10-Q 1 fy2015_q1x10qxdoc.htm FORM 10-Q FY2015_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 27, 2014
 
 
 
 
 
 
 
 
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 1,699,563,381 shares of common stock outstanding as of January 28, 2015.




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 27,
2014
 
December 28,
2013
Revenues:
 
 
 
Services
$
10,727

 
$
9,857

Products
2,664

 
2,452

Total revenues
13,391

 
12,309

Costs and expenses:
 
 
 
Cost of services (exclusive of depreciation and amortization)
(6,134
)
 
(5,614
)
Cost of products (exclusive of depreciation and amortization)
(1,522
)
 
(1,451
)
Selling, general, administrative and other
(1,935
)
 
(2,018
)
Depreciation and amortization
(592
)
 
(561
)
Total costs and expenses
(10,183
)
 
(9,644
)
Restructuring and impairment charges

 
(19
)
Other income, net

 
6

Interest income/(expense), net
(58
)
 
49

Equity in the income of investees
212

 
239

Income before income taxes
3,362

 
2,940

Income taxes
(1,118
)
 
(1,036
)
Net income
2,244

 
1,904

Less: Net income attributable to noncontrolling interests
(62
)
 
(64
)
Net income attributable to The Walt Disney Company (Disney)
$
2,182

 
$
1,840

 
 
 
 
Earnings per share attributable to Disney:
 
 
 
Diluted
$
1.27

 
$
1.03

 
 
 
 
Basic
$
1.28

 
$
1.04

 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
Diluted
1,717

 
1,784

 
 
 
 
Basic
1,700

 
1,762

 
 
 
 
Dividends declared per share
$
1.15

 
$
0.86

See Notes to Condensed Consolidated Financial Statements

2



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
 
 
Quarter Ended
 
December 27,
2014
 
December 28,
2013
Net income
$
2,244

 
$
1,904

Other comprehensive income/(loss), net of tax:
 
 
 
Market value adjustments for investments
(16
)
 
(19
)
Market value adjustments for hedges
135

 
31

Pension and postretirement medical plan adjustments
44

 
25

Foreign currency translation and other
(95
)
 
14

Other comprehensive income/(loss)
68

 
51

Comprehensive income
2,312

 
1,955

Less: Net income attributable to noncontrolling interests
(62
)
 
(64
)
Less: Other comprehensive (income)/loss attributable to noncontrolling interests
20

 
(8
)
Comprehensive income attributable to Disney
$
2,270

 
$
1,883

See Notes to Condensed Consolidated Financial Statements





3


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
December 27,
2014
 
September 27,
2014
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
5,077

 
$
3,421

Receivables
8,591

 
7,822

Inventories
1,476

 
1,574

Television costs and advances
712

 
1,061

Deferred income taxes
452

 
497

Other current assets
932

 
801

Total current assets
17,240

 
15,176

Film and television costs
5,672

 
5,325

Investments
2,642

 
2,696

Parks, resorts and other property
 
 
 
Attractions, buildings and equipment
42,324

 
42,263

Accumulated depreciation
(24,045
)
 
(23,722
)
 
18,279

 
18,541

Projects in progress
4,148

 
3,553

Land
1,233

 
1,238

 
23,660

 
23,332

Intangible assets, net
7,369

 
7,434

Goodwill
27,849

 
27,881

Other assets
2,603

 
2,342

Total assets
$
87,035

 
$
84,186

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
9,069

 
$
7,595

Current portion of borrowings
4,376

 
2,164

Unearned royalties and other advances
3,359

 
3,533

Total current liabilities
16,804

 
13,292

 
 
 
 
Borrowings
12,167

 
12,676

Deferred income taxes
4,414

 
4,098

Other long-term liabilities
5,857

 
5,942

Commitments and contingencies (Note 10)

 

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
34,488

 
34,301

Retained earnings
53,969

 
53,734

Accumulated other comprehensive loss
(1,880
)
 
(1,968
)
 
86,577

 
86,067

Treasury stock, at cost, 1.1 billion shares at December 27, 2014 and
   September 27, 2014
(42,412
)
 
(41,109
)
Total Disney Shareholders’ equity
44,165

 
44,958

Noncontrolling interests
3,628

 
3,220

Total equity
47,793

 
48,178

Total liabilities and equity
$
87,035

 
$
84,186


See Notes to Condensed Consolidated Financial Statements

4



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
 
Quarter Ended
 
December 27,
2014
 
December 28,
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
2,244

 
$
1,904

Depreciation and amortization
592

 
561

Gains on sales of investments and dispositions

 
(111
)
Deferred income taxes
290

 
(85
)
Equity in the income of investees
(212
)
 
(239
)
Cash distributions received from equity investees
197

 
187

Net change in film and television costs and advances
114

 
(299
)
Equity-based compensation
104

 
96

Other
171

 
27

Changes in operating assets and liabilities:
 
 
 
Receivables
(1,027
)
 
(1,175
)
Inventories
92

 
97

Other assets
(44
)
 
(20
)
Accounts payable and other accrued liabilities
(1,283
)
 
(707
)
Income taxes
617

 
976

Cash provided by operations
1,855

 
1,212

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(998
)
 
(658
)
Sales of investments/proceeds from dispositions

 
136

Other
7

 
(5
)
Cash used in investing activities
(991
)
 
(527
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper borrowings, net
2,747

 
2,149

Borrowings
69

 
66

Reduction of borrowings
(1,098
)
 
