10-Q 1 fy2016_q1x10qxdoc.htm FORM 10-Q 10-Q


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
January 2, 2016
 
 
 
 
 
 
 
 
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 1,631,570,150 shares of common stock outstanding as of February 3, 2016.




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
 
January 2,
2016
 
December 27,
2014
Revenues:
 
 
 
Services
$
12,622

 
$
10,727

Products
2,622

 
2,664

Total revenues
15,244

 
13,391

Costs and expenses:
 
 
 
Cost of services (exclusive of depreciation and amortization)
(7,056
)
 
(6,134
)
Cost of products (exclusive of depreciation and amortization)
(1,567
)
 
(1,522
)
Selling, general, administrative and other
(2,025
)
 
(1,935
)
Depreciation and amortization
(607
)
 
(592
)
Total costs and expenses
(11,255
)
 
(10,183
)
Restructuring and impairment charges
(81
)
 

Interest expense, net
(24
)
 
(58
)
Equity in the income of investees
474

 
212

Income before income taxes
4,358

 
3,362

Income taxes
(1,448
)
 
(1,118
)
Net income
2,910

 
2,244

Less: Net income attributable to noncontrolling interests
(30
)
 
(62
)
Net income attributable to The Walt Disney Company (Disney)
$
2,880

 
$
2,182

 
 
 
 
Earnings per share attributable to Disney:
 
 
 
Diluted
$
1.73

 
$
1.27

 
 
 
 
Basic
$
1.74

 
$
1.28

 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
Diluted
1,668

 
1,717

 
 
 
 
Basic
1,654

 
1,700

 
 
 
 
Dividends declared per share
$
0.71

 
$
1.15

See Notes to Condensed Consolidated Financial Statements

2



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
 
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Net income
$
2,910

 
$
2,244

Other comprehensive income/(loss), net of tax:
 
 
 
Market value adjustments for investments
(3
)
 
(16
)
Market value adjustments for hedges
(25
)
 
135

Pension and postretirement medical plan adjustments
42

 
44

Foreign currency translation and other
(113
)
 
(95
)
Other comprehensive income/(loss)
(99
)
 
68

Comprehensive income
2,811

 
2,312

Less: Net income attributable to noncontrolling interests
(30
)
 
(62
)
Less: Other comprehensive loss attributable to noncontrolling interests
51

 
20

Comprehensive income attributable to Disney
$
2,832

 
$
2,270

See Notes to Condensed Consolidated Financial Statements





3


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
January 2,
2016
 
October 3,
2015
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
4,301

 
$
4,269

Receivables
10,298

 
8,019

Inventories
1,434

 
1,571

Television costs and advances
811

 
1,170

Deferred income taxes

 
767

Other current assets
924

 
962

Total current assets
17,768

 
16,758

Film and television costs
6,330

 
6,183

Investments
3,268

 
2,643

Parks, resorts and other property
 
 
 
Attractions, buildings and equipment
42,937

 
42,745

Accumulated depreciation
(25,179
)
 
(24,844
)
 
17,758

 
17,901

Projects in progress
6,485

 
6,028

Land
1,244

 
1,250

 
25,487

 
25,179

Intangible assets, net
7,104

 
7,172

Goodwill
27,818

 
27,826

Other assets
2,346

 
2,421

Total assets
$
90,121

 
$
88,182

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
9,320

 
$
7,844

Current portion of borrowings
5,950

 
4,563

Unearned royalties and other advances
3,526

 
3,927

Total current liabilities
18,796

 
16,334

Borrowings
12,965

 
12,773

Deferred income taxes
3,874

 
4,051

Other long-term liabilities
6,288

 
6,369

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 – 2.9 billion
shares at January 2, 2016 and 2.8 billion shares at October 3, 2015
35,249

 
35,122

Retained earnings
60,734

 
59,028

Accumulated other comprehensive loss
(2,469
)
 
(2,421
)
 
93,514

 
91,729

Treasury stock, at cost, 1.2 billion shares
(49,556
)
 
(47,204
)
Total Disney Shareholders’ equity
43,958

 
44,525

Noncontrolling interests
4,240

 
4,130

Total equity
48,198

 
48,655

Total liabilities and equity
$
90,121

 
$
88,182

See Notes to Condensed Consolidated Financial Statements

4



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
OPERATING ACTIVITIES
 
 
 
Net income
$
2,910

 
$
2,244

Depreciation and amortization
607

 
592

Gains on sales of investments
(27
)
 

Deferred income taxes
551

 
290

Equity in the income of investees
(474
)

(212
)
Cash distributions received from equity investees
206

 
197

Net change in film and television costs and advances
705

 
114

Equity-based compensation
106

 
104

Other
144

 
171

Changes in operating assets and liabilities:
 
 
 
Receivables
(2,358
)
 
(1,027
)
Inventories
134

 
92

Other assets
91

 
(44
)
Accounts payable and other accrued liabilities
(891
)
 
(1,283
)
Income taxes
658

 
617

Cash provided by operations
2,362

 
1,855

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(1,406
)
 
