10-Q 1 fy2017_q2x10qxdoc.htm FORM 10-Q Document


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
April 1, 2017
 
 
 
twdcimagea01a01a01a01a05.jpg
 
 
 
 
 
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
(Do not check if smaller reporting company)
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 1,564,879,056 shares of common stock outstanding as of May 3, 2017.




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
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Revenues:
 
 
 
 
 
 
 
Services
$
11,487

 
$
11,171

 
$
23,893

 
$
23,793

Products
1,849

 
1,798

 
4,227

 
4,420

Total revenues
13,336

 
12,969

 
28,120

 
28,213

Costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
(5,839
)
 
(5,566
)
 
(12,859
)
 
(12,622
)
Cost of products (exclusive of depreciation and amortization)
(1,130
)
 
(1,298
)
 
(2,516
)
 
(2,865
)
Selling, general, administrative and other
(1,941
)
 
(2,137
)
 
(3,926
)
 
(4,162
)
Depreciation and amortization
(676
)
 
(605
)
 
(1,363
)
 
(1,212
)
Total costs and expenses
(9,586
)
 
(9,606
)
 
(20,664
)
 
(20,861
)
Restructuring and impairment charges

 

 

 
(81
)
Interest expense, net
(84
)
 
(67
)
 
(183
)
 
(91
)
Equity in the income of investees
85

 
150

 
203

 
624

Income before income taxes
3,751

 
3,446

 
7,476

 
7,804

Income taxes
(1,212
)
 
(1,170
)
 
(2,449
)
 
(2,618
)
Net income
2,539

 
2,276

 
5,027

 
5,186

Less: Net income attributable to noncontrolling interests
(151
)
 
(133
)
 
(160
)
 
(163
)
Net income attributable to The Walt Disney Company (Disney)
$
2,388

 
$
2,143

 
$
4,867

 
$
5,023

 
 
 
 
 
 
 
 
Earnings per share attributable to Disney:
 
 
 
 
 
 
 
Diluted
$
1.50

 
$
1.30

 
$
3.05

 
$
3.04

 
 
 
 
 
 
 
 
Basic
$
1.51

 
$
1.31

 
$
3.07

 
$
3.06

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Diluted
1,591

 
1,643

 
1,597

 
1,655

 
 
 
 
 
 
 
 
Basic
1,580

 
1,633

 
1,586

 
1,643

 
 
 
 
 
 
 
 
Dividends declared per share
$

 
$

 
$
0.78

 
$
0.71

See Notes to Condensed Consolidated Financial Statements

2



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
 
 
Quarter Ended
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Net income
$
2,539

 
$
2,276

 
$
5,027

 
$
5,186

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Market value adjustments for investments
1

 
(1
)
 
(10
)
 
(4
)
Market value adjustments for hedges
(164
)
 
(204
)
 
116

 
(229
)
Pension and postretirement medical plan adjustments
80

 
40

 
126

 
82

Foreign currency translation and other
67

 
54

 
(223
)
 
(59
)
Other comprehensive income/(loss)
(16
)
 
(111
)
 
9

 
(210
)
Comprehensive income
2,523

 
2,165

 
5,036

 
4,976

Less: Net income attributable to noncontrolling interests
(151
)
 
(133
)
 
(160
)
 
(163
)
Less: Other comprehensive (income)/loss attributable to noncontrolling interests
(9
)
 
(19
)
 
90

 
32

Comprehensive income attributable to Disney
$
2,363

 
$
2,013

 
$
4,966

 
$
4,845

See Notes to Condensed Consolidated Financial Statements





3


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
April 1,
2017
 
October 1,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
3,800

 
$
4,610

Receivables
9,293

 
9,065

Inventories
1,304

 
1,390

Television costs and advances
1,133

 
1,208

Other current assets
740

 
693

Total current assets
16,270

 
16,966

Film and television costs
6,974

 
6,339

Investments
4,155

 
4,280

Parks, resorts and other property
 
 
 
Attractions, buildings and equipment
50,785

 
50,270

Accumulated depreciation
(27,646
)
 
(26,849
)
 
23,139

 
23,421

Projects in progress
3,023

 
2,684

Land
1,237

 
1,244

 
27,399

 
27,349

Intangible assets, net
6,845

 
6,949

Goodwill
27,831

 
27,810

Other assets
2,333

 
2,340

Total assets
$
91,807

 
$
92,033

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
8,077

 
$
9,130

Current portion of borrowings
4,865

 
3,687

Unearned royalties and other advances
4,423

 
4,025

Total current liabilities
17,365

 
16,842

Borrowings
16,788

 
16,483

Deferred income taxes
4,006

 
3,679

Other long-term liabilities
6,381

 
7,706

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
36,100

 
35,859

Retained earnings
69,708

 
66,088

Accumulated other comprehensive loss
(3,880
)
 