(1,046
)
Repurchases of common stock
(1,303
)
 
(1,718
)
Proceeds from exercise of stock options
65

 
94

Other
417

 
218

Cash provided by/(used in) financing activities
897

 
(237
)
 
 
 
 
Impact of exchange rates on cash and cash equivalents
(105
)
 
18

 
 
 
 
Increase in cash and cash equivalents
1,656

 
466

Cash and cash equivalents, beginning of period
3,421

 
3,931

Cash and cash equivalents, end of period
$
5,077

 
$
4,397

See Notes to Condensed Consolidated Financial Statements

5



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
December 27, 2014
 
December 28, 2013
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
44,958

 
$
3,220

 
$
48,178

 
$
45,429

 
$
2,721

 
$
48,150

Comprehensive income
2,270

 
42

 
2,312

 
1,883

 
72

 
1,955

Equity compensation activity
179

 

 
179

 
238

 

 
238

Dividends
(1,948
)
 

 
(1,948
)
 
(1,508
)
 

 
(1,508
)
Common stock repurchases
(1,303
)
 

 
(1,303
)
 
(1,718
)
 

 
(1,718
)
Contributions

 
351

 
351

 

 
180

 
180

Distributions and other
9

 
15

 
24

 

 
(1
)
 
(1
)
Ending balance
$
44,165

 
$
3,628

 
$
47,793

 
$
44,324

 
$
2,972

 
$
47,296

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 presentation of the results for the interim period. Operating results for the quarter ended December 27, 2014 are not necessarily indicative of the results that may be expected for the year ending October 3, 2015. 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 2014 Annual Report on Form 10-K.
The Company enters into relationships or investments with other entities in which it does not have majority ownership. 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 (as defined by ASC 810-10-25-38) or the right to receive benefits from the VIE that could potentially be significant to the VIE. Disneyland Paris, Hong Kong Disneyland Resort (HKDL) and Shanghai Disney Resort (collectively the International Theme Parks) are VIEs. Company subsidiaries (the Management Companies) have management agreements with the International Theme Parks, which provide the Management Companies, subject to certain protective rights of joint venture partners, with the ability to direct the day-to-day operating activities and the development of business strategies that we believe most significantly impact the economic performance of the International Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the International Theme Parks. Therefore, although the Company has less than a 50% direct ownership interest in the International Theme Parks, 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 27,
2014
 
December 28,
2013
Media Networks
 
 
 
Cable Networks
$
242

 
$
257

Broadcasting
(29
)
 
(18
)
Equity in the income of investees included in segment operating income
$
213

 
$
239




7

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


 
Quarter Ended
 
December 27,
2014
 
December 28,
2013
Revenues (1):
 
 
 
Media Networks
$
5,860

 
$
5,290

Parks and Resorts
3,910

 
3,597

Studio Entertainment
1,858

 
1,893

Consumer Products
1,379

 
1,126

Interactive
384

 
403

 
$
13,391

 
$
12,309

Segment operating income (1):
 
 
 
Media Networks
$
1,495

 
$
1,455

Parks and Resorts
805

 
671

Studio Entertainment
544

 
409

Consumer Products
626

 
430

Interactive
75

 
55

 
$
3,545

 
$
3,020


(1) Studio Entertainment segment revenues and operating income include an allocation of Consumer Products revenues, which is meant to reflect royalties on sales of merchandise based on certain film properties. The increase to Studio Entertainment revenues and operating income and corresponding decrease to Consumer Products revenues and operating income totaled $145 million and $63 million for the quarters ended December 27, 2014 and December 28, 2013, respectively.
A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
December 27,
2014
 
December 28,
2013
Segment operating income
$
3,545

 
$
3,020

Corporate and unallocated shared expenses
(125
)
 
(116
)
Restructuring and impairment charges

 
(19
)
Other income, net

 
6

Interest income/(expense), net
(58
)
 
49

Income before income taxes
$
3,362

 
$
2,940

 
3.
Acquisitions
Maker Studios
On May 7, 2014, the Company acquired Maker Studios, Inc. (Maker), a leading network of online video content, for approximately $500 million of cash consideration, subject to certain conditions and adjustments. Maker shareholders may also receive up to $450 million of additional cash upon final determination of Maker’s achievement of performance targets for calendar years 2014 and 2015.  The Company has recognized a $198 million liability for the fair value of the contingent consideration (determined by a probability weighting of potential payouts). Subsequent changes in the estimated fair value, if any, will be recognized in earnings. The majority of the purchase price has been allocated to goodwill, which is not deductible for tax purposes. Goodwill reflects the synergies expected from enhancing the presence of Disney’s franchises and brands through the use of Maker’s distribution platform, advanced technology and business intelligence capability. The revenue and net income of Maker included in the Company’s Condensed Consolidated Statement of Income for the quarter ended December 27, 2014 was not material.