(998
)
Sales of investments
40

 

Acquisitions
(400
)
 

Other
(32
)
 
7

Cash used in investing activities
(1,798
)
 
(991
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper borrowings, net
1,907

 
2,747

Borrowings
382

 
69

Reduction of borrowings
(564
)
 
(1,098
)
Repurchases of common stock
(2,352
)
 
(1,303
)
Proceeds from exercise of stock options
52

 
65

Contributions from noncontrolling interest holders

 
351

Other
107

 
66

Cash (used in)/provided by financing activities
(468
)
 
897

 
 
 
 
Impact of exchange rates on cash and cash equivalents
(64
)
 
(105
)
 
 
 
 
Change in cash and cash equivalents
32

 
1,656

Cash and cash equivalents, beginning of period
4,269

 
3,421

Cash and cash equivalents, end of period
$
4,301

 
$
5,077

See Notes to Condensed Consolidated Financial Statements

5



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
January 2, 2016
 
December 27, 2014
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
44,525

 
$
4,130

 
$
48,655

 
$
44,958

 
$
3,220

 
$
48,178

Comprehensive income
2,832

 
(21
)
 
2,811

 
2,270

 
42

 
2,312

Equity compensation activity
128

 

 
128

 
179

 

 
179

Dividends
(1,168
)
 

 
(1,168
)
 
(1,948
)
 

 
(1,948
)
Common stock repurchases
(2,352
)
 

 
(2,352
)
 
(1,303
)
 

 
(1,303
)
Contributions

 

 

 

 
351

 
351

Distributions and other
(7
)
 
131

 
124

 
9

 
15

 
24

Ending balance
$
43,958

 
$
4,240

 
$
48,198

 
$
44,165

 
$
3,628

 
$
47,793

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 January 2, 2016 are not necessarily indicative of the results that may be expected for the year ending October 1, 2016. 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 2015 Annual Report on Form 10-K.
The Company enters into relationships or investments with other entities that 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 (as defined by ASC 810-10-25-38). 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, 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. Fiscal 2015 segment financial information has been restated to reflect the combination of the Consumer Products and Interactive segments into a single segment effective at the beginning of fiscal 2016.
Segment operating results reflect earnings before corporate and unallocated shared expenses, restructuring and impairment charges, interest expense, income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees. Corporate and unallocated shared expenses principally consist of corporate functions, executive management and certain unallocated administrative support functions.
Equity in the income of investees is included in segment operating income as follows: 
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Media Networks
 
 
 
Cable Networks
$
214

 
$
242

Broadcasting
(72
)
 
(29
)
Equity in the income of investees included in segment operating income
142

 
213

Vice Gain
332

 

Other

 
(1
)
Total equity in the income of investees
$
474

 
$
212

During the three months ended January 2, 2016, the Company recognized its share of a net gain recorded by A&E Television Networks (A&E), a joint venture owned 50% by the Company, in connection with A&E’s acquisition of an interest

7

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


in Vice Group Holding, Inc. (Vice) (Vice Gain). The Company’s $332 million share of the Vice Gain is recorded in "Equity in the income of investees" in the Condensed Consolidated Statement of Income but is not included in segment operating income. See Note 3 for further discussion of the transaction.
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Revenues (1):
 
 
 
Media Networks
$
6,332

 
$
5,860

Parks and Resorts
4,281

 
3,910

Studio Entertainment
2,721

 
1,858

Consumer Products & Interactive Media
1,910

 
1,763

 
$
15,244

 
$
13,391

Segment operating income (1):
 
 
 
Media Networks
$
1,412

 
$
1,495

Parks and Resorts
981

 
805

Studio Entertainment
1,014

 
544

Consumer Products & Interactive Media
860

 
701

 
$
4,267

 
$
3,545


(1) Studio Entertainment segment revenues and operating income include an allocation of Consumer Products & Interactive Media 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 & Interactive Media revenues and operating income totaled $262 million and $145 million for the quarters ended January 2, 2016 and December 27, 2014, respectively.
A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Segment operating income
$
4,267

 
$
3,545

Corporate and unallocated shared expenses
(136
)
 
(125
)
Restructuring and impairment charges
(81
)
 

Interest expense, net
(24
)
 
(58
)
Vice Gain
332

 

Income before income taxes
$
4,358

 
$
3,362

 
3.
Acquisitions
Vice/A&E
Vice is a media company targeting a millennial audience through news and pop culture content and creative brand integration. During the first quarter of fiscal 2016, A&E acquired an 8% interest in Vice in exchange for a 49.9% interest in one of A&E’s cable channels, H2, which will be rebranded as VICELAND and programmed with Vice content. As a result of this exchange, A&E recognized a net non-cash gain based on the estimated fair value of H2. The Company’s share of the Vice Gain totaled $332 million and was recorded in "Equity in the income of investees" in the Condensed Consolidated Statement of Income for the quarter ended January 2, 2016. At January 2, 2016, A&E had a 20% interest in Vice.
In addition, during the first quarter of fiscal 2016, the Company acquired an 11% interest in Vice for $400 million of cash.
The Company accounts for its interests in A&E and Vice as equity method investments.
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. Maker shareholders were eligible to receive up to $450 million of additional

8

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


cash upon Maker’s achievement of certain performance targets for calendar years 2014 and 2015. At the date of the acquisition, the Company recorded a $198 million liability for the fair value of the contingent consideration (determined by a probability weighting of potential payouts). $105 million was paid in fiscal 2015 and a final payment of $70 million was made in January 2016.