(3,979
)
 
101,928

 
97,968

Treasury stock, at cost, 1.3 billion shares
(58,144
)
 
(54,703
)
Total Disney Shareholders’ equity
43,784

 
43,265

Noncontrolling interests
3,483

 
4,058

Total equity
47,267

 
47,323

Total liabilities and equity
$
91,807

 
$
92,033

See Notes to Condensed Consolidated Financial Statements

4



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
5,027

 
$
5,186

Depreciation and amortization
1,363

 
1,212

Deferred income taxes
126

 
797

Equity in the income of investees
(203
)

(624
)
Cash distributions received from equity investees
397

 
383

Net change in film and television costs and advances
(428
)
 
35

Equity-based compensation
189

 
205

Other
261

 
320

Changes in operating assets and liabilities:
 
 
 
Receivables
(284
)
 
(542
)
Inventories
90

 
218

Other assets
103

 
63

Accounts payable and other accrued liabilities
(1,934
)
 
(746
)
Income taxes
(9
)
 
(522
)
Cash provided by operations
4,698

 
5,985

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(1,923
)
 
(2,556
)
Acquisitions
(557
)
 
(400
)
Other
90

 
(82
)
Cash used in investing activities
(2,390
)
 
(3,038
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper borrowings, net
914

 
709

Borrowings
2,053

 
3,766

Reduction of borrowings
(1,233
)
 
(626
)
Dividends
(1,237
)
 
(1,168
)
Repurchases of common stock
(3,500
)
 
(4,391
)
Proceeds from exercise of stock options
186

 
160

Other
(232
)
 
(654
)
Cash used in financing activities
(3,049
)
 
(2,204
)
 
 
 
 
Impact of exchange rates on cash and cash equivalents
(69
)
 
3

 
 
 
 
Change in cash and cash equivalents
(810
)
 
746

Cash and cash equivalents, beginning of period
4,610

 
4,269

Cash and cash equivalents, end of period
$
3,800

 
$
5,015

See Notes to Condensed Consolidated Financial Statements

5



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
April 1, 2017
 
April 2, 2016
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
43,210

 
$
3,967

 
$
47,177

 
$
43,958

 
$
4,240

 
$
48,198

Comprehensive income
2,363

 
160

 
2,523

 
2,013

 
152

 
2,165

Equity compensation activity
182

 

 
182

 
194

 

 
194

Common stock repurchases
(2,035
)
 

 
(2,035
)
 
(2,039
)
 

 
(2,039
)
Distributions and other
64

 
(644
)
 
(580
)
 
(2
)
 
(506
)
 
(508
)
Ending balance
$
43,784

 
$
3,483

 
$
47,267

 
$
44,124

 
$
3,886

 
$
48,010

See Notes to Condensed Consolidated Financial Statements



6



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Six Months Ended
 
April 1, 2017
 
April 2, 2016
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
43,265

 
$
4,058

 
$
47,323

 
$
44,525

 
$
4,130

 
$
48,655

Comprehensive income
4,966

 
70

 
5,036

 
4,845

 
131

 
4,976

Equity compensation activity
230

 

 
230

 
322

 

 
322

Dividends
(1,237
)
 

 
(1,237
)
 
(1,168
)
 

 
(1,168
)
Common stock repurchases
(3,500
)
 

 
(3,500
)
 
(4,391
)
 

 
(4,391
)
Distributions and other
60

 
(645
)
 
(585
)
 
(9
)
 
(375
)
 
(384
)
Ending balance
$
43,784

 
$
3,483

 
$
47,267

 
$
44,124

 
$
3,886

 
$
48,010

See Notes to Condensed Consolidated Financial Statements


7



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 six months ended April 1, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017. 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 2016 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 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 results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance.
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
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Media Networks
$
88

 
$
151

 
$
207

 
$
293

Parks and Resorts
(3
)
 

 
(5
)
 

Consumer Products & Interactive Media

 

 
1

 

Equity in the income of investees included in segment operating income
85

 
151

 
203

 
293

Vice Gain

 

 

 
332

Other

 
(1
)
 

 
(1
)
Total equity in the income of investees
$
85

 
$
150

 
$
203

 
$
624

During the six months ended April 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 in Vice Group Holding, Inc. (Vice) (Vice Gain). The Company’s $332 million share of the Vice Gain is recorded in “Equity in the

8

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


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.
Segment revenues and segment operating income are as follows:
 
Quarter Ended
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Revenues (1):
 
 
 
 
 
 
 
Media Networks
$
5,946


$
5,793


$
12,179


$
12,125

Parks and Resorts
4,299


3,928


8,854


8,209

Studio Entertainment
2,034


2,062


4,554


4,783

Consumer Products & Interactive Media
1,057


1,186


2,533


3,096

 
$
13,336

 
$
12,969

 
$
28,120

 
$
28,213

Segment operating income (1):
 