8

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


Goodwill
The changes in the carrying amount of goodwill for the quarter ended December 27, 2014 are as follows:
 
Media
Networks
 
Parks and
Resorts
 
Studio
Entertainment
 
Consumer
Products
 
Interactive
 
Total
Balance at Sept. 27, 2014
$
16,378

 
$
291

 
$
6,856

 
$
2,967

 
$
1,389

 
$
27,881

Acquisitions

 

 

 

 

 

Dispositions

 

 

 
(1
)
 

 
(1
)
Other, net
(14
)
 

 
(12
)
 

 
(5
)
 
(31
)
Balance at Dec. 27, 2014
$
16,364

 
$
291

 
$
6,844

 
$
2,966

 
$
1,384

 
$
27,849


4.
Borrowings
During the quarter ended December 27, 2014, the Company’s borrowing activity was as follows: 
 
September 27,
2014
 
Borrowings
 
Reductions of borrowings
 
Other
Activity
 
December 27,
2014
Commercial paper with original maturities less than three months, net (1)
$
50

 
$
1,025

 
$

 
$

 
$
1,075

Commercial paper with original maturities greater than three months

 
1,722

 

 

 
1,722

U.S. medium-term notes
13,713

 

 
(1,000
)
 
3

 
12,716

Foreign currency denominated debt
783

 
69

 
(93
)
 
(19
)
 
740

Other
294

 

 
(12
)
 
8

 
290

Total
$
14,840

 
$
2,816

 
$
(1,105
)
 
$
(8
)
 
$
16,543


(1) Borrowings and reductions of borrowings are reported net.
The Company has bank facilities with a syndicate of lenders to support commercial paper borrowings. The following is a summary of the bank facilities at December 27, 2014:
 
Committed
Capacity
 
Capacity
Used
 
Unused
Capacity
Facility expiring March 2015
$
1,500

 
$

 
$
1,500

Facility expiring June 2017
2,250

 

 
2,250

Facility expiring March 2019
2,250

 

 
2,250

Total
$
6,000

 
$

 
$
6,000

All of the above bank facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. The spread above LIBOR can range from 0.23% to 1.63%. The Company also has the ability to issue up to $800 million of letters of credit under the facility expiring in March 2019, which if utilized, reduces available borrowings under this facility. As of December 27, 2014, $214 million of letters of credit were outstanding, of which none were issued under this facility. The facilities contain only one financial covenant, relating to interest coverage, which the Company met on December 27, 2014 by a significant margin, and specifically exclude certain entities, including the International Theme Parks, from any representations, covenants, or events of default.


9

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


Interest income/(expense)
Interest and investment income and interest expense are reported net in the Condensed Consolidated Statements of Income and consist of the following (net of capitalized interest):
 
Quarter Ended
 
December 27,
2014
 
December 28,
2013
Interest expense
$
(69
)
 
$
(81
)
Interest and investment income
11

 
130

Interest income/(expense), net
$
(58
)
 
$
49


Interest and investment income includes gains and losses on the sale of available-for-sale and non-publicly traded cost method investments, investment impairments and interest earned on cash and cash equivalents and certain receivables. There were no sales of investments during the quarter ended December 27, 2014. The quarter ended December 28, 2013 included $59 million and $46 million of realized net gains on available-for-sale and cost method investments, respectively.

5.
International Theme Park Investments
At December 27, 2014, the Company had a 51% effective ownership interest in the operations of Disneyland Paris, a 48% ownership interest in the operations of HKDL 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.
The following tables present summarized balance sheet information for the Company as of December 27, 2014 and September 27, 2014, reflecting the impact of consolidating the International Theme Parks balance sheets.
 
As of December 27, 2014
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
4,174

 
$
903

 
$
5,077

Other current assets
11,883

 
280

 
12,163

Total current assets
16,057

 
1,183

 
17,240

Investments/Advances
6,812

 
(4,170
)
 
2,642

Parks, resorts and other property
16,981

 
6,679

 
23,660

Other assets
43,480

 
13

 
43,493

Total assets
$
83,330

 
$
3,705

 
$
87,035

 
 
 
 
 
 
Current portion of borrowings
$
4,376

 
$

 
$
4,376

Other current liabilities
11,660

 
768

 
12,428

Total current liabilities
16,036

 
768

 
16,804

Borrowings
11,912

 
255

 
12,167

Deferred income taxes and other long-term liabilities
10,088

 
183

 
10,271

Equity
45,294

 
2,499

 
47,793

Total liabilities and equity
$
83,330

 
$
3,705

 
$
87,035

 

10

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


 
As of September 27, 2014
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
2,645

 
$
776

 
$
3,421

Other current assets
11,452

 
303

 
11,755

Total current assets
14,097

 
1,079

 
15,176

Investments/Advances
6,627

 
(3,931
)
 
2,696

Parks, resorts and other property
17,081

 
6,251

 
23,332

Other assets
42,958

 
24

 
42,982

Total assets
$
80,763

 
$
3,423

 
$
84,186

 
 
 
 
 
 
Current portion of borrowings
$
2,164

 
$

 
$
2,164

Other current liabilities
10,318

 
810

 
11,128

Total current liabilities
12,482

 
810

 
13,292

Borrowings
12,423

 
253

 
12,676

Deferred income taxes and other long-term liabilities
9,859

 
181

 
10,040

Equity
45,999

 
2,179

 
48,178

Total liabilities and equity
$
80,763

 
$
3,423

 
$
84,186


The following table presents summarized income statement information of the Company for the quarter ended December 27, 2014, reflecting the impact of consolidating the International Theme Parks income statements.
 
Before 
International
Theme Parks
Consolidation(1)
 
International
Theme Parks
and Adjustments
 
Total
Revenues
$
12,813

 
$
578

 
$
13,391

Cost and expenses
(9,597
)
 
(586
)
 
(10,183
)
Other income/(expense), net
(31
)
 
31

 

Interest income/(expense), net
(43
)
 
(15
)
 
(58
)
Equity in the income of investees
218

 
(6
)
 
212

Income before income taxes
3,360

 
2

 
3,362

Income taxes
(1,118
)
 

 
(1,118
)
Net income
$
2,242

 
$
2

 
$
2,244

 
(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 $14 million of royalties and management fees recognized for the quarter ended December 27, 2014.
 