4.
Borrowings
During the quarter ended January 2, 2016, the Company’s borrowing activity was as follows: 
 
October 3,
2015
 
Borrowings
 
Payments
 
Other
Activity
 
January 2,
2016
Commercial paper with original maturities less than three months(1)
$
2,330

 
$
408

 
$

 
$
1

 
$
2,739

Commercial paper with original maturities greater than three months
100

 
1,599

 
(100
)
 
1

 
1,600

U.S. medium-term notes
13,873

 

 
(500
)
 
4

 
13,377

Foreign currency denominated debt and other obligations(2)
714

 
91

 
(64
)
 
(74
)
 
667

International Theme Parks borrowings(3)
319

 
291

 

 
(78
)
 
532

Total
$
17,336

 
$
2,389

 
$
(664
)
 
$
(146
)
 
$
18,915

(1) 
Borrowings and payments are reported net.
(2) 
The other activity is primarily market value adjustments for debt with qualifying hedges.
(3) 
The other activity is primarily the conversion of HKDL debt into equity. See Note 5 for further discussion of the transaction.
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 January 2, 2016:
 
Committed
Capacity
 
Capacity
Used
 
Unused
Capacity
Facility expiring March 2016
$
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 January 2, 2016, $187 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 January 2, 2016 by a significant margin, and specifically exclude certain entities, including the International Theme Parks, from any representations, covenants, or events of default.
On January 8, 2016, the Company issued $3.0 billion in debt under its U.S. medium-term note program. The proceeds will be used for general corporate purposes.


9

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


Interest expense, net
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
 
January 2,
2016
 
December 27,
2014
Interest expense
$
(66
)
 
$
(69
)
Interest and investment income
42

 
11

Interest expense, net
$
(24
)
 
$
(58
)

Interest and investment income includes gains and losses on the sale of publicly and non-publicly traded investments, investment impairments and interest earned on cash and cash equivalents and certain receivables.

5.
International Theme Park Investments
At January 2, 2016, the Company had an 81% effective ownership interest in the operations of Disneyland Paris, a 47% 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 January 2, 2016 and October 3, 2015, reflecting the impact of consolidating the International Theme Parks balance sheets.
 
As of January 2, 2016
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
3,489

 
$
812

 
$
4,301

Other current assets
13,231

 
236

 
13,467

Total current assets
16,720

 
1,048

 
17,768

Investments/Advances
7,759

 
(4,491
)
 
3,268

Parks, resorts and other property
17,445

 
8,042

 
25,487

Other assets
43,533

 
65

 
43,598

Total assets
$
85,457

 
$
4,664

 
$
90,121

 
 
 
 
 
 
Current portion of borrowings
$
5,950

 
$

 
$
5,950

Other current liabilities
11,994

 
852

 
12,846

Total current liabilities
17,944

 
852

 
18,796

Borrowings
12,433

 
532

 
12,965

Deferred income taxes and other long-term liabilities
9,962

 
200

 
10,162

Equity
45,118

 
3,080

 
48,198

Total liabilities and equity
$
85,457

 
$
4,664

 
$
90,121

 

10

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


 
As of October 3, 2015
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
3,488

 
$
781

 
$
4,269

Other current assets
12,237

 
252

 
12,489

Total current assets
15,725

 
1,033

 
16,758

Investments/Advances
7,505

 
(4,862
)
 
2,643

Parks, resorts and other property
17,431

 
7,748

 
25,179

Other assets
43,540

 
62

 
43,602

Total assets
$
84,201

 
$
3,981

 
$
88,182

 
 
 
 
 
 
Current portion of borrowings
$
4,562

 
$
1

 
$
4,563

Other current liabilities
11,331

 
440

 
11,771

Total current liabilities
15,893

 
441

 
16,334

Borrowings
12,454

 
319

 
12,773

Deferred income taxes and other long-term liabilities
10,225

 
195

 
10,420

Equity
45,629

 
3,026

 
48,655

Total liabilities and equity
$
84,201

 
$
3,981

 
$
88,182

The following table presents summarized income statement information of the Company for the quarter ended January 2, 2016, reflecting the impact of consolidating the International Theme Parks income statements.
 
Before 
International
Theme Parks
Consolidation(1)
 
International
Theme Parks
and Adjustments
 
Total
Revenues
$
14,751

 
$
493

 
$
15,244

Cost and expenses
(10,676
)
 
(579
)
 
(11,255
)
Restructuring and impairment charges
(81
)
 

 
(81
)
Interest expense, net
(14
)
 
(10
)
 
(24
)
Equity in the income of investees
407

 
67

 
474

Income before income taxes
4,387

 
(29
)
 
4,358

Income taxes
(1,448
)
 

 
(1,448
)
Net income
$
2,939

 
$
(29
)
 
$
2,910

 
(1) 
In the quarter ended January 2, 2016, royalty and management fees from the International Theme Parks totaling $35 million are included in Revenues, and our share of the net income/(loss) of the International Theme Parks is included in Equity in the income of investees.
 