 
 
 
 
 
 
Media Networks
$
2,223

 
$
2,299

 
$
3,585

 
$
3,711

Parks and Resorts
750

 
624

 
1,860

 
1,605

Studio Entertainment
656

 
542

 
1,498

 
1,556

Consumer Products & Interactive Media
367

 
357

 
1,009

 
1,217

 
$
3,996

 
$
3,822

 
$
7,952

 
$
8,089

(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 $107 million and $180 million for the quarters ended April 1, 2017 and April 2, 2016, respectively, and $288 million and $442 million for the six months ended April 1, 2017 and April 2, 2016, respectively.
A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Segment operating income
$
3,996

 
$
3,822

 
$
7,952

 
$
8,089

Corporate and unallocated shared expenses
(161
)
 
(162
)
 
(293
)
 
(298
)
Restructuring and impairment charges

 

 

 
(81
)
Interest expense, net
(84
)
 
(67
)
 
(183
)
 
(91
)
Vice Gain

 

 

 
332

Infinity Charge(1)

 
(147
)
 

 
(147
)
Income before income taxes
$
3,751

 
$
3,446

 
$
7,476

 
$
7,804


(1) In the prior-year quarter, the Company discontinued its Infinity console game business, which is reported in the Consumer Products & Interactive Media segment, and recorded a charge primarily to write down inventory. The charge also included severance and other asset impairments. The charge was reported in “Cost of products” in the Condensed Consolidated Statement of Income.

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 has been 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 $332 million share of

9

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


the Vice Gain was recorded in “Equity in the income of investees” in the Condensed Consolidated Statement of Income in the first quarter of fiscal 2016. At April 1, 2017, 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.
BAMTech
In August 2016, the Company paid $450 million for a 15% interest in BAMTech, an entity which holds Major League Baseball’s streaming technology and content delivery businesses. In January 2017, the Company acquired an additional 18% interest for $557 million. The Company has an option to increase its ownership to 66% by acquiring an additional interest at fair market value from Major League Baseball between August 2020 and August 2023. The Company accounts for its interest in BAMTech as an equity method investment.

4.
Borrowings
During the six months ended April 1, 2017, the Company’s borrowing activity was as follows: 
 
October 1,
2016
 
Borrowings
 
Payments
 
Other
Activity
 
April 1,
2017
Commercial paper with original maturities less than three months(1)
$
777

 
$

 
$
(280
)
 
$
2

 
$
499

Commercial paper with original maturities greater than three months
744

 
3,536

 
(2,342
)
 
9

 
1,947

U.S. medium-term notes
16,827

 
1,999

 
(1,000
)
 
1

 
17,827

International Theme Parks borrowings
1,087

 
13

 

 
(10
)
 
1,090

Foreign currency denominated debt and other(2)
735

 
41

 
(233
)
 
(253
)
 
290

Total
$
20,170

 
$
5,589

 
$
(3,855
)
 
$
(251
)
 
$
21,653

(1) 
Borrowings and payments are reported net.
(2) 
The other activity is primarily market value adjustments for debt with qualifying hedges.
The Company has bank facilities with a syndicate of lenders to support commercial paper borrowings as follows:
 
Committed
Capacity
 
Capacity
Used
 
Unused
Capacity
Facility expiring March 2018
$
2,500

 
$

 
$
2,500

Facility expiring March 2019
2,250

 

 
2,250

Facility expiring March 2021
2,250

 

 
2,250

Total
$
7,000

 
$

 
$
7,000

The Company had a $1.5 billion bank facility expiring in March 2017. This facility was refinanced increasing the borrowing capacity by $1.0 billion to $2.5 billion and extending the maturity date to March 2018. 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 April 1, 2017, the Company has $187 million of outstanding letters of credit, of which none were issued under this facility. The facilities specifically exclude certain entities, including the International Theme Parks, from any representations, covenants, or events of default and contain only one financial covenant relating to interest coverage, which the Company met on April 1, 2017 by a significant margin.

10

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
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Interest expense
$
(115
)
 
$
(81
)
 
$
(236
)
 
$
(147
)
Interest and investment income
31

 
14

 
53

 
56

Interest expense, net
$
(84
)
 
$
(67
)
 
$
(183
)
 
$
(91
)
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
The Company has an 89% effective ownership interest in the operations of Disneyland Paris, a 47% ownership interest in the operations of Hong Kong Disneyland Resort and a 43% ownership interest in the operations of Shanghai Disney Resort. The International Theme Parks are VIEs consolidated in the Company’s financial statements. See Note 1 for the Company’s policy on consolidating VIEs.
The following table summarizes the carrying amounts of the International Theme Parks’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets as of April 1, 2017 and October 1, 2016:
 
