10-Q 1 fy2018_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
March 31, 2018
 
 
 
twdcimagea01a01a01a01a10.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 1,490,523,320 shares of common stock outstanding as of May 2, 2018.




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
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Revenues:
 
 
 
 
 
 
 
Services
$
12,520

 
$
11,487

 
$
25,504

 
$
23,893

Products
2,028

 
1,849

 
4,395

 
4,227

Total revenues
14,548

 
13,336

 
29,899

 
28,120

Costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
(6,304
)
 
(5,839
)
 
(13,638
)
 
(12,859
)
Cost of products (exclusive of depreciation and amortization)
(1,229
)
 
(1,130
)
 
(2,632
)
 
(2,516
)
Selling, general, administrative and other
(2,247
)
 
(1,941
)
 
(4,326
)
 
(3,926
)
Depreciation and amortization
(731
)
 
(676
)
 
(1,473
)
 
(1,363
)
Total costs and expenses
(10,511
)
 
(9,586
)
 
(22,069
)
 
(20,664
)
Restructuring and impairment charges
(13
)
 

 
(28
)
 

Other income, net
41

 

 
94

 

Interest expense, net
(143
)
 
(84
)
 
(272
)
 
(183
)
Equity in the income of investees
6

 
85

 
49

 
203

Income before income taxes
3,928

 
3,751

 
7,673

 
7,476

Income taxes
(813
)
 
(1,212
)
 
(85
)
 
(2,449
)
Net income
3,115

 
2,539

 
7,588

 
5,027

Less: Net income attributable to noncontrolling interests
(178
)
 
(151
)
 
(228
)
 
(160
)
Net income attributable to The Walt Disney Company (Disney)
$
2,937

 
$
2,388

 
$
7,360

 
$
4,867

 
 
 
 
 
 
 
 
Earnings per share attributable to Disney:
 
 
 
 
 
 
 
Diluted
$
1.95

 
$
1.50

 
$
4.86

 
$
3.05

 
 
 
 
 
 
 
 
Basic
$
1.95

 
$
1.51

 
$
4.88

 
$
3.07

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Diluted
1,510

 
1,591

 
1,515

 
1,597

 
 
 
 
 
 
 
 
Basic
1,503

 
1,580

 
1,507

 
1,586

 
 
 
 
 
 
 
 
Dividends declared per share
$

 
$

 
$
0.84

 
$
0.78

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
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Net income
$
3,115

 
$
2,539

 
$
7,588

 
$
5,027

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Market value adjustments for investments
7

 
1

 
6

 
(10
)
Market value adjustments for hedges
(112
)
 
(164
)
 
(94
)
 
116

Pension and postretirement medical plan adjustments
94

 
80

 
155

 
126

Foreign currency translation and other
144

 
67

 
231

 
(223
)
Other comprehensive income/(loss)
133

 
(16
)
 
298

 
9

Comprehensive income
3,248

 
2,523

 
7,886

 
5,036

Net income attributable to noncontrolling interests, including redeemable noncontrolling interests
(178
)
 
(151
)
 
(228
)
 
(160
)
Other comprehensive (income)/loss attributable to noncontrolling interests
(74
)
 
(9
)
 
(115
)
 
90

Comprehensive income attributable to Disney
$
2,996

 
$
2,363

 
$
7,543

 
$
4,966

See Notes to Condensed Consolidated Financial Statements





3


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
March 31,
2018
 
September 30,
2017
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
4,179

 
$
4,017

Receivables
9,678

 
8,633

Inventories
1,301

 
1,373

Television costs and advances
1,114

 
1,278

Other current assets
536

 
588

Total current assets
16,808

 
15,889

Film and television costs
8,074

 
7,481

Investments
3,148

 
3,202

Parks, resorts and other property
 
 
 
Attractions, buildings and equipment
55,317

 
54,043

Accumulated depreciation
(30,435
)
 
(29,037
)
 
24,882

 
25,006

Projects in progress
3,056

 
2,145

Land
1,262

 
1,255

 
29,200

 
28,406

Intangible assets, net
6,962

 
6,995

Goodwill
31,350

 
31,426

Other assets
2,401

 
2,390

Total assets
$
97,943

 
$
95,789

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
9,022

 
$
8,855

Current portion of borrowings
5,918

 
6,172

Deferred revenue and other
4,788

 
4,568

Total current liabilities
19,728

 
19,595

Borrowings
18,766

 
19,119

Deferred income taxes
2,949

 
4,480

Other long-term liabilities
6,699

 
6,443

Commitments and contingencies (Note 12)


 


Redeemable noncontrolling interests
1,150

 
1,148

Equity
 
 
 
Preferred stock, $0.01 par value, Authorized – 100 million shares, Issued – none

 