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 January 2, 2016, 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
$
2,288

 
$
74

 
$
2,362

Investments in parks, resorts and other property
(799
)
 
(607
)
 
(1,406
)
Cash (used in)/provided by other investing activities
(678
)
 
286

 
(392
)
Cash (used in)/provided by financing activities
(758
)
 
290

 
(468
)
Impact of exchange rates on cash and cash equivalents
(52
)
 
(12
)
 
(64
)
Change in cash and cash equivalents
1

 
31

 
32

Cash and cash equivalents, beginning of period
3,488

 
781

 
4,269

Cash and cash equivalents, end of period
$
3,489

 
$
812

 
$
4,301

Disneyland Paris    
During calendar 2015, Disneyland Paris completed a recapitalization consisting of the following:
A €0.4 billion equity rights offering of which the Company funded €0.2 billion in February 2015. The Company purchased shares that were unsubscribed by other Disneyland Paris shareholders, which increased the Company’s effective ownership by approximately four percentage points.
In February 2015, the Company converted €0.6 billion of its loans to Disneyland Paris into equity at a conversion price of €1.25 per share. The conversion increased the Company’s effective ownership by an additional 23 percentage points. In addition, Disneyland Paris repaid €0.3 billion that was outstanding under then existing lines of credit from the Company. These lines of credit have been replaced by a new €0.4 billion line of credit from the Company bearing interest at EURIBOR plus 2% and maturing in 2023. There is no outstanding balance under the new line of credit at January 2, 2016. As of January 2, 2016, the total outstanding balance of loans provided by the Company to Disneyland Paris was €1.0 billion.
In September 2015, the Company completed a mandatory tender offer to the other Disneyland Paris shareholders and acquired €0.1 billion in shares at €1.25 per share, which increased the Company’s effective ownership by an additional eight percentage points.
Following the completion of the mandatory tender offer and to offset the dilution caused by the loan conversion, in November 2015 certain Disneyland Paris shareholders purchased €0.05 billion in shares from the Company at €1.25 per share, which decreased the Company’s effective ownership by four percentage points.
As of January 2, 2016, the Company had an 81% effective ownership interest in Disneyland Paris.
Hong Kong Disneyland Resort
At January 2, 2016, the Government of the Hong Kong Special Administrative Region (HKSAR) and the Company had 53% and 47% equity interests in HKDL, respectively. HKSAR holds a right to receive additional shares over time to the extent HKDL exceeds certain return on asset performance targets. The amount of additional shares HKSAR can receive is capped on both an annual and cumulative basis and could decrease the Company’s equity interest by up to an additional 7 percentage points over a period no shorter than 16 years.
HKDL is building 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%. As of January 2, 2016, the Company has funded $181 million of equity and HKSAR has converted $181 million of its loan to equity. To date, neither the Company nor HKSAR have funded any of the shareholder loans.

12

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


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 initially includes a theme park, two hotels and a retail, dining and entertainment complex. The park opening is planned for June 16, 2016.
The investment in Shanghai Disney Resort will be funded in accordance with each shareholder’s ownership percentage, with approximately 67% from equity contributions and 33% from shareholder loans. As of January 2, 2016, the outstanding balance of loans provided by the Company and Shendi to Shanghai Disney Resort were 2.2 billion yuan ($345 million) and 2.9 billion yuan ($450 million), respectively. The Company and Shendi have committed to fund an additional 2.6 billion yuan ($400 million) and 3.4 billion yuan ($531 million) of loans, respectively. Shanghai Disney Resort is owned through two joint venture companies, in which Shendi owns 57% and the Company owns 43%. A management company, 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
 
January 2, 2016
 
December 27, 2014
 
January 2, 2016
 
December 27, 2014
Service costs
$
80

 
$
83

 
$
3

 
$
4

Interest costs
115

 
131

 
15

 
17

Expected return on plan assets
(188
)
 
(178
)
 
(11
)
 
(10
)
Amortization of prior-year service costs
3

 
4

 

 

Recognized net actuarial loss/(gain)
61

 
62

 
2

 
3

Net periodic benefit cost
$
71

 
$
102

 
$
9

 
$
14

During the quarter ended January 2, 2016, 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 2016 of approximately $900 million to $950 million. Final minimum pension plan funding requirements for fiscal 2016 will be determined based on our January 1, 2016 funding actuarial valuation, which will be available in the fourth quarter of fiscal 2016.