International Theme Parks
 
April 1,
2017
 
October 1, 2016
Cash and cash equivalents
$
538

 
$
1,008

Other current assets
385

 
331

Total current assets
923

 
1,339

Parks, resorts and other property
9,120

 
9,270

Other assets
83

 
88

Total assets
$
10,126

 
$
10,697

 
 
 
 
Current liabilities
$
1,292

 
$
1,499

Borrowings - long-term
1,090

 
1,087

Other long-term liabilities
283

 
256

Total liabilities
$
2,665

 
$
2,842

The following table summarizes the International Theme Parks’ revenues, costs and expenses and equity in the loss of investees included in the Company’s Condensed Consolidated Statement of Income for the six months ended April 1, 2017:
 
April 1,
2017
Revenues
$
1,409

Costs and expenses
(1,513
)
Equity in the loss of investees
(5
)
For the six months ended April 1, 2017, royalty and management fees of $72 million are eliminated in consolidation but are considered in calculating earnings allocated to noncontrolling interests.
For the six months ended April 1, 2017, International Theme Parks’ cash flows included in the Company’s Condensed Consolidated Statement of Cash Flows were $208 million generated from operating activities, $595 million used in investing activities and $13 million generated from financing activities.

11

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


Disneyland Paris    
In February 2017, the Company increased its effective ownership percentage from 81% to 88% by exchanging 1.36 million of the Company’s common shares for 70.5 million outstanding shares of Euro Disney S.C.A. (EDSCA), the publicly-traded French entity, which has an 82% interest in the Disneyland Paris operating company. The transaction was valued at €141 million ($150 million) based on a purchase price of €2 per share.
Subject to French regulatory clearance, the Company intends to make a cash tender offer for the remaining 109 million outstanding shares of EDSCA at a price of €2 per share (approximately €219 million or $234 million). If the Company’s ownership in EDSCA is at least 95% following the tender offer, the Company will proceed with a mandatory buyout and delisting of EDSCA from Euronext Paris.
Additionally, the Company committed to support a recapitalization of up to €1.5 billion (approximately $1.6 billion) to enable Disneyland Paris to continue the implementation of improvements, reduce debt and increase liquidity.
The Company has term loans to Disneyland Paris with outstanding balances totaling €1.0 billion at April 1, 2017 bearing interest at a 4% fixed rate and maturing in 2024. In addition, the Company has provided Disneyland Paris a €0.4 billion line of credit bearing interest at EURIBOR plus 2% and maturing in 2023. At April 1, 2017, €190 million is outstanding under the line of credit. The loans and line of credit are eliminated upon consolidation.
The Company has waived royalties and management fees for the fourth quarter of fiscal 2016 through the third quarter of fiscal 2018.
Hong Kong Disneyland Resort
The Government of the Hong Kong Special Administrative Region (HKSAR) and the Company have 53% and 47% equity interests in Hong Kong Disneyland Resort, respectively.
As part of financing the construction of a third hotel, which opened April 30, 2017, the Company and HKSAR have provided loans with outstanding balances of $137 million and $92 million, respectively, which bear interest at a rate of three month HIBOR plus 2% and mature in September 2025. The Company’s loan is eliminated upon consolidation.
Shanghai Disney Resort
Shanghai Shendi (Group) Co., Ltd (Shendi) and the Company have 57% and 43% equity interests in Shanghai Disney Resort, respectively. A management company, in which the Company has a 70% interest and Shendi a 30% interest, is responsible for operating Shanghai Disney Resort.
The Company has provided Shanghai Disney Resort with long-term loans totaling $768 million, bearing interest at rates up to 8%. In addition, the Company has an outstanding balance of $290 million due from Shanghai Disney Resort related to development and pre-opening costs of the resort and outstanding royalties and management fees. The Company has also provided Shanghai Disney Resort with a $157 million line of credit bearing interest at 8%. There is no outstanding balance under the line of credit at April 1, 2017. The loan and line of credit are eliminated upon consolidation.
Shendi has provided Shanghai Disney Resort with term loans totaling 6.6 billion yuan (approximately $1.0 billion), bearing interest at rates up to 8% and maturing in 2036; however, early repayment is permitted. Shendi has also provided Shanghai Disney Resort with a 1.4 billion yuan (approximately $199 million) line of credit bearing interest at 8%. There is no outstanding balance under the line of credit at April 1, 2017.