Common stock, $0.01 par value,
Authorized – 4.6 billion shares, Issued – 2.9 billion shares
36,411

 
36,248

Retained earnings
78,704

 
72,606

Accumulated other comprehensive loss
(3,345
)
 
(3,528
)
 
111,770

 
105,326

Treasury stock, at cost, 1.4 billion shares
(66,619
)
 
(64,011
)
Total Disney Shareholders’ equity
45,151

 
41,315

Noncontrolling interests
3,500

 
3,689

Total equity
48,651

 
45,004

Total liabilities and equity
$
97,943

 
$
95,789

See Notes to Condensed Consolidated Financial Statements

4



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
7,588

 
$
5,027

Depreciation and amortization
1,473

 
1,363

Deferred income taxes
(1,623
)
 
126

Equity in the income of investees
(49
)

(203
)
Cash distributions received from equity investees
389

 
397

Net change in film and television costs and advances
(490
)
 
(428
)
Equity-based compensation
194

 
189

Other
155

 
261

Changes in operating assets and liabilities:
 
 
 
Receivables
(1,004
)
 
(284
)
Inventories
64

 
90

Other assets
(248
)
 
78

Accounts payable and other accrued liabilities
(92
)
 
(1,934
)
Income taxes
406

 
(9
)
Cash provided by operations
6,763

 
4,673

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(2,044
)
 
(1,923
)
Acquisitions
(1,581
)
 
(557
)
Other
(180
)
 
90

Cash used in investing activities
(3,805
)
 
(2,390
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper borrowings, net
1,372

 
914

Borrowings
1,048

 
2,053

Reduction of borrowings
(1,350
)
 
(1,233
)
Dividends
(1,266
)
 
(1,237
)
Repurchases of common stock
(2,608
)
 
(3,500
)
Proceeds from exercise of stock options
91

 
186

Other
(169
)
 
(232
)
Cash used in financing activities
(2,882
)
 
(3,049
)
 
 
 
 
Impact of exchange rates on cash, cash equivalents and restricted cash
55

 
(69
)
 
 
 
 
Change in cash, cash equivalents and restricted cash
131

 
(835
)
Cash, cash equivalents and restricted cash, beginning of period
4,064

 
4,760

Cash, cash equivalents and restricted cash, end of period
$
4,195

 
$
3,925

See Notes to Condensed Consolidated Financial Statements

5



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
March 31, 2018
 
April 1, 2017
 
Disney
Shareholders
 
Non-
controlling
Interests (1)
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests (1)
 
Total
Equity
Beginning balance
$
43,289

 
$
3,794

 
$
47,083

 
$
43,210

 
$
3,967

 
$
47,177

Comprehensive income
2,996

 
251

 
3,247

 
2,363

 
160

 
2,523

Equity compensation activity
157

 

 
157

 
182

 

 
182

Common stock repurchases
(1,295
)
 

 
(1,295
)
 
(2,035
)
 

 
(2,035
)
Distributions and other
4

 
(545
)
 
(541
)
 
64

 
(644
)
 
(580
)
Ending balance
$
45,151

 
$
3,500

 
$
48,651

 
$
43,784

 
$
3,483

 
$
47,267

(1) 
Excludes redeemable noncontrolling interest
See Notes to Condensed Consolidated Financial Statements



6



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Six Months Ended
 
March 31, 2018
 
April 1, 2017
 
Disney
Shareholders
 
Non-
controlling
Interests (1)
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
41,315

 
$
3,689

 
$
45,004

 
$
43,265

 
$
4,058

 
$
47,323

Comprehensive income
7,543

 
348

 
7,891

 
4,966

 
70

 
5,036

Equity compensation activity
163

 

 
163

 
230

 

 
230

Dividends
(1,266
)
 

 
(1,266
)
 
(1,237
)
 

 
(1,237
)
Common stock repurchases
(2,608
)
 

 
(2,608
)
 
(3,500
)
 

 
(3,500
)
Distributions and other
4

 
(537
)
 
(533
)
 
60

 
(645
)
 
(585
)
Ending balance
$
45,151

 
$
3,500

 
$
48,651

 
$
43,784

 
$
3,483

 
$
47,267

(1) 
Excludes redeemable noncontrolling interest
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 March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending September 29, 2018. 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 2017 Annual Report on Form 10-K.
The Company enters into relationships or investments with other entities that may be variable interest entities (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 (as defined by ASC 810-10-25-38) to the VIE. Hong Kong Disneyland Resort and Shanghai Disney Resort (collectively the Asia Theme Parks) are VIEs in which the Company has less than 50% equity ownership. Company subsidiaries (the Management Companies) have management agreements with the Asia 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 Asia Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the Asia Theme Parks. Therefore, the Company has consolidated the Asia 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.
Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheet to the total of the amounts reported in the Condensed Consolidated Statement of Cash Flows.
 