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
 
January 2,
2016
 
December 27,
2014
Shares (in millions):
 
 
 
Weighted average number of common and common equivalent shares outstanding (basic)
1,654

 
1,700

Weighted average dilutive impact of Awards
14

 
17

Weighted average number of common and common equivalent shares outstanding (diluted)
1,668

 
1,717

Awards excluded from diluted earnings per share
4

 
9

 

13

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


8.
Equity
The Company paid the following dividends in fiscal 2016 and 2015:
Per Share
 
Total Paid
 
Payment Timing
 
Related to Fiscal Period
$0.71
$1.2 billion
 
Second Quarter of Fiscal 2016
Second Half 2015
$0.66
 
$1.1 billion
 
Fourth Quarter of Fiscal 2015
 
First Half 2015
$1.15
$1.9 billion
 
Second Quarter of Fiscal 2015
2014
During the quarter ended January 2, 2016, the Company repurchased 21 million shares of its common stock for $2.4 billion. As of January 2, 2016, the Company had remaining authorization in place to repurchase approximately 334 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) 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 at October 3, 2015
$
13

 
$
334

 
$
(2,497
)
 
$
(271
)
 
$
(2,421
)
Quarter Ended January 2, 2016:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising
  during the period
(3
)
 
41

 

 
(62
)
 
(24
)
Reclassifications of net (gains)
  losses to net income

 
(66
)
 
42

 

 
(24
)
Balance at January 2, 2016
$
10

 
$
309

 
$
(2,455
)
 
$
(333
)
 
$
(2,469
)
 
 
 
 
 
 
 
 
 
 
Balance at September 27, 2014
$
100

 
$
204

 
$
(2,196
)
 
$
(76
)
 
$
(1,968
)
Quarter Ended December 27, 2014:
 
 
 
 
 
 
 
 
 
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
)


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
 
 
January 2,
2016
 
December 27,
2014
Cash flow hedges
 
Primarily revenue
 
$
105

 
$
65

Estimated tax
 
Income taxes
 
(39
)
 
(24
)
 
 
 
 
66

 
41

 
 
 
 
 
 
 
Pension and postretirement
  medical expense
 
Costs and expenses
 
(67
)
 
(70
)
Estimated tax
 
Income taxes
 
25

 
26

 
 
 
 
(42
)
 
(44
)
 
 
 
 
 
 
 
Total reclassifications for the period
 
 
 
$
24

 
$
(3
)
At January 2, 2016 and October 3, 2015, the Company held available-for-sale investments in unrecognized gain positions totaling $20 million and $21 million, respectively, 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
 
January 2,
2016
 
December 27,
2014
Stock options/rights (1)
$
23

 
$
25

RSUs
83

 
79

Total equity-based compensation expense (2)
$
106

 
$
104

Equity-based compensation expense capitalized during the period
$
15

 
$
15

 
(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 January 2, 2016 and December 27, 2014, amortization of previously capitalized equity-based compensation totaled $17 million and $9 million, respectively.
Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $233 million and $798 million, respectively, as of January 2, 2016.
The weighted average grant date fair values of options issued during the quarters ended January 2, 2016 and December 27, 2014 were $31.17 and $22.61, respectively.
During the quarter ended January 2, 2016, the Company made equity compensation grants consisting of 3.8 million stock options and 3.2 million RSUs.

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

15

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


$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 June 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 January 2, 2016, the remaining debt service obligation guaranteed by the Company was $325 million, of which $60 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 and vacation ownership units. 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 $0.9 billion as of January 2, 2016. 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 January 2, 2016. The activity in the current period related to the allowance for credit losses was not material.
Income Taxes
During the quarter ended January 2, 2016, the Company decreased its gross unrecognized tax benefits by $18 million to $894 million including a $10 million decrease to income tax expense.
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 $161 million, of which $60 million would reduce our income tax expense and effective tax rate if recognized. 


16

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


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 January 2, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
35

 
$

 
$

 
$
35

Derivatives
 
 
 
 
 
 
 
Interest rate

 
69

 

 
69

Foreign exchange

 
926

 

 
926

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(23
)
 

 
(23
)
Foreign exchange

 
(184
)
 

 
(184
)
Other

 
(36
)
 

 
(36
)
Other

 

 
(70
)
 
(70
)
Total recorded at fair value
$
35

 
$
752

 
$
(70
)
 
$
717

Fair value of borrowings
$

 
$
18,355

 
$
1,009

 
$
19,364

 
 
Fair Value Measurement at October 3, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
36

 
$

 
$

 
$
36

Derivatives
 
 
 
 
 
 
 
Interest rate

 
101

 

 
101

Foreign exchange

 
910

 

 
910

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Foreign exchange

 
(178
)
 

 
(178
)
Other

 
(38
)
 

 
(38
)
Other

 

 
(96
)
 
(96
)
Total recorded at fair value
$
36

 
$
795

 
$
(96
)
 
$
735

Fair value of borrowings
$

 
$
17,036

 
$
752

 
$
17,788

 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.