12

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


6.
Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows: 
 
Pension Plans
 
Postretirement Medical Plans
 
Quarter Ended
 
Six Months Ended
 
Quarter Ended
 
Six Months Ended
 
April 1, 2017
 
April 2, 2016
 
April 1, 2017
 
April 2, 2016
 
April 1, 2017
 
April 2, 2016
 
April 1, 2017
 
April 2, 2016
Service costs
$
92

 
$
79

 
$
183

 
$
159

 
$
3

 
$
3

 
$
6

 
$
6

Interest costs
111

 
114

 
223

 
229

 
14

 
15

 
28

 
30

Expected return on plan assets
(218
)
 
(186
)
 
(437
)
 
(374
)
 
(12
)
 
(11
)
 
(24
)
 
(22
)
Amortization of prior-year service costs
2

 
4

 
5

 
7

 

 

 

 

Recognized net actuarial loss
101

 
60

 
202

 
121

 
4

 
2

 
8

 
4

Net periodic benefit cost
$
88

 
$
71

 
$
176

 
$
142

 
$
9

 
$
9

 
$
18

 
$
18

During the six months ended April 1, 2017, the Company made $1.4 billion of contributions to its pension and postretirement medical plans. The Company currently does not expect to make any additional material contributions to its pension and postretirement medical plans during the remainder of fiscal 2017. However, final funding amounts for fiscal 2017 will be assessed based on our January 1, 2017 funding actuarial valuation, which we expect to receive during the fourth quarter of fiscal 2017.

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 the number of Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, are as follows: 
 
Quarter Ended
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Shares (in millions):
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding (basic)
1,580

 
1,633

 
1,586

 
1,643

Weighted average dilutive impact of Awards
11

 
10

 
11

 
12

Weighted average number of common and common equivalent shares outstanding (diluted)
1,591

 
1,643

 
1,597

 
1,655

Awards excluded from diluted earnings per share
8

 
12

 
12

 
8

 
8.
Equity
The Company paid the following dividends in fiscal 2017 and 2016:
Per Share
 
Total Paid
 
Payment Timing
 
Related to Fiscal Period
$0.78
$1.2 billion
Second Quarter of Fiscal 2017
Second Half 2016
$0.71
$1.1 billion
Fourth Quarter of Fiscal 2016
First Half 2016
$0.71
$1.2 billion
Second Quarter of Fiscal 2016
Second Half 2015
During the six months ended April 1, 2017, the Company repurchased 34 million shares of its common stock for $3.5 billion. As of April 1, 2017, the Company had remaining authorization in place to repurchase approximately 248 million additional shares. The repurchase program does not have an expiration date.

13

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


The following table summarizes the changes in each component of accumulated other comprehensive income (loss) (AOCI) (generally net of 37% estimated tax) including our proportional share of equity method investee amounts:
 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
(1)
 
AOCI
 
Market Value Adjustments
 
 
Investments
 
Cash Flow Hedges
 
Balance at December 31, 2016
$
15

 
$
255

 
$
(3,605
)
 
$
(520
)
 
$
(3,855
)
Quarter Ended April 1, 2017:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising
  during the period
5

 
(132
)
 
12

 
58

 
(57
)
Reclassifications of realized net (gains) losses to net income
(4
)
 
(32
)
 
68

 

 
32

Balance at April 1, 2017
$
16

 
$
91

 
$
(3,525
)
 
$
(462
)
 
$
(3,880
)
 
 
 
 
 
 
 
 
 
 
Balance at January 2, 2016
$
10

 
$
309

 
$
(2,455
)
 
$
(333
)
 
$
(2,469
)
Quarter Ended April 2, 2016:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising
  during the period
(1
)
 
(162
)
 
(2
)
 
35

 
(130
)
Reclassifications of realized net (gains) losses to net income

 
(42
)
 
42

 

 

Balance at April 2, 2016
$
9

 
$
105

 
$
(2,415
)
 
$
(298
)
 
$
(2,599
)
 
 
 
 
 
 
 
 
 
 
Balance at October 1, 2016
$
26

 
$
(25
)
 
$
(3,651
)
 
$
(329
)
 
$
(3,979
)
Six Months Ended April 1, 2017:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising
  during the period
(6
)
 
192

 
(10
)
 
(133
)
 
43

Reclassifications of net (gains)
  losses to net income
(4
)
 
(76
)
 
136

 

 
56

Balance at April 1, 2017
$
16

 
$
91

 
$
(3,525
)
 
$
(462
)
 
$
(3,880
)
 
 
 
 
 
 
 
 
 
 
Balance at October 3, 2015
$
13

 
$
334

 
$
(2,497
)
 
$
(271
)
 
$
(2,421
)
Six Months Ended April 2, 2016:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising
  during the period
(4
)
 
(121
)
 
(2
)
 
(27
)
 
(154
)
Reclassifications of net (gains)
  losses to net income

 
(108
)
 
84

 

 
(24
)
Balance at April 2, 2016
$
9

 
$
105

 
$
(2,415
)
 
$
(298
)
 
$
(2,599
)
(1) 
Foreign Currency Translation and Other is net of an average 23% estimated tax at April 1, 2017 as the Company has not recognized deferred tax assets for some of our foreign entities.