 
March 31,
2018
 
September 30,
2017
Cash and cash equivalents
 
$
4,179

 
$
4,017

Restricted cash included in:
 
 
 
 
Other current assets
 
11

 
26

Other assets
 
5

 
21

Total cash, cash equivalents and restricted cash in the statement of cash flows
 
$
4,195

 
$
4,064

3.
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, other income, 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.

8

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


Equity in the income of investees is included in segment operating income as follows: 
 
Quarter Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Media Networks
$
13

 
$
88

 
$
63

 
$
207

Parks and Resorts
(7
)
 
(3
)
 
(14
)
 
(5
)
Consumer Products & Interactive Media

 

 

 
1

Equity in the income of investees included in segment operating income
$
6

 
$
85

 
$
49

 
$
203

Segment revenues and segment operating income are as follows:
 
Quarter Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Revenues (1):
 
 
 
 
 
 
 
Media Networks
$
6,138


$
5,946


$
12,381


$
12,179

Parks and Resorts
4,879


4,299


10,033


8,854

Studio Entertainment
2,454


2,034


4,958


4,554

Consumer Products & Interactive Media
1,077


1,057


2,527


2,533

 
$
14,548

 
$
13,336

 
$
29,899

 
$
28,120

Segment operating income (1):
 
 
 
 
 
 
 
Media Networks
$
2,082

 
$
2,223

 
$
3,275

 
$
3,585

Parks and Resorts
954

 
750

 
2,301

 
1,860

Studio Entertainment
847

 
656

 
1,676

 
1,498

Consumer Products & Interactive Media
354

 
367

 
971

 
1,009

 
$
4,237

 
$
3,996

 
$
8,223

 
$
7,952

(1) 
Studio Entertainment 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 film properties. The increase to Studio Entertainment revenues and operating income and corresponding decrease to Consumer Products & Interactive Media revenues and operating income was $136 million and $107 million for the quarters ended March 31, 2018 and April 1, 2017, respectively, and $307 million and $288 million for the six months ended March 31, 2018 and April 1, 2017, respectively.
A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Segment operating income
$
4,237

 
$
3,996

 
$
8,223

 
$
7,952

Corporate and unallocated shared expenses
(194
)
 
(161
)
 
(344
)
 
(293
)
Restructuring and impairment charges
(13
)
 

 
(28
)
 

Other income, net
41

 

 
94

 

Interest expense, net
(143
)
 
(84
)
 
(272
)
 
(183
)
Income before income taxes
$
3,928

 
$
3,751

 
$
7,673

 
$
7,476

In March, the Company announced a strategic reorganization of its businesses into four operating segments: the newly-formed Direct-to-Consumer and International; the combined Parks, Experiences and Consumer Products; Media Networks; and Studio Entertainment. The Company is in the process of modifying internal and external reporting processes and systems to accommodate the new structure and expects to transition to the new segment reporting structure by the beginning of fiscal 2019. We continue to report operating results to our chief operating decision maker using our current operating segments.