17

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


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.
Level 3 borrowings, which include International Theme Park 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 January 2, 2016
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
393

 
$
257

 
$
(51
)
 
$
(15
)
Interest rate

 
69

 
(23
)
 

Other

 

 
(23
)
 
(3
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
175

 
101

 
(111
)
 
(7
)
Other

 

 

 
(10
)
Gross fair value of derivatives
568

 
427

 
(208
)
 
(35
)
Counterparty netting
(155
)
 
(74
)
 
205

 
24

Cash collateral received
(260
)
 
(146
)
 

 

Net derivative positions
$
153

 
$
207

 
$
(3
)
 
$
(11
)
 
 
As of October 3, 2015
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
406

 
$
271

 
$
(54
)
 
$
(17
)
Interest rate

 
101

 

 

Other

 

 
(18
)
 
(3
)
Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
146

 
87

 
(102
)
 
(5
)
Other

 

 

 
(17
)
Gross fair value of derivatives
552

 
459

 
(174
)
 
(42
)
Counterparty netting
(136
)
 
(56
)
 
169

 
23

Cash collateral received
(238
)
 
(191
)
 

 

Net derivative positions
$
178

 
$
212

 
$
(5
)
 
$
(19
)

18

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


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 January 2, 2016 and October 3, 2015, the total notional amount of the Company’s pay-floating interest rate swaps was $5.9 billion and $6.4 billion, respectively. The following table summarizes adjustments related to fair value hedges included in "Interest expense, net" in the Condensed Consolidated Statements of Income. 
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Gain (loss) on interest rate swaps
$
(55
)
 
$
10

Gain (loss) on hedged borrowings
55

 
(10
)
In addition, during the quarters ended January 2, 2016 and December 27, 2014, the Company realized net benefits of $23 million and $25 million, respectively, in interest 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 January 2, 2016 or at October 3, 2015 and gains and losses related to pay-fixed swaps recognized in earnings for the quarters ended January 2, 2016 and December 27, 2014 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, 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 January 2, 2016 and October 3, 2015, the notional amounts of the Company’s net foreign exchange cash flow hedges were $6.2 billion and $6.5 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 January 2, 2016 and December 27, 2014 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $336 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 January 2, 2016 and October 3, 2015 were $3.1 billion and $3.3 billion, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the net foreign exchange gains or losses on the foreign exchange contracts we entered into to mitigate our exposure with respect to foreign currency

19

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


denominated assets and liabilities for the quarters ended January 2, 2016 and December 27, 2014 by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of Income.
 
Costs and Expenses
 
Interest expense, net
 
Quarter Ended
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
 
January 2,
2016
 
December 27,
2014
Net gains (losses) on foreign currency denominated assets and liabilities
$
(89
)
 
$
(215
)
 
$
10

 
$
12

Net gains (losses) on foreign exchange risk management contracts not designated as hedges
79

 
205

 
(12
)
 
(12
)
Net gains (losses)
$
(10
)
 
$
(10
)
 
$
(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 January 2, 2016 and October 3, 2015 and related gains or losses recognized in earnings for the quarters ended January 2, 2016 and December 27, 2014 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 January 2, 2016 and October 3, 2015 were not material. The related gains or losses recognized in earnings were not material for the quarters ended January 2, 2016 and December 27, 2014.
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 $4 million and $7 million on January 2, 2016 and October 3, 2015, respectively.
 
13. Restructuring and Impairment Charges
The Company recorded $81 million of restructuring and impairment charges in the current quarter for an investment impairment and contract termination and severance costs.

14. New Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance that replaces the existing accounting standards for revenue recognition. The guidance provides a five step framework 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. Subsequently, the FASB has issued exposure drafts to amend certain aspects of the guidance, including revenue recognition associated with the licensing of intellectual property (IP). The FASB has indicated that it expects to issue the final guidance on IP licensing in the next few months. The new guidance is effective beginning the first quarter of the Company’s 2019 fiscal year (with early adoption permitted beginning fiscal year 2018). The guidance 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

20

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


retained earnings at the beginning of the year of adoption. The Company is assessing the potential impact this guidance will have on its financial statements.
Income Taxes
In November 2015, the FASB issued guidance to simplify the presentation of deferred income taxes by reporting the net amount of deferred tax assets and liabilities on a jurisdiction by jurisdiction basis as noncurrent on the balance sheet. The Company adopted the provisions of this guidance in the first quarter of fiscal 2016 and applied the provisions prospectively.


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
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)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues:
 
 
 
 
 
Services
$
12,622

 
$
10,727

 
18
 %
Products
2,622

 
2,664

 
(2)
 %
Total revenues
15,244

 
13,391

 
14
 %
Costs and expenses:
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
(7,056
)
 
(6,134
)
 
(15)
 %
Cost of products (exclusive of depreciation and amortization)
(1,567
)
 
(1,522
)
 
(3)
 %
Selling, general, administrative and other
(2,025
)
 
(1,935
)
 
(5)
 %
Depreciation and amortization
(607
)
 
(592
)
 
(3)
 %
Total costs and expenses
(11,255
)
 
(10,183
)
 
(11)
 %
Restructuring and impairment charges
(81
)
 

 
nm

Interest expense, net
(24
)
 
(58
)
 
59
 %
Equity in the income of investees
474

 
212

 
>100
 %
Income before income taxes
4,358

 
3,362

 
30
 %
Income taxes
(1,448
)
 
