned television stations was driven by political advertising.

The increase in other revenues was due to higher program sales driven by Revenge and Once Upon A Time.
Costs and Expenses
Operating expenses include programming and production costs, which increased $288 million from $2,675 million to $2,963 million. At Cable Networks, an increase in programming and production costs of $234 million was primarily due to higher sports rights costs driven by contractual rate increases for college football and the NFL and an increase in the number of NBA games due to the lockout in the prior year. At Broadcasting, programming and production costs increased $54 million due to higher program sales and more hours of first run original scripted primetime programming in the current quarter.

The increase in selling, general, administrative and other costs was driven by higher marketing costs at ESPN, the ABC Television Network, and the worldwide Disney Channels, partially offset by lower marketing costs at ABC Family.
Equity in the Income of Investees
Income from equity investees increased $20 million from $144 million to $164 million driven by A&E Television Networks (AETN) primarily due to increased affiliate and advertising revenues, partially offset by higher marketing costs, along with the benefit from an increase in the Company's ownership from 42% to 50%.
 
Segment Operating Income
Segment operating income increased 2%, or $21 million, to $1,214 million, primarily due to increases at the domestic Disney Channels, ABC Family and the ABC Television Network and higher equity income in AETN, partially offset by a decrease at ESPN.
The following table provides supplemental revenue and segment operating income detail for the Media Networks segment: 
 
Quarter Ended
 
% Change

(in millions)
December 29, 2012
 
December 31, 2011
 
Better/
(Worse)
Revenues
 
 
 
 
 
 
Cable Networks
$
3,538

 
$
3,309

 
7
 %
 
Broadcasting
1,563

 
1,470

 
6
 %
 
 
$
5,101

 
$
4,779

 
7
 %
 
Segment operating income
 
 
 
 
 
 
Cable Networks
$
952

 
$
967

 
(2)
 %
 
Broadcasting
262

 
226

 
16
 %
 
 
$
1,214

 
$
1,193

 
2
 %
 

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)



Parks and Resorts
Operating results for the Parks and Resorts segment are as follows: 
 
Quarter Ended
 
% Change
(in millions)
December 29, 2012
 
December 31, 2011
 
Better/
(Worse)
Revenues
 
 
 
 
 
 
Domestic
$
2,732

 
$
2,503

 
9
 %
 
International
659

 
652

 
1
 %
 
Total revenues
3,391

 
3,155

 
7
 %
 
Operating expenses
(2,053
)
 
(1,887
)
 
(9)
 %
 
Selling, general, administrative and other
(426
)
 
(412
)
 
(3)
 %
 
Depreciation and amortization
(335
)
 
(303
)
 
(11)
 %
 
Operating Income
$
577

 
$
553

 
4
 %
 
Revenues
Parks and Resorts revenues increased 7%, or $236 million due to an increase of $229 million at our domestic operations and an increase of $7 million at our international operations.

Revenue growth of 9% at our domestic operations reflected a 5% increase from volume and 4% from higher average guest spending. Higher volume was due to the addition of the Disney Fantasy cruise ship which launched in March 2012, attendance growth at Disneyland Resort and higher occupied room nights at Walt Disney World Resort. Increased guest spending was primarily due to higher average ticket prices, daily hotel room rates, and food, beverage and merchandise spending, partially offset by lower average cruise ship ticket prices.

Revenue growth of 1% at our international operations reflected a 2% increase from higher average guest spending which was essentially offset by a 2% decrease due to the impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the euro. Guest spending growth was due to higher merchandise sales and average ticket prices.
The following table presents supplemental park and hotel statistics: 
 
Domestic
 
International (2)
 
Total
 
Quarter Ended
 
Quarter Ended
 
Quarter Ended
 
December 29, 2012
 
December 31, 2011
 
December 29, 2012
 
December 31, 2011
 
December 29, 2012
 
December 31, 2011
Parks
 
 
 
 
 
 
 
 
 
 
 
Increase/(decrease)
 
 
 
 
 
 
 
 
 
 
 
Attendance
4
%
 
3
%
 
(1
)%
 
8
%
 
3
%
 
4
%
Per Capita Guest Spending
6
%
 
8
%
 
2
 %
 
2
%
 
6
%
 
6
%
Hotels (1)
 
 
 
 
 
 
 
 
 
 
 
Occupancy
81
%
 
85
%
 
84
 %
 
85
%
 
81
%
 
85
%
Available Room Nights (in thousands)
2,623

 
2,405