9

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


4.
Acquisitions
BAMTech
On September 25, 2017, the Company acquired an additional 42% interest in BAMTech, a streaming technology and content delivery business, from an affiliate of Major League Baseball (MLB) for $1.6 billion (paid in January 2018). The acquisition increased our interest from 33% to 75%, and as a result, we began consolidating BAMTech during the fourth quarter of fiscal 2017. The estimated acquisition date fair value of BAMTech is $3.9 billion.
BAMTech’s noncontrolling interest holders, MLB and the National Hockey League (NHL), have the right to sell their shares to the Company in the future. MLB can generally sell their shares to the Company starting five years from and ending ten years after the September 25, 2017 acquisition date at the greater of fair value or a guaranteed floor value ($563 million accreting at 8% annually for eight years). The NHL can sell their shares to the Company in fiscal 2020 for $300 million or in fiscal 2021 for $350 million. Accordingly, these interests are recorded as “Redeemable noncontrolling interests” in the Company’s Condensed Consolidated Balance Sheet.
The Company has the right to purchase MLB’s interest in BAMTech starting five years from and ending ten years after the acquisition date at the greater of fair value or the guaranteed floor value. The Company has the right to acquire the NHL interest in fiscal years 2020 or 2021 for $500 million.
The acquisition date fair value of the noncontrolling interests was estimated at $1.1 billion, which was calculated using an option pricing model and generally reflects the net present value of the expected future redemption amount.
As a result of the MLB and NHL sale rights, the noncontrolling interests will generally not be allocated BAMTech losses. Prospectively, the Company will record the noncontrolling interests at the greater of (i) their acquisition date fair value adjusted for their share (if any) of earnings, losses, or dividends or (ii) an accreted value from the date of the acquisition to the earliest redemption date. The accretion of the MLB interest to the earliest redemption value in five years after the acquisition date will be recorded using an interest method. As of March 31, 2018, the redeemable noncontrolling interest subject to accretion would have had a redemption amount of $586 million if it were redeemed at that time. Adjustments to the carrying amount of redeemable noncontrolling interests increase or decrease income available to Company shareholders through an adjustment to “Net income attributable to noncontrolling interests” on the Condensed Consolidated Statement of Income.
The Company is negotiating to provide the noncontrolling interest holder in ESPN a portion of the Company’s share of the BAMTech direct-to-consumer sports business at a price that is consistent with the amount the Company invested. If such transaction is finalized, the ESPN noncontrolling interest holder’s investment would be recorded as a noncontrolling interest transaction when consummated.
We have allocated $3.5 billion of the purchase price to goodwill (approximately half of which is deductible for tax purposes) with the remainder primarily allocated to identifiable intangible assets. We are in the process of finalizing the valuation of the acquired assets, assumed liabilities and noncontrolling interests.
The revenue and costs of BAMTech included in the Company’s Condensed Consolidated Statement of Income for the six months ended March 31, 2018 were approximately $0.2 billion and $0.3 billion, respectively.
Twenty-First Century Fox
On December 14, 2017, the Company and Twenty-First Century Fox, Inc. (“21CF”) announced a definitive agreement (the “Merger Agreement”) for the Company to acquire 21CF. Prior to the acquisition, 21CF will transfer a portfolio of its news, sports and broadcast businesses, including the Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, FS1, FS2, Fox Deportes and Big Ten Network and certain other assets and liabilities into a newly formed subsidiary (“New Fox”) (the “New Fox Separation”) and distribute all of the issued and outstanding common stock of New Fox to shareholders of 21CF (other than holders that are subsidiaries of 21CF (shares held by such holders, the “Hook Stock”)) on a pro rata basis (the “New Fox Distribution”). Prior to the New Fox Distribution, New Fox will pay 21CF a dividend in the amount of $8.5 billion. As the New Fox Separation and the New Fox Distribution will be taxable to 21CF at the corporate level, the dividend is intended to fund the taxes resulting from the New Fox Separation and New Fox Distribution and certain other transactions contemplated by the Merger Agreement (the “Transaction Tax”). 21CF will retain all assets and liabilities not transferred to New Fox, which will include the 21CF film and television studios, certain cable networks (including FX and National Geographic) and 21CF’s international television businesses. Following the New Fox Separation and the New Fox Distribution, TWC Merger Enterprises 2 Corp., a wholly owned subsidiary of the Company (“Merger Sub”) will merge with and into 21CF (the “Initial Merger”), with 21CF surviving (the “Surviving Corporation”). Immediately after the effective time of the Initial Merger, the Surviving Corporation will merge with and into TWC Merger Enterprises 1, LLC, a wholly owned subsidiary of the Company (“Merger LLC”), with Merger LLC to be the surviving entity (the “Subsequent