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
 
Six Months Ended
 
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Investments, net
 
Interest expense, net
 
$
6

 
$

 
$
6

 
$

Estimated tax
 
Income taxes
 
(2
)
 

 
(2
)
 

 
 
 
 
4

 

 
4

 

 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
Primarily revenue
 
$
51

 
$
67

 
121

 
172

Estimated tax
 
Income taxes
 
(19
)
 
(25
)
 
(45
)
 
(64
)
 
 
 
 
32

 
42

 
76

 
108

 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement
  medical expense
 
Costs and expenses
 
(108
)
 
(67
)
 
(216
)
 
(134
)
Estimated tax
 
Income taxes
 
40

 
25

 
80

 
50

 
 
 
 
(68
)
 
(42
)
 
(136
)
 
(84
)
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
 
 
$
(32
)
 
$

 
$
(56
)
 
$
24

At April 1, 2017 and October 1, 2016, the Company held available-for-sale investments in unrecognized gain positions totaling $20 million and $49 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
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Stock options
$
22

 
$
23

 
$
42

 
$
46

RSUs
70

 
76

 
147

 
159

Total equity-based compensation expense (1)
$
92

 
$
99

 
$
189

 
$
205

Equity-based compensation expense capitalized during the period
$
21

 
$
19

 
$
42

 
$
34

(1) 
Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs.
Unrecognized compensation cost related to unvested stock options and RSUs was $184 million and $627 million, respectively, as of April 1, 2017.
The weighted average grant date fair values of options granted during the six months ended April 1, 2017 and April 2, 2016 were $25.79 and $31.16, respectively.
During the six months ended April 1, 2017, the Company made equity compensation grants consisting of 4.5 million stock options and 3.6 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 about a product, Lean Finely Textured Beef, that was included in ground beef and hamburger meat. Plaintiffs’ complaint sought actual and consequential damages in excess of $400 million (which in March 2016 they asserted could be as

15

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


much as $1.9 billion), statutory damages (including treble damages) pursuant to South Dakota’s Agricultural Food Products Disparagement Act, and punitive damages. 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 April 1, 2017, the remaining debt service obligation guaranteed by the Company was $311 million, of which $50 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.
The Company has guaranteed $113 million of Hulu LLC’s $338 million term loan, which expires in October 2017. Hulu is a joint venture in which the Company has a 30% ownership interest.
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 April 1, 2017. 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 April 1, 2017. The activity in the current period related to the allowance for credit losses was not material.
Income Taxes
During the six months ended April 1, 2017, the Company decreased its gross unrecognized tax benefits by $40 million to $804 million, including a $19 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 $136 million, of which $31 million would reduce our income tax expense and effective tax rate if recognized. 

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

16

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


The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level: 
 
Fair Value Measurement at April 1, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
53

 
$

 
$

 
$
53

Derivatives
 
 
 
 
 
 
 
Interest rate

 
15

 

 
15

Foreign exchange

 
672

 

 
672

Other

 
6

 

 
6

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(163
)
 

 
(163
)
Foreign exchange

 
(379
)
 

 
(379
)
Other

 
(2
)
 

 
(2
)
Total recorded at fair value
$
53

 
$
149

 
$

 
$
202

Fair value of borrowings
$

 
$
20,782

 
$
1,383

 
$
22,165

 
 
Fair Value Measurement at October 1, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
85

 
$

 
$

 
$
85

Derivatives
 
 
 
 
 
 
 
Interest rate

 
132

 

 
132

Foreign exchange

 
596

 

 
596

Other

 
6

 

 
6

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(13
)
 

 
(13
)
Foreign exchange

 
(510
)
 

 
(510
)
Other

 
(4
)
 

 
(4
)
Total recorded at fair value
$
85

 
$
207

 
$

 
$
292

Fair value of borrowings
$

 
$
19,500

 
$
1,579

 
$
21,079

 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.
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.


17

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


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 April 1, 2017
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
304

 
$
204

 
$
(121
)
 
$
(124
)
Interest rate

 
15

 
(142
)
 

Other
4

 
2

 
(2
)
 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
132

 
32

 
(134
)
 

Interest rate

 

 

 
(21
)
Gross fair value of derivatives
440

 
253

 
(399
)
 
(145
)
Counterparty netting
(266
)
 
(149
)
 
309

 
106

Cash collateral (received)/paid
(68
)
 
(24
)
 
38

 

Net derivative positions
$
106

 
$
80

 
$
(52
)
 
$
(39
)
 
 
As of October 1, 2016
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
278

 
$
191

 
$
(209
)
 
$
(163
)
Interest rate

 
132

 
(13
)
 

Other
3

 
3

 
(4
)
 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
125

 
2

 
(133
)
 
(5
)
Gross fair value of derivatives
406

 
328

 
(359
)
 
(168
)
Counterparty netting
(241
)
 
(199
)
 
316

 
124

Cash collateral (received)/paid
(77
)
 
(44
)
 
7

 

Net derivative positions
$
88

 
$
85

 
$
(36
)
 
$
(44
)
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 to lower overall borrowing costs. 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 primarily uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate risk management activities.