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 cash flow statement information of the Company for the quarter ended December 27, 2014, 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
$
1,742

 
$
113

 
$
1,855

Investments in parks, resorts and other property
(360
)
 
(638
)
 
(998
)
Cash (used in)/provided by other investing activities
(320
)
 
327

 
7

Cash provided by financing activities
562

 
335

 
897

Impact of exchange rates on cash and cash equivalents
(95
)
 
(10
)
 
(105
)
Change in cash and cash equivalents
1,529

 
127

 
1,656

Cash and cash equivalents, beginning of period
2,645

 
776

 
3,421

Cash and cash equivalents, end of period
$
4,174

 
$
903

 
$
5,077

Disneyland Paris    
In September 2012, the Company provided Disneyland Paris with €1.2 billion ($1.5 billion) of intercompany loans, which were used to repay its outstanding third-party bank debt. The Company has also provided Disneyland Paris lines of credit totaling €350 million ($428 million), one of which bears interest at EURIBOR and expires in two tranches (€100 million in 2015 and €150 million in 2018) and another €100 million credit line, which bears interest at EURIBOR plus 2.0% and expires in 2017. The balance outstanding under the lines of credit was €250 million ($305 million) at December 27, 2014. The total outstanding balance of loans provided to Disneyland Paris, including amounts outstanding under the lines of credit, was €1.8 billion ($2.2 billion) as of December 27, 2014.

Disneyland Paris is currently implementing a €1.0 billion ($1.2 billion) recapitalization consisting of the following:
An equity rights offering to raise approximately €0.4 billion ($0.4 billion) in cash proceeds of which the Company will fund approximately €0.2 billion ($0.3 billion). To the extent the other Disneyland Paris shareholders choose not to participate in the rights offering, the Company will also purchase the unsubscribed shares.
The Company will convert €0.6 billion ($0.7 billion) of its loans to Disneyland Paris into equity.
The Company will be required to make a mandatory tender offer to the other Disneyland Paris shareholders to purchase their shares at a price, which is subject to French regulatory approval. Based on the proposed price of €1.25 per share, the Company may be required to purchase up to an additional €0.3 billion ($0.4 billion) in shares.
To mitigate the dilution caused by the loan conversion, the Disneyland Paris shareholders will have the right to purchase shares from the Company at the price used to convert debt to equity.
The Company will replace the existing lines of credit with a new consolidated €350 million line of credit bearing interest at EURIBOR plus 2.0% and maturing in 2023.
The Company’s ownership interest in Disneyland Paris after the proposed recapitalization will depend on the number of Disneyland Paris shareholders that participate in the rights offering, accept the Company’s tender offer, and/or exercise their anti-dilution rights to purchase Disneyland Paris shares from the Company. The Company will have a minimum effective ownership interest of 51% after the above transaction.
The recapitalization received Disneyland Paris shareholders’ approval in January 2015 and the rights offering has commenced. The recapitalization is expected to be completed in fiscal 2015.
The Company has recognized approximately $365 million of deferred income tax assets on the difference between the Company’s tax basis in its investment in Disneyland Paris and the Company’s financial statement carrying value of Disneyland Paris. The Company will likely be required to write-off this deferred tax asset as a result of the recapitalization.

12

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


Hong Kong Disneyland Resort
At December 27, 2014, the Government of the Hong Kong Special Administrative Region (HKSAR) and the Company had a 52% and 48% equity interest in HKDL, respectively. In addition, HKSAR holds a right to receive additional shares over time if HKDL exceeds certain return on asset performance targets.  The amount of additional shares HKSAR can receive varies to the extent certain performance targets are exceeded but is capped on both an annual and cumulative basis. Based on the number of shares currently outstanding, these additional shares could decrease the Company’s equity interest by up to 10 percentage points over a period no shorter than 18 years. As HKDL exceeded the performance targets in fiscal 2014, HKSAR received an additional equity interest of one percentage point in January 2015.
HKDL plans to build a third hotel at the resort, which is expected to open in 2017 and cost approximately $550 million. To fund the construction, the Company will contribute approximately $219 million of equity, and HKSAR will convert an equal amount of its outstanding loan to HKDL into equity. Additionally, the Company and HKSAR will provide shareholder loans of up to approximately $149 million and $104 million, respectively. The loans will mature on dates from fiscal 2022 through fiscal 2025 and bear interest at a rate of three month HIBOR plus 2%.
Shanghai Disney Resort
The Company and Shanghai Shendi (Group) Co., Ltd (Shendi) are constructing a Disney Resort (Shanghai Disney Resort) in the Pudong district of Shanghai that includes a theme park, two hotels and a retail, dining and entertainment area with a planned investment of approximately 34 billion yuan ($5.5 billion). Construction on the project began in April 2011, with the completion of major construction work anticipated by the end of calendar 2015 and opening planned for spring 2016.
The total investment in Shanghai Disney Resort will be funded in accordance with each partner’s ownership percentage, with approximately 67% from equity contributions and 33% from shareholder loans. Shanghai Disney Resort is owned through two joint venture companies, in which Shendi owns 57% and the Company owns 43%. An additional joint venture, in which the Company has a 70% interest and Shendi a 30% interest, is responsible for designing, constructing and operating Shanghai Disney Resort.