10

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


Merger,” and together with the Initial Merger, the “Mergers”). As a result of the Mergers, 21CF will become a wholly owned subsidiary of the Company.
The Boards of Directors of the Company and 21CF have approved the transaction. In order to seek approval from 21CF and the Company’s shareholders, the Company filed a preliminary Form S-4 Registration Statement (“S-4”) with the U.S. Securities and Exchange Commission (“SEC”) on April 18, 2018, which S-4, once effective, will constitute a prospectus for the registration of Company common stock to be delivered to 21CF shareholders pursuant to the Merger Agreement as well as a joint proxy statement of the Company and 21CF. The consummation of the transaction is subject to various conditions, including, among others, (i) customary conditions relating to the adoption of the Merger Agreement by the requisite vote of shareholders of 21CF and the approval of the stock issuance by the requisite vote of the Company’s shareholders, (ii) the consummation of the New Fox Separation, (iii) the receipt of a tax ruling from the Australian Taxation Office and certain tax opinions with respect to the treatment of the transaction under U.S. and Australian tax laws, and (iv) the receipt of certain regulatory approvals and governmental consents.
Upon consummation of the transaction, each issued and outstanding share of 21CF common stock (other than Hook Stock) will be exchanged automatically for 0.2745 shares of Company common stock. The exchange ratio may be subject to an adjustment based on the final estimate of the Transaction Tax and other transactions contemplated by the Merger Agreement. The initial exchange ratio in the Merger Agreement of 0.2745 shares of Company common stock for each share of 21CF common stock (other than Hook Stock) was set based on an estimate of $8.5 billion for the Transaction Tax and will be adjusted immediately prior to consummation of the transaction if the final estimate of the Transaction Tax at closing is more than $8.5 billion or less than $6.5 billion. Such adjustment could increase or decrease the exchange ratio, depending on whether the final estimate is lower or higher, respectively, than $6.5 billion or $8.5 billion. Additionally, if the final estimate of the Transaction Tax is lower than $8.5 billion, the Company will make a cash payment to New Fox reflecting the difference between such amount and $8.5 billion, up to a maximum cash payment of $2.0 billion. As included in the S-4 filing, based on the number of shares of 21CF common stock outstanding as of April 11, 2018 and the closing price for the Company’s common stock on April 11, 2018 of $100.80, the Company would be required to issue approximately 512 million new shares of Company common stock, a value of approximately $51.6 billion. The value at which the Company will record the equity consideration will be based upon the Company’s stock price on the date the transaction closes. In addition, the Company will assume 21CF’s net debt, which was approximately $14.6 billion as of December 30, 2017 (approximately $19.8 billion of debt less approximately $5.2 billion in cash).
Under the terms of the Merger Agreement, Disney will pay 21CF $2.5 billion if the merger is not consummated under certain circumstances relating to the failure to obtain approvals, or if there is a final, non-appealable order preventing the transaction, in each case, relating to antitrust laws, communications laws or foreign regulatory laws. If the Merger Agreement is terminated under certain other circumstances relating to changes in board recommendations and/or alternative transactions, the Company or 21CF may be required to pay the other party approximately $1.5 billion.
21CF currently has an approximately 39% interest in Sky. In December 2016, 21CF issued an announcement disclosing the terms of a firm offer to acquire the fully diluted share capital of Sky which 21CF and its affiliates do not already own at a price of £10.75 per share, payable in cash, subject to certain payments of dividends (the “Sky Acquisition”). The Sky Acquisition remains subject to certain customary closing conditions, including approval by the UK Secretary of State for Digital, Culture, Media and Sport and the requisite approval by Sky shareholders unaffiliated with 21CF. On April 12, 2018, the U.K. Takeover Panel ruled that, if the closing occurs under the Merger Agreement, and if 21CF has not previously completed its acquisition of the remaining interests in Sky and if no third party has acquired more than 50% of the ordinary shares in Sky prior to such time, then Disney will be obliged to make a mandatory offer for all the ordinary shares in Sky not already owned by 21CF in accordance with Note 8 of Rule 9.1 of the U.K. Takeover Code within 28 days of the closing under the Merger Agreement. The U.K. Takeover Panel further ruled that any such offer would be required to be made in cash and at a price of £10.75 for each ordinary share in Sky.
In connection with 21CF’s efforts to obtain U.K. regulatory approval for the Sky Acquisition, 21CF offered to sell, and Disney has advised 21CF that it is prepared to acquire, the Sky News business for a nominal amount if the Sky Acquisition is completed. Under the terms of the proposal, the Company would be committed to operate the Sky News business at its current cost structure for 10 years and 21CF has agreed to fund the anticipated costs of the Sky News business, based on the current cost structure (plus inflation), for 10 years.

11

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


Goodwill
The changes in the carrying amount of goodwill for the six months ended March 31, 2018 are as follows:
 
Media
Networks
 
Parks and
Resorts
 
Studio
Entertainment
 
Consumer
Products & Interactive Media
 
Unallocated (1)
 
Total
Balance at Sept. 30, 2017
$
16,325

 
$
291

 
$
6,817

 
$
4,393

 
$
3,600

 
$
31,426

Acquisitions

 

 

 

 

 

Dispositions

 

 

 

 

 

Other, net
3

 

 
2

 
1

 
(82
)
 
(76
)
Balance at Mar. 31, 2018
$
16,328

 
$
291

 
$
6,819

 
$
4,394

 
$
3,518

 
$
31,350

(1) 
Unallocated amount will be allocated to the segments once the BAMTech purchase price allocation is finalized. Other, net represents the impact on goodwill of updates to our initial estimated fair value of intangible assets related to BAMTech.
5.
Borrowings
During the six months ended March 31, 2018, the Company’s borrowing activity was as follows: 
 
September 30,
2017
 
Borrowings
 
Payments
 
Other
Activity
 
March 31,
2018
Commercial paper with original maturities less than three months(1)
$
1,151

 
$

 
$
(764
)
 
$
(2
)
 
$
385

Commercial paper with original maturities greater than three months
1,621

 
4,467

 
(2,331
)
 
9

 
3,766

U.S. and European medium-term notes
19,721

 

 
(1,300
)
 
12

 
18,433

BAMTech acquisition payable
1,581

 

 
(1,581
)
 