18

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


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 April 1, 2017 and October 1, 2016, the total notional amount of the Company’s pay-floating interest rate swaps was $7.3 billion and $8.3 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
 
Six Months Ended
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Gain (loss) on interest rate swaps
$
(10
)
 
$
104

 
$
(242
)
 
$
49

Gain (loss) on hedged borrowings
10

 
(104
)
 
242

 
(49
)
In addition, during the quarter and six months ended April 1, 2017, the Company realized net benefits of $10 million and $22 million, respectively, in “Interest expense, net” related to pay-floating interest rate swaps. During the quarter and six months ended April 2, 2016, the Company realized net benefits of $26 million and $49 million, respectively, in “Interest expense, net” related to 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 April 1, 2017 or at October 1, 2016 and gains and losses related to pay-fixed swaps recognized in earnings for the quarter and six months ended April 1, 2017 and April 2, 2016 were not material.
To facilitate its interest rate risk management activities, the Company sold an option in November 2016 to enter into a future pay-floating interest rate swap indexed to LIBOR for $0.5 billion in future borrowings. The fair value of this contract as of April 1, 2017 was not material. The option is not designated as a hedge and does not qualify for hedge accounting, accordingly any changes in value are recorded in earnings.
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 April 1, 2017 and October 1, 2016, the notional amounts of the Company’s net foreign exchange cash flow hedges were $5.9 billion and $5.6 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the quarter and six months ended April 1, 2017 and April 2, 2016 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $189 million.

19

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


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 April 1, 2017 and October 1, 2016 were $3.6 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 denominated assets and liabilities for the six months ended April 1, 2017 and April 2, 2016 by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of Income.
 
Costs and Expenses
 
Interest expense, net
 
Income Tax expense
Quarter Ended:
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Net gains (losses) on foreign currency denominated assets and liabilities
$
110

 
$
135

 
$
(3
)
 
$
(15
)
 
$
(11
)
 
$
4

Net gains (losses) on foreign exchange risk management contracts not designated as hedges
(103
)
 
(163
)
 
3

 
16

 
14

 

Net gains (losses)
$
7

 
$
(28
)
 
$

 
$
1

 
$
3

 
$
4

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended:
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on foreign currency denominated assets and liabilities
$
(123
)
 
$
46

 
$
4

 
$
(5
)
 
$
12

 
$
27

Net gains (losses) on foreign exchange risk management contracts not designated as hedges
118

 
(84
)
 
(4
)
 
4

 
(17
)
 

Net gains (losses)
$
(5
)
 
$
(38
)
 
$

 
$
(1
)
 
$
(5
)
 
$
27

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 April 1, 2017 and October 1, 2016 and related gains or losses recognized in earnings for the quarter and six months ended April 1, 2017 and April 2, 2016 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 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 notional amount and fair value of these contracts at April 1, 2017 and October 1, 2016 were not material. The related gains or losses recognized in earnings were not material for the quarter and six months ended April 1, 2017 and April 2, 2016.
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 $129 million and $86 million on April 1, 2017 and October 1, 2016, respectively.
 
13. Restructuring and Impairment Charges
The Company recorded $81 million of restructuring and impairment charges in the prior-year six-month period for an investment impairment and contract termination and severance costs.