6.
Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows: 
 
Pension Plans
 
Postretirement Medical Plans
 
Quarter Ended
 
Quarter Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
Service costs
$
83

 
$
71

 
$
4

 
$
3

Interest costs
131

 
122

 
17

 
16

Expected return on plan assets
(178
)
 
(161
)
 
(10
)
 
(9
)
Amortization of prior-year service costs
4

 
4

 

 

Recognized net actuarial loss/(gain)
62

 
36

 
3

 
(2
)
Net periodic benefit cost
$
102

 
$
72

 
$
14

 
$
8

During the quarter ended December 27, 2014, 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 2015 of approximately $350 million to $375 million. Final minimum pension plan funding requirements for fiscal 2015 will be determined based on our January 1, 2015 funding actuarial valuation, which will be available in the fourth quarter of fiscal 2015.


13

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


7.
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 27,
2014
 
December 28,
2013
Shares (in millions):
 
 
 
Weighted average number of common and common equivalent shares outstanding (basic)
1,700

 
1,762

Weighted average dilutive impact of Awards
17

 
22

Weighted average number of common and common equivalent shares outstanding (diluted)
1,717

 
1,784

Awards excluded from diluted earnings per share
9

 
10

 
8.
Equity
On December 3, 2014, the Company declared a $1.15 per share dividend ($1.9 billion) related to fiscal 2014 for shareholders of record on December 15, 2014, which was paid on January 8, 2015. The Company paid a $0.86 per share dividend ($1.5 billion) during the second quarter of fiscal 2014 related to fiscal 2013.
During the quarter ended December 27, 2014, the Company repurchased 15 million shares of its common stock for $1.3 billion. On January 30, 2015, the Company’s Board of Directors increased the repurchase authorization to a total of 400 million shares as of that date. 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) including our proportional share of equity method investee amounts, net of 37% estimated tax:
 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
 
Investments, net
 
Cash Flow Hedges
 
Balance September 27, 2014
$
100

 
$
204

 
$
(2,196
)
 
$
(76
)
 
$
(1,968
)
Unrealized gains (losses) arising during the period
(16
)
 
176

 

 
(75
)
 
85

Reclassifications of net (gains) losses to net income

 
(41
)
 
44

 

 
3

Balance at December 27, 2014
$
84

 
$
339

 
$
(2,152
)
 
$
(151
)
 
$
(1,880
)
 
 
 
 
 
 
 
 
 
 
Balance at September 28, 2013
$
95

 
$
83

 
$
(1,271
)
 
$
(94
)
 
$
(1,187
)
Unrealized gains (losses) arising during the period
18

 
41

 

 
6

 
65

Reclassifications of net (gains) losses to net income
(37
)
 
(10
)
 
25

 

 
(22
)
Balance at December 28, 2013
$
76

 
$
114

 
$
(1,246
)
 
$
(88
)
 
$
(1,144
)
 
 
 
 
 
 
 
 
 
 


14

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


Details about AOCI components reclassified to net income are as follows:
Gains/(losses) in net income:
 
Affected line item in the Condensed Consolidated Statements of Income:
 
Quarter Ended
 
 
December 27,
2014
 
December 28,
2013
Investments, net
 
Interest income/(expense), net
 
$

 
$
59

Estimated tax
 
Income taxes
 

 
(22
)
 
 
 
 

 
37

 
 
 
 
 
 
 
Cash flow hedges
 
Primarily revenue
 
65

 
16

Estimated tax
 
Income taxes
 
(24
)
 
(6
)
 
 
 
 
41

 
10

 
 
 
 
 
 
 
Pension and postretirement medical expense
 
Primarily included in the computation of net periodic benefit cost (see Note 6)
 
(70
)
 
(40
)
Estimated tax
 
Income taxes
 
26

 
15

 
 
 
 
(44
)
 
(25
)
 
 
 
 
 
 
 
Total reclassifications for the period
 
 
 
$
(3
)
 
$
22

At December 27, 2014, the Company held available-for-sale investments in net unrecognized gain positions totaling $46 million and no investments in significant unrecognized loss positions. At September 27, 2014, the Company held available-for-sale investments in net unrecognized gain positions totaling $55 million and no investments in significant unrecognized loss positions.

9.
Equity-Based Compensation
Compensation expense related to stock options, stock appreciation rights and restricted stock units (RSUs) is as follows:
 
Quarter Ended
 
December 27,
2014
 
December 28,
2013
Stock options/rights (1)
$
25

 
$
25

RSUs
79

 
74

Total equity-based compensation expense (2)
$
104

 
$
99

Equity-based compensation expense capitalized during the period
$
15

 
$
14

 
(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. During the quarters ended December 27, 2014 and December 28, 2013, amortization of previously capitalized equity-based compensation totaled $9 million and $13 million, respectively.
Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $237 million and $762 million, respectively, as of December 27, 2014.
The weighted average grant date fair values of options issued during the quarters ended December 27, 2014 and December 28, 2013 were $22.61 and $19.15, respectively.
During the quarter ended December 27, 2014, the Company made equity compensation grants consisting of 4.9 million stock options and 3.9 million RSUs, of which 0.2 million RSUs included market and/or performance conditions.