 

Asia Theme Parks borrowings(2)
1,145

 

 

 
81

 
1,226

Foreign currency denominated debt and other(3)
72

 
1,048

 
(50
)
 
(196
)
 
874

Total
$
25,291

 
$
5,515

 
$
(6,026
)
 
$
(96
)
 
$
24,684

(1) 
Borrowings and payments are reported net.
(2) 
The other activity is primarily the U.S. dollar weakening against the Chinese Renminbi.
(3) 
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 2019
$
6,000

 
$

 
$
6,000

Facility expiring March 2021
2,250

 

 
2,250

Facility expiring March 2023
4,000

 

 
4,000

Total
$
12,250

 
$

 
$
12,250

The Company had bank facilities totaling $2.5 billion and $2.25 billion expiring in March 2018 and March 2019, respectively. These facilities were refinanced increasing the borrowing capacity to $6.0 billion and $4.0 billion and extending the maturity dates to March 2019 and March 2023, respectively. 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 0.18% to 1.63%. The Company also has the ability to issue up to $500 million of letters of credit under the facility expiring in March 2023, which if utilized, reduces available borrowings under this facility. As of March 31, 2018, the Company has $196 million of outstanding letters of credit, of which none were issued under this facility. The facilities specifically exclude certain entities, including the Asia Theme Parks, from any representations, covenants, or

12

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


events of default and contain only one financial covenant relating to interest coverage, which the Company met on March 31, 2018 by a significant margin.
Cruise Ship Credit Facilities
In October 2016 and December 2017, the Company entered into credit facilities to finance three new cruise ships, which are expected to be delivered in 2021, 2022 and 2023. The financings may be used for up to 80% of the contract price of the cruise ships. Under the agreements, $1.0 billion in financing is available beginning in April 2021, $1.1 billion is available beginning in May 2022 and $1.1 billion is available beginning in April 2023. If utilized, the interest rates will be fixed at 3.48%, 3.72% and 3.74%, respectively, and the loan and interest will be payable semi-annually over a 12-year period from the borrowing date. Early repayment is permitted subject to cancellation fees.
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
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Interest expense
$
(172
)
 
$
(115
)
 
$
(318
)
 
$
(236
)
Interest and investment income
29

 
31

 
46

 
53

Interest expense, net
$
(143
)
 
$
(84
)
 
$
(272
)
 
$
(183
)
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.
6.
International Theme Parks
The Company has 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 Asia Theme Parks together with Disneyland Paris are collectively referred to as the International Theme Parks).
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 March 31, 2018 and September 30, 2017:
 
March 31, 2018
 
September 30, 2017
Cash and cash equivalents
$
780

 
$
843

Other current assets
450

 
376

Total current assets
1,230

 
1,219

Parks, resorts and other property
9,640

 
9,403

Other assets
94

 
111

Total assets (1)
$
10,964

 
$
10,733

 
 
 
 
Current liabilities
$
1,075

 
$
1,163

Borrowings - long-term
1,226

 
1,145

Other long-term liabilities
386

 
371

Total liabilities (1)
$
2,687

 
$
2,679

(1) 
Total assets of the Asia Theme Parks were $8 billion at March 31, 2018 and September 30, 2017, which primarily consist of parks, resorts and other property of $7 billion at March 31, 2018 and September 30, 2017. Total liabilities of the Asia Theme Parks were $2 billion at March 31, 2018 and September 30, 2017.     

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 International Theme Parks’ revenues and costs and expenses included in the Company’s Condensed Consolidated Statement of Income for the six months ended March 31, 2018:
 