(1,118
)
 
(30)
 %
Net income
2,910

 
2,244

 
30
 %
Less: Net income attributable to noncontrolling interests
(30
)
 
(62
)
 
52
 %
Net income attributable to Disney
$
2,880

 
$
2,182

 
32
 %
Diluted earnings per share attributable to Disney
$
1.73

 
$
1.27

 
36
 %


22

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


Quarter Results
Diluted earnings per share attributable to Disney (EPS) increased 36% from $1.27 to $1.73 due to improved operating performance, the Vice Gain at A&E (discussed below) and a decrease in weighted average shares outstanding as a result of our share repurchase program, partially offset by the impact of foreign currency translation due to the strengthening of the U.S. dollar against major currencies (FX Impact).
Revenues
Service revenues for the quarter grew 18%, or $1.9 billion, to $12.6 billion due to increases in theatrical distribution, merchandise licensing, advertising, volume and guest spending at our domestic parks and resorts, fees from Multi-channel Video Distributors (MVPDs) (Affiliate Fees), and TV and subscription video on demand (SVOD) distribution. These increases were partially offset by an unfavorable FX Impact.
Product revenues for the quarter decreased 2%, or $42 million, to $2.6 billion driven by an unfavorable FX Impact, a decrease in console game volumes and lower retail sales, partially offset by increased guest spending and food, beverage and merchandise volumes at our domestic parks and resorts.
Costs and expenses
Cost of services for the quarter increased 15%, or $0.9 billion, to $7.1 billion due to increased sports programming costs, higher theatrical distribution costs, and inflation and new guest offerings at our domestic parks and resorts. These increases were partially offset by a favorable FX Impact.
Cost of products for the quarter increased 3%, or $45 million, to $1.6 billion primarily due to higher food, beverage and merchandise volumes and inflation at our domestic parks and resorts, partially offset by a favorable FX impact.
Selling, general, administrative and other costs increased 5%, or $90 million, to $2.0 billion primarily due to higher theatrical marketing costs, partially offset by a favorable FX Impact.
Depreciation and amortization costs increased 3%, or $15 million, to $0.6 billion primarily due to depreciation associated with new theme park attractions, partially offset by a favorable FX Impact.
Restructuring and impairment charges
The Company recorded $81 million of restructuring and impairment charges in the quarter for an investment impairment and contract termination and severance costs.
Interest expense, net
Interest expense, net is as follows: 
 
Quarter Ended
 

(in millions)
January 2, 2016
 
December 27, 2014
 
% Change
Better/(Worse)
Interest expense
$
(66
)
 
$
(69
)
 
4
%
Interest and investment income
42

 
11

 
>100
%
Interest expense, net
$
(24
)
 
$
(58
)
 
59
%
The increase in interest and investment income for the quarter was due to gains on sales of investments.
Equity in the income of investees
Equity in the income of investees increased $262 million, to $474 million for the quarter due to the $332 million Vice Gain ($0.13 of EPS) (see Note 3 to the Condensed Consolidated Financial Statements). The benefit of the Vice Gain was partially offset by higher equity losses at Hulu and lower operating results at A&E. The increase in equity losses at Hulu was due to increased programming and marketing costs driven by new content offerings, partially offset by higher subscription and advertising revenues. The decrease at A&E was due to lower advertising revenue and higher programming costs.

23

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


Effective Income Tax Rate 
 
Quarter Ended
 
 
 
January 2, 2016
 
December 27, 2014
 
Change
Better/(Worse)
Effective income tax rate
33.2
%
 
33.3
%
 
0.1

ppt
The effective income tax rate was relatively flat as a favorable FX Impact from deferred income tax liabilities recorded on our foreign earnings was essentially offset by a higher average effective tax rate due to a decreased benefit related to the mix of earnings that are eligible for qualified domestic production activities deductions.
Noncontrolling Interests 
 
Quarter Ended
 
 
(in millions)
January 2, 2016
 
December 27, 2014
 
% Change
Better/(Worse) 
Net income attributable to noncontrolling interests
$
30

 
$
62

 
52
%
The decrease in net income attributable to noncontrolling interests for the quarter was due to lower results at Disneyland Paris and higher pre-opening expenses at Shanghai Disney Resort.
Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes.

SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended January 2, 2016 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, changes in viewership levels and timing of program sales. 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.
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 & Interactive Media revenues are influenced by seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first fiscal quarter, and the timing and performance of theatrical and game releases and cable programming broadcasts.