15

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


10.
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 July 9, 2013, the Company moved in state court to dismiss all claims and on March 27, 2014, the state court dismissed certain common law disparagement counts as preempted by South Dakota’s produce disparagement statute, but denied the motion on the remaining claims. On April 23, 2014, the Company petitioned the South Dakota Supreme Court to allow a discretionary appeal seeking reversal of the state court’s order permitting the remaining common law disparagement claims to proceed and also seeking reversal of its decision to allow certain claims to proceed as defamation claims. On May 22, 2014, the South Dakota Supreme Court denied the Company’s petition. On May 23, 2014, the Company answered the Complaint. Trial is set for February 2017. At this time, the Company is not able to predict the ultimate outcome of this matter, nor can it estimate the range of possible loss.
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 any of the above actions.
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 27, 2014, the remaining debt service obligation guaranteed by the Company was $334 million, of which $68 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 television program rights 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 television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $0.8 billion as of December 27, 2014. 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 4%, was approximately $0.7 billion as of December 27, 2014. The activity in the current period related to the allowance for credit losses was not material.
Income Taxes
During the quarter ended December 27, 2014, the Company increased its gross unrecognized tax benefits by $19 million to $822 million with a resulting $15 million increase to income tax expense.

16

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


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 $141 million, of which $132 million would reduce our income tax expense and effective tax rate if recognized. 
Venezuela operations
The Company has operations in Venezuela, including film and television distribution and merchandise licensing and has approximately 1.7 billion of Venezuelan bolivar (BsF) denominated net monetary assets, which primarily consist of cash. At December 27, 2014, the Venezuelan government (Government) has foreign currency exchange controls, which centralize the purchase and sale of all foreign currency at a Government determined official rate or through rates determined by Government-run exchange mechanisms (SICAD 1 or SICAD 2 rates). The Company translates its BsF denominated net monetary assets at the SICAD 2 rate, which was 50.0 BsF per U.S. dollar at December 27, 2014.

11. 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 and is classified in one of 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
The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level: 
 
Fair Value Measurement at December 27, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
84

 
$

 
$

 
$
84

Derivatives
 
 
 
 
 
 
 
Interest rate

 
110

 

 
110

Foreign exchange

 
909

 

 
909

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(62
)
 

 
(62
)
Foreign exchange

 
(133
)
 

 
(133
)
Other

 
(27
)
 

 
(27
)
Other

 

 
(198
)
 
(198
)
Total recorded at fair value
$
84

 
$
797

 
$
(198
)
 
$
683

Fair value of borrowings
$

 
$
16,259

 
$
846

 
$
17,105

 

17

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


 
Fair Value Measurement at September 27, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
100

 
$

 
$

 
$
100

Derivatives
 
 
 
 
 
 
 
Interest rate

 
117

 

 
117

Foreign exchange

 
621

 

 
621

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(75
)
 

 
(75
)
Foreign exchange

 
(121
)
 

 
(121
)
Other

 

 
(198
)
 
(198
)
Total recorded at fair value
$
100

 
$
542

 
$
(198
)
 
$
444

Fair value of borrowings
$

 
$
14,374

 
$
901

 
$
15,275

 The fair values of Level 2 derivatives are primarily determined by internal discounted cash flow 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.
The fair value of the Level 3 other liabilities represents the fair value of the contingent consideration for Maker and is determined by a probability weighting of potential payouts.
Level 3 borrowings, which include HKDL borrowings and other foreign currency denominated borrowings, are generally valued based on historical market transactions, prevailing market interest rates and the Company’s current borrowing cost and credit risk.
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.

12. 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 Company’s derivative positions measured at fair value are summarized in the following tables: 
 
As of December 27, 2014
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
423

 
$
253

 
$
(79
)
 
$
(6
)
Interest rate

 
110

 
(62
)
 

Other

 

 
(20
)
 
(7
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
149

 
84

 
(48
)
 

Gross fair value of derivatives
572

 
447

 
(209
)
 
(13
)
Counterparty netting
(172
)
 
(17
)
 
179

 
10

Cash collateral (received)/posted
(213
)
 
(174
)
 

 

Net derivative positions
$
187

 
$
256

 
$
(30
)
 
$
(3
)

18

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


 
 
As of September 27, 2014
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
251

 
$
160

 
$
(54
)
 
$
(8
)
Interest rate

 
117

 
(75
)
 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
171

 
39

 
(59
)
 

Gross fair value of derivatives
422

 
316

 
(188
)
 
(8
)
Counterparty netting
(144
)
 
(18
)
 
154

 
8

Cash collateral (received)/posted
(80
)
 
(119
)
 

 

Net derivative positions
$
198

 
$
179

 
$
(34
)
 
$


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 27, 2014 and September 27, 2014, the total notional amount of the Company’s pay-floating interest rate swaps was $5.8 billion and $6.8 billion, respectively. The following table summarizes adjustments related to fair value hedges included in Interest income/(expense), net in the Condensed Consolidated Statements of Income. 
 
Quarter Ended
 
December 27,
2014
 
December 28,
2013
Gain (loss) on interest rate swaps
$
10

 
$
(31
)
Gain (loss) on hedged borrowings
(10
)
 
31

In addition, the Company realized net benefits of $25 million and $22 million for the quarters ended December 27, 2014 and December 28, 2013, respectively, in Interest income/(expense), net related to the pay-floating interest rate swaps.
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 27, 2014 or at September 27, 2014 and gains and losses related to pay-fixed swaps recognized in earnings for the quarters ended December 27, 2014 and December 28, 2013 were not material.
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,

19

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


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 27, 2014 and September 27, 2014, the notional amounts of the Company’s net foreign exchange cash flow hedges were $5.6 billion and $5.0 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 27, 2014 and December 28, 2013 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $354 million.
Foreign exchange risk management contracts with respect to foreign currency 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 27, 2014 and September 27, 2014 were $4.2 billion and $4.3 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 quarters ended December 27, 2014 and December 28, 2013 by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of Income.
 