March 31, 2018
Revenues
$
1,749

Costs and expenses
(1,752
)
Equity in the loss of investees
(14
)
Asia Theme Parks’ royalty and management fees of $83 million for the six months ended March 31, 2018 are eliminated in consolidation but are considered in calculating earnings allocated to noncontrolling interests.
International Theme Parks’ cash flows for the six months ended March 31, 2018 included in the Company’s Condensed Consolidated Statement of Cash Flows were $272 million generated from operating activities, $319 million used in investing activities and $8 million generated from financing activities. The majority of cash flows used in investing activities were for the Asia Theme Parks.
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 in April 2017, the Company and HKSAR have provided loans with outstanding balances of $140 million and $93 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.
The Company has provided Hong Kong Disneyland Resort with a revolving credit facility of HK $2.1 billion ($269 million), which bears interest at a rate of three month HIBOR plus 1.25% and matures in December 2023. There is no outstanding balance under the line of credit at March 31, 2018.
In August 2017, the Company and HKSAR entered into an agreement for a multi-year expansion of Hong Kong Disneyland that will add a number of new guest offerings, including two new themed areas, by 2023. Under the terms of the agreement, the HK $10.9 billion ($1.4 billion) expansion will be funded by equity contributions from the Company and HKSAR on an equal basis.
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 loans totaling $788 million, bearing interest at rates up to 8% and maturing in 2036, with early repayment permitted. In addition, the Company has an outstanding balance of $320 million due from Shanghai Disney Resort related to development costs, pre-opening expense and 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 March 31, 2018. These balances are eliminated upon consolidation.
Shendi has provided Shanghai Disney Resort with loans totaling 6.8 billion yuan (approximately $1.1 billion), bearing interest at rates up to 8% and maturing in 2036, with early repayment permitted. Shendi has also provided Shanghai Disney Resort with a 1.4 billion yuan (approximately $217 million) line of credit bearing interest at 8%. There is no outstanding balance under the line of credit at March 31, 2018.
7.
Income Taxes
On December 22, 2017, new federal income tax legislation, the “Tax Cuts and Jobs Act” (Tax Act), was signed into law. The most significant impacts on the Company are as follows:
Effective January 1, 2018, the U.S. corporate federal statutory income tax rate was reduced from 35.0% to 21.0%. Because of our fiscal year end, the Company’s fiscal 2018 statutory federal tax rate is 24.5%, which is applicable to each quarter of the fiscal year, and will be 21.0% thereafter.
The Company remeasured its U.S. federal deferred tax assets and liabilities at the rate that the Company expects to be in effect when those deferred taxes will be realized (either 24.5% if in 2018 or 21.0% thereafter). The Company

14

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


recognized a benefit from the deferred tax remeasurement of approximately $2.0 billion in the six months ended March 31, 2018.
A one-time tax is due on certain accumulated foreign earnings (Deemed Repatriation Tax), which is payable over eight years. The effective tax rate is generally 15.5% on the portion of the earnings held in cash and cash equivalents and 8% on the remainder. The Company recognized a charge for the Deemed Repatriation Tax of approximately $350 million in the six months ended March 31, 2018. Generally there will no longer be a U.S. federal income tax cost arising from the repatriation of foreign earnings.
The Company will be eligible to claim an immediate deduction for investments in qualified fixed assets and film and television productions placed in service in fiscal 2018 through fiscal 2022. This provision phases out through fiscal 2027.
The domestic production activity deduction was eliminated effective for the Company’s fiscal 2019.
Certain foreign derived income will be taxed in the U.S. at an effective rate of approximately 13% (which increases to approximately 16% in 2025) rather than the general statutory rate of 21%. This will be effective for the Company in fiscal 2019.
Certain foreign earnings will be taxed at a minimum effective rate of approximately 13%. This will be effective for the Company in fiscal 2019.
The amounts that the Company has recorded are provisional estimates of the impact the Tax Act will have on the Company’s financial statements in fiscal 2018. Additional information and analysis is required to finalize the impact that the Tax Act will have on our full year financial results including the following:
Filing the fiscal 2017 U.S. federal income tax return, which could impact our estimated foreign earnings and deferred income tax assets and liabilities, and
Finalizing the determination of foreign cash and cash equivalents at the end of fiscal 2018, which is required to calculate the Deemed Repatriation Tax.
Although the Company does not anticipate material adjustments to the provisional amounts, final results could vary from these provisional amounts.
Additionally, potential further guidance may be forthcoming from the Financial Accounting Standards Board and the Securities and Exchange Commission, as well as regulations, interpretations and rulings from federal and state tax agencies, which could result in additional impacts.
During the six months ended March 31, 2018, the Company increased its gross unrecognized tax benefits by $0.1 billion to $0.9 billion. 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 $296 million, of which $131 million would reduce our income tax expense and effective tax rate if recognized.
8.
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
 
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
 
March 31, 2018
 
April 1, 2017
Service costs
$
87

 
$
92

 
$
175

 
$
183

 
$
2

 
$
3

 
$
5

 
$
6

Interest costs
122

 
111

 
245

 
223

 
15

 
14

 
30

 
28

Expected return on plan assets
(227
)
 
(218
)
 
(452
)
 
(437
)
 
(13
)
 
(12
)
 
(26
)
 
(24
)
Amortization of prior-year service costs
5

 
2

 
8

 
5

 

 

 

 

Recognized net actuarial loss
88

 
101

 
175

 
202

 
4

 
4

 
7

 
8

Net periodic benefit cost
$
75

 
$
88

 
$
151

 
$
176

 
$
8

 
$
9

 
$
16

 
$
18


15

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


During the six months ended March 31, 2018, the Company did not make any material contributions to its pension and postretirement medical plans. The Company is assessing whether it will make any material contributions in the remainder of fiscal 2018. Final funding amounts for fiscal 2018 will be assessed based on our January 1, 2018 funding actuarial valuation, which will be available by the end of the fourth quarter of fiscal 2018.
9.
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
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Shares (in millions):
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding (basic)
1,503