20

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


14. New Accounting Pronouncements

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the Financial Accounting Standards Board (FASB) issued guidance that will require the Company to present all components of net periodic pension and postretirement benefit costs, other than service costs, in a line item outside a subtotal of income from operations in the income statement. The service cost component will continue to be presented in the same line items as other employee compensation costs. In addition, the guidance allows only service costs to be eligible for capitalization, for example, as part of a self-constructed fixed asset or a film production. The new guidance is effective beginning with the first quarter of the Company’s 2019 fiscal year (with early adoption permitted as of the beginning of an annual period). The guidance is required to be adopted retrospectively with respect to the income statement presentation requirement and prospectively for the capitalization requirement. We do not expect the change in capitalization requirement to have a material impact on our financial statements. See Note 6 of this filing and Note 10 to the Consolidated Financial Statements in the 2016 Annual Report on Form 10-K for the amount of each component of net periodic pension and postretirement benefit costs we have reported historically. The amounts of net periodic pension and postretirement benefit costs in these filings are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement.
Restricted Cash
In November 2016, the FASB issued guidance that requires restricted cash to be presented with cash and cash equivalents in the statement of cash flows. The guidance is required to be adopted retrospectively, and is effective beginning in the first quarter of the Company’s 2019 fiscal year (with early adoption permitted). At April 1, 2017 and October 1, 2016, the Company held restricted cash of approximately $125 million and $150 million, respectively, primarily associated with collateral received from counterparties to its derivative contracts. The Company’s restricted cash balances are currently presented in the Condensed Consolidated Balance Sheets as “Other current assets” and “Other assets” based on the maturity dates of the related derivatives. Changes in restricted cash are currently classified as operating activities in the Condensed Consolidated Statements of Cash Flows as a component of changes in “Other assets”. Under the new guidance, changes in the Company’s restricted cash will generally be classified as either operating activities or investing activities in the Condensed Consolidated Statements of Cash Flows, depending on the nature of the activities that gave rise to the restricted cash balance.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued guidance that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs instead of when the asset is sold to an outside party. The new guidance is effective beginning with the first quarter of the Company’s 2019 fiscal year (with early adoption permitted as of the beginning of an annual period). The guidance requires prospective adoption with a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. The Company is assessing the potential impact this guidance will have on its financial statements.
Stock Compensation - Employee Share-based Payments
In March 2016, the FASB issued guidance to amend certain aspects of accounting for employee share-based awards, including accounting for income taxes related to those transactions. The guidance requires that excess tax benefits and tax deficiencies (that result from an increase or decrease in the value of an award from grant date to the vesting date or exercise date) on share-based compensation arrangements are recognized in the tax provision, instead of in equity as under the current guidance. In addition, these amounts are to be classified as an operating activity in the statement of cash flows, instead of as a financing activity. The Company reported excess tax benefits of $0.2 billion and $0.3 billion in fiscal 2016 and 2015, respectively.
In addition, cash paid for shares withheld to satisfy employee taxes is to be classified as a financing activity, instead of as an operating activity. Cash paid for employee taxes was $0.2 billion and $0.3 billion in fiscal 2016 and 2015, respectively. The fiscal 2016 and 2015 amounts of excess tax benefits and cash paid for employee taxes are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement.
The Company adopted the new guidance in the first quarter of fiscal 2017. As of April 1, 2017, the impact of the new guidance was as follows:
During the quarter and six months ended April 1, 2017, excess tax benefits of $53 million and $91 million, respectively, were recognized as a benefit in “Income taxes” in the Condensed Consolidated Statement of Income and classified as a source in operating activities in the Condensed Consolidated Statement of Cash Flows. The guidance required prospective adoption for the statement of income and allowed for either prospective or retrospective adoption for the statement of cash flows. The Company elected to prospectively adopt the effect to the statement of cash flows

21

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


and accordingly, did not restate the Condensed Consolidated Statement of Cash Flows for the quarter and six months ended April 2, 2016.
During the quarter and six months ended April 1, 2017, cash paid for shares withheld to satisfy employee taxes of $52 million and $187 million, respectively, were classified as a use in financing activities in the Condensed Consolidated Statement of Cash Flows. The guidance required retrospective adoption; accordingly, for the quarter and six months ended April 2, 2016, uses of $129 million and $223 million, respectively, were reclassified from operating activities to financing activities in the Condensed Consolidated Statement of Cash Flows.
Leases
In February 2016, the FASB issued a new lease accounting standard, which requires the present value of committed operating lease payments to be recorded as right-of-use lease assets and lease liabilities on the balance sheet. As of October 1, 2016, the Company had an estimated $3.1 billion in undiscounted future minimum lease commitments. The Company is currently assessing the impact of the new guidance on its financial statements. The guidance is required to be adopted retrospectively, and is effective beginning in the first quarter of the Company’s 2020 fiscal year (with early adoption permitted).
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance that replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model, eliminating industry-specific accounting rules. The core principle is to recognize revenue upon the transfer of control of goods or services to customers at an amount that reflects the consideration expected to be received. Since its issuance, the FASB has amended several aspects of the new guidance, including provisions that address revenue recognition associated with the licensing of intellectual property. The new guidance, including the amendments, is effective beginning with the first quarter of the Company’s 2019 fiscal year (with early adoption permitted at the beginning of 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 retained earnings at the beginning of the year of adoption. We are continuing to assess the potential impact of this guidance, including the impact on those areas currently subject to industry-specific guidance such as licensing of intellectual property. In the second quarter we completed our initial review of representative samples of our existing customer contracts across our significant revenue streams. We are currently evaluating our accounting policies for required changes under the new guidance and quantifying the impact of the changes. We expect our assessment to be completed by the end of the year. Our method of adoption will in part be based on the degree of change identified in our assessment.

22



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
Tax Impact of Employee Share-Based Awards
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
 
Six Months Ended
 
% Change
(in millions, except per share data)
April 1,
2017
 
April 2,
2016
 
Better/
(Worse)
 
April 1,
2017
 
April 2,
2016
 
Better/