Costs and Expenses
 
Interest Income/(Expense), net
 
December 27,
2014
 
December 28,
2013
 
December 27,
2014
 
December 28,
2013
Net gains (losses) on foreign currency denominated assets and liabilities
$
(215
)
 
$
9

 
$
12

 
$
12

Net gains (losses) on foreign exchange risk management contracts not designated as hedges
205

 
(22
)
 
(12
)
 
(10
)
Net gains (losses)
$
(10
)
 
$
(13
)
 
$

 
$
2

Commodity Price Risk Management
The Company is subject to the volatility of commodities prices and the Company 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 notional amount of these commodities contracts at December 27, 2014 and September 27, 2014 and related gains or losses recognized in earnings for the quarters ended December 27, 2014 and December 28, 2013 were not material.
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 at December 27, 2014 and September 27, 2014 were not material. The related gains or losses recognized in earnings were not material for the quarters ended December 27, 2014 and December 28, 2013.
Contingent Features and Cash Collateral
The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required 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. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or the counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company 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 values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $33 million and $34 million on December 27, 2014 and September 27, 2014, respectively.
 

20

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


13. New Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board issued guidance that replaces the existing accounting standards for revenue recognition. The guidance requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services. The standard is effective beginning the first quarter of the Company’s 2018 fiscal year (with early adoption not permitted) and may be adopted either by restating all years presented in the Company’s financial statements or by recording the impact of adoption as an adjustment to retained earnings at the beginning of fiscal 2018. The Company is assessing the potential impact this guidance will have on its financial statements.

21



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:
Consolidated Results and Non-segment Items
Seasonality
Business Segment Results
Corporate and Unallocated Shared Expenses
Significant Developments
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
CONSOLIDATED RESULTS AND NON-SEGMENT ITEMS
Our summary consolidated results are presented below: 
 
Quarter Ended
 
% Change
(in millions, except per share data)
December 27,
2014
 
December 28,
2013
 
Better/
(Worse)
Revenues:
 
 
 
 
 

Services
$
10,727

 
$
9,857

 
9
 %
 
Products
2,664

 
2,452

 
9
 %
 
Total revenues
13,391

 
12,309

 
9
 %
 
Costs and expenses:
 
 
 
 
 

Cost of services (exclusive of depreciation and amortization)
(6,134
)
 
(5,614
)
 
(9)
 %
 
Cost of products (exclusive of depreciation and amortization)
(1,522
)
 
(1,451
)
 
(5)
 %
 
Selling, general, administrative and other
(1,935
)
 
(2,018
)
 
4
 %
 
Depreciation and amortization
(592
)
 
(561
)
 
(6)
 %
 
Total costs and expenses
(10,183
)
 
(9,644
)
 
(6)
 %
 
Restructuring and impairment charges

 
(19
)
 
nm

 
Other income, net

 
6

 
nm

 
Interest income/(expense), net
(58
)
 
49

 
nm


Equity in the income of investees
212

 
239

 
(11)
 %
 
Income before income taxes
3,362

 
2,940

 
14
 %

Income taxes
(1,118
)
 
(1,036
)
 
(8)
 %

Net income
2,244

 
1,904

 
18
 %

Less: Net income attributable to noncontrolling interests
(62
)
 
(64
)
 
3
 %

Net income attributable to Disney
$
2,182

 
$
1,840

 
19
 %

Diluted earnings per share attributable to Disney
$
1.27

 
$
1.03

 
23
 %



22

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


Quarter Results
Revenues for the quarter increased 9%, or $1.1 billion, to $13.4 billion; net income attributable to Disney increased 19%, or $0.3 billion, to $2.2 billion; and diluted earnings per share attributable to Disney (EPS) for the quarter increased 23% from $1.03 to $1.27 due to improved operating performance, a decrease in the weighted average shares outstanding as a result of our share repurchase program and a lower effective income tax rate, partially offset by the absence of investment gains recognized in the prior-year quarter.
Revenues
Service revenues for the quarter increased 9%, or $0.9 billion, to $10.7 billion driven by higher contractual rates for fees from Multi-channel Video Distributors (MVPDs) (Affiliate Fees) at our Media Networks, higher volumes and average guest spending at our domestic parks and resorts, higher program sales and television and subscription video on demand (TV/SVOD) distribution revenues and an increase in merchandise licensing revenue driven by Frozen. These increases were partially offset by lower theatrical distribution revenue reflecting the strong performance of Frozen in the prior-year quarter.
Product revenues for the quarter increased 9%, or $0.2 billion, to $2.7 billion reflecting comparable store and online sales growth at our retail operations, higher volumes and average guest spending on food, beverage and merchandise at our parks and resorts operations and increased home entertainment volumes.
Costs and expenses
Cost of services for the quarter increased 9%, or $0.5 billion, to $6.1 billion due to higher programming and production costs, driven by sports programming, and higher costs at domestic parks and resorts driven by inflation and higher volumes.
Cost of products for the quarter increased 5%, or $71 million, to $1.5 billion driven by volume growth at our retail and domestic parks and resorts operations.
Selling, general, administrative and other costs decreased 4%, or $83 million, to $1.9 billion primarily due to lower theatrical marketing expenses driven by the timing of Marvel releases and the inclusion of two DreamWorks Studios releases in the prior-year quarter compared to none in the current quarter.
Depreciation and amortization costs increased 6%, or $31 million, to $0.6 billion driven by new attractions at our parks and resorts.
Interest Income/(Expense), net
Interest income/(expense), net is as follows: 
(in millions)
 