24

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


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)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues:
 
 
 
 
 
Media Networks
$
6,332

 
$
5,860

 
8
 %
Parks and Resorts
4,281

 
3,910

 
9
 %
Studio Entertainment
2,721

 
1,858

 
46
 %
Consumer Products & Interactive Media
1,910

 
1,763

 
8
 %
 
$
15,244

 
$
13,391

 
14
 %
Segment operating income:
 
 
 
 
 
Media Networks
$
1,412

 
$
1,495

 
(6)
 %
Parks and Resorts
981

 
805

 
22
 %
Studio Entertainment
1,014

 
544

 
86
 %
Consumer Products & Interactive Media
860

 
701

 
23
 %
 
$
4,267

 
$
3,545

 
20
 %
 
The following table reconciles segment operating income to income before income taxes: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Segment operating income
$
4,267

 
$
3,545

 
20
 %
Corporate and unallocated shared expenses
(136
)
 
(125
)
 
(9)
 %
Restructuring and impairment charges
(81
)
 

 
nm

Interest expense, net
(24
)
 
(58
)
 
59
 %
Vice Gain
332

 

 
nm

Income before income taxes
$
4,358


$
3,362

 
30
 %
Depreciation expense is as follows: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Media Networks
 
 
 
 
 
Cable Networks
$
37

 
$
37

 
 %
Broadcasting
21

 
21

 
 %
Total Media Networks
58

 
58

 
 %
Parks and Resorts
 
 
 
 


Domestic
318

 
297

 
(7)
 %
International
84

 
89

 
6
 %
Total Parks and Resorts
402

 
386

 
(4)
 %
Studio Entertainment
13

 
14

 
7
 %
Consumer Products & Interactive Media
14

 
16

 
13
 %
Corporate
63

 
61

 
(3)
 %
Total depreciation expense
$
550

 
$
535

 
(3)
 %

25

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


Amortization of intangible assets is as follows:
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Media Networks
$
5

 
$
5

 
 %
Parks and Resorts
1

 
1

 
 %
Studio Entertainment
20

 
21

 
5
 %
Consumer Products & Interactive Media
31

 
30

 
(3)
 %
Total amortization of intangible assets
$
57

 
$
57

 
 %

Media Networks
Operating results for the Media Networks segment are as follows: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues
 
 
 
 
 
Affiliate Fees
$
2,960

 
$
2,854

 
4
 %
Advertising
2,619

 
2,335

 
12
 %
TV/SVOD distribution and other
753

 
671

 
12
 %
Total revenues
6,332

 
5,860

 
8
 %
Operating expenses
(4,355
)
 
(3,890
)
 
(12)
 %
Selling, general, administrative and other
(644
)
 
(625
)
 
(3)
 %
Depreciation and amortization
(63
)
 
(63
)
 
 %
Equity in the income of investees
142

 
213

 
(33)
 %
Operating Income
$
1,412

 
$
1,495

 
(6)
 %
Revenues
The 4% increase in Affiliate Fees was due to growth of 7% from higher contractual rates, partially offset by decreases of 2% from lower subscribers and 2% from an unfavorable FX Impact.
The 12% increase in advertising revenues was due to increases of $245 million at Cable Networks, from $1,243 million to $1,488 million, and $39 million at Broadcasting, from $1,092 million to $1,131 million. The increase at Cable Networks was due to a 12% increase from higher units sold and a 10% increase from higher rates, both of which benefited from the timing of the College Football Playoff (CFP) bowl games relative to our fiscal quarter end. Six CFP games were aired in the current quarter that were aired in the second quarter of the prior year. Broadcasting advertising revenues reflected a 5% increase from higher network units sold, a 3% increase from higher network rates and a 1% increase from airing New Year’s Eve specials in the current quarter that aired in the second quarter of the prior year. These increases were partially offset by a 5% decrease from lower network ratings and a 2% decrease from the owned television stations driven by lower political advertising.
TV/SVOD distribution and other revenue increased $82 million from $671 million to $753 million due to higher program sales driven by sales of Jessica Jones and Disney Channel titles in the current quarter.
Costs and Expenses
Operating expenses include programming and production costs, which increased $470 million from $3,589 million to $4,059 million. At Cable Networks, programming and production costs increased $400 million primarily due to the timing of CFP games and contractual rate increases for the NFL and college football. These increases were partially offset by the absence of rights costs for NASCAR. At Broadcasting, programming and production costs increased $70 million due a higher average cost of new scripted programming, higher TV/SVOD sales and the costs of airing New Year’s Eve specials in the current quarter.
Equity in the Income of Investees
Income from equity investees decreased $71 million from $213 million to $142 million due to higher equity losses from Hulu and lower equity income from A&E. Higher equity losses from Hulu were due to increased programming and marketing

26

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


costs driven by new content offerings, partially offset by higher subscription and advertising revenues. The A&E decrease was driven by lower advertising revenue and higher programming costs.
 Segment Operating Income
Segment operating income decreased 6%, or $83 million, to $1,412 million due to lower income from equity investees, decreases at ESPN and the owned television stations, and an unfavorable FX Impact, partially offset by increases at the ABC Television Network and the domestic Disney Channels.
The following table provides supplemental revenue and segment operating income detail for the Media Networks segment: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues
 
 
 
 
 
Cable Networks
$
4,521

 
$
4,166

 
9
 %
Broadcasting
1,811

 
1,694

 
7
 %
 
$
6,332

 
$
5,860

 
8
 %
Segment operating income
 
 
 
 
 
Cable Networks
$
1,189

 
$
1,255

 
(5)
 %
Broadcasting