December 27, 2014
 
December 28, 2013
 
% Change
 Better/(Worse) 
Interest expense
 
$
(69
)
 
$
(81
)
 
15
 %
 
Interest and investment income
 
11

 
130

 
(92
)%
 
Interest income/(expense), net
 
$
(58
)
 
$
49

 
nm

 
The decrease in interest expense was primarily due to lower effective interest rates. The decrease in interest and investment income for the quarter was due to gains on sales of investments in the prior-year quarter.
Equity in the Income of Investees
Equity in the income of investees decreased 11%, or $27 million, to $212 million driven by a decrease at Hulu due to higher programming and marketing costs, partially offset by an increase in advertising revenue.
Effective Income Tax Rate 
 
December 27, 2014
 
December 28, 2013
 
Change
Better/(Worse)
Effective income tax rate
33.3
%
 
35.2
%
 
1.9

ppt
The decrease in the effective income tax rate was driven by an increase in earnings from foreign operations indefinitely reinvested outside the United States, which are subject to tax rates lower than the federal statutory income tax rate.

23

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


SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 27, 2014 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. In the past, certain affiliate revenues at ESPN were deferred until annual programming commitments were met, which were typically satisfied during the second half of the Company’s fiscal year. Most MVPD contracts no longer have annual programming commitments that require the deferral of revenues.
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.
Interactive revenues fluctuate due to the timing and performance of game releases, which are determined by several factors, including theatrical releases and cable programming broadcasts on which the games are based, 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 27,
2014
 
December 28,
2013
 
Better/
(Worse)
Revenues:
 
 
 
 
 
 
Media Networks
$
5,860

 
$
5,290

 
11
 %
 
Parks and Resorts
3,910

 
3,597

 
9
 %
 
Studio Entertainment
1,858

 
1,893

 
(2)
 %
 
Consumer Products
1,379

 
1,126

 
22
 %
 
Interactive
384

 
403

 
(5)
 %
 
 
$
13,391

 
$
12,309

 
9
 %
 
Segment operating income:
 
 
 
 
 
 
Media Networks
$
1,495

 
$
1,455

 
3
 %
 
Parks and Resorts
805

 
671

 
20
 %
 
Studio Entertainment
544

 
409

 
33
 %
 
Consumer Products
626

 
430

 
46
 %
 
Interactive
75

 
55

 
36
 %
 
 
$
3,545

 
$
3,020

 
17
 %
 
 

24

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


The following table reconciles segment operating income to income before income taxes: 
 
Quarter Ended
 
% Change
(in millions)
December 27,
2014
 
December 28,
2013
 
Better/
(Worse)
Segment operating income
$
3,545

 
$
3,020

 
17
 %

Corporate and unallocated shared expenses
(125
)
 
(116
)
 
(8)
 %

Restructuring and impairment charges

 
(19
)
 
nm

 
Other income, net

 
6

 
nm


Interest income/(expense), net
(58
)
 
49

 
nm


Income before income taxes
$
3,362


$
2,940

 
14
 %


Depreciation expense is as follows: 
 
Quarter Ended
 
% Change
(in millions)
December 27,
2014
 
December 28,
2013
 
Better/
(Worse)
Media Networks
 
 
 
 
 
 
Cable Networks
$
37

 
$
33

 
(12)
 %
 
Broadcasting
21

 
23

 
9
 %
 
Total Media Networks
58

 
56

 
(4)
 %
 
Parks and Resorts
 
 
 
 


 
Domestic
297

 
279

 
(6)
 %
 
International
89

 
86

 
(3)
 %
 
Total Parks and Resorts
386

 
365

 
(6)
 %
 
Studio Entertainment
14

 
12

 
(17)
 %
 
Consumer Products
13

 
12

 
(8)
 %
 
Interactive
3

 
1

 
>(100) %
Corporate
61

 
58

 
(5)
 %
 
Total depreciation expense
$
535

 
$
504

 
(6)
 %
 

Amortization of intangible assets is as follows:
 
Quarter Ended
 
% Change
(in millions)
December 27,
2014
 
December 28,
2013
 
Better/
(Worse)
Media Networks
$
5

 
$
2

 
>(100) %
Parks and Resorts
1

 
1

 
%
 
Studio Entertainment
21

 
23

 
9
%
 
Consumer Products
27

 
28

 
4
%
 
Interactive
3

 
3

 
%
 
Total amortization of intangible assets
$
57

 
$
57

 
%
 


25

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


Media Networks
Operating results for the Media Networks segment are as follows: 
 
Quarter Ended
 
% Change
(in millions)
December 27,
2014
 
December 28,
2013
 
Better/
(Worse)
Revenues
 
 
 
 
 
 
Affiliate Fees
$
2,854

 
$
2,384

 
20
 %
 
Advertising
2,302

 
2,333

 
(1)
 %
 
Other
704

 
573

 
23
 %
 
Total revenues
5,860

 
5,290

 
11
 %
 
Operating expenses
(3,890
)
 
(3,437
)