 
1,580

 
1,507

 
1,586

Weighted average dilutive impact of Awards
7

 
11

 
8

 
11

Weighted average number of common and common equivalent shares outstanding (diluted)
1,510

 
1,591

 
1,515

 
1,597

Awards excluded from diluted earnings per share
12

 
8

 
13

 
12

10.
Equity
The Company paid the following dividends in fiscal 2018 and 2017:
Per Share
 
Total Paid
 
Payment Timing
 
Related to Fiscal Period
$0.84
$1.3 billion
Second Quarter of Fiscal 2018
Second Half 2017
$0.78
$1.2 billion
Fourth Quarter of Fiscal 2017
First Half 2017
$0.78
$1.2 billion
Second Quarter of Fiscal 2017
Second Half 2016
During the six months ended March 31, 2018, the Company repurchased 25 million shares of its common stock for $2.6 billion. As of March 31, 2018, the Company had remaining authorization in place to repurchase approximately 167 million additional shares. The repurchase program does not have an expiration date.

16

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


The following tables summarize the changes in each component of accumulated other comprehensive income (loss) (AOCI) including our proportional share of equity method investee amounts:
 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
AOCI, before tax
Investments
 
Cash Flow Hedges
 
Balance at December 30, 2017
$
14

 
$
(69
)
 
$
(4,810
)
 
$
(461
)
 
$
(5,326
)
Quarter Ended March 31, 2018:
 
 
 
 
 
 
 
 


Unrealized gains (losses) arising during the period
10

 
(165
)
 
24

 
103

 
(28
)
Reclassifications of realized net (gains) losses to net income

 
37

 
96

 

 
133

Balance at March 31, 2018
$
24

 
$
(197
)
 
$
(4,690
)
 
$
(358
)
 
$
(5,221
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
26

 
$
398

 
$
(5,751
)
 
$
(662
)
 
$
(5,989
)
Quarter Ended April 1, 2017:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
8

 
(206
)
 
5

 
63

 
(130
)
Reclassifications of realized net (gains) losses to net income
(6
)
 
(51
)
 
108

 

 
51

Balance at April 1, 2017
$
28

 
$
141

 
$
(5,638
)
 
$
(599
)
 
$
(6,068
)
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2017
$
15

 
$
(108
)
 
$
(4,906
)
 
$
(523
)
 
$
(5,522
)
Six Months Ended March 31, 2018:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
9

 
(146
)
 
24

 
165

 
52

Reclassifications of net (gains) losses to net income

 
57

 
192

 

 
249

Balance at March 31, 2018
$
24

 
$
(197
)
 
$
(4,690
)
 
$
(358
)
 
$
(5,221
)
 
 
 
 
 
 
 
 
 
 
Balance at October 1, 2016
$
44

 
$
(38
)
 
$
(5,859
)
 
$
(521
)
 
$
(6,374
)
Six Months Ended April 1, 2017:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(10
)
 
300

 
5

 
(78
)
 
217

Reclassifications of net (gains) losses to net income
(6
)
 
(121
)
 
216

 

 
89

Balance at April 1, 2017
$
28

 
$
141

 
$
(5,638
)
 
$
(599
)
 
$
(6,068
)

17

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


 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
Tax on AOCI
Investments
 
Cash Flow Hedges
 
Balance at December 30, 2017
$
(7
)
 
$
25

 
$
1,804

 
$
100

 
$
1,922

Quarter Ended March 31, 2018:
 
 
 
 
 
 
 
 


Unrealized gains (losses) arising during the period
(3
)
 
25

 
(3
)
 
(33
)
 
(14
)
Reclassifications of realized net (gains) losses to net income

 
(9
)
 
(23
)
 

 
(32
)
Balance at March 31, 2018
$
(10
)
 
$
41

 
$
1,778

 
$
67

 
$
1,876

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
(11
)
 
$
(143
)
 
$
2,146

 
$
142

 
$
2,134

Quarter Ended April 1, 2017:
 
 
 
 
 
 
 
 


Unrealized gains (losses) arising during the period
(3
)
 
74

 
7

 
(5
)
 
73

Reclassifications of realized net (gains) losses to net income
2

 
19

 
(40
)
 

 
(19
)
Balance at April 1, 2017
$
(12
)
 
$
(50
)
 
$
2,113

 
$
137

 
$
2,188

 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2017
$
(7
)
 
$
46

 
$
1,839

 
$
116

 
$
1,994

Six Months Ended March 31, 2018:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(3
)
 
12

 
(3
)
 
(49
)
 
(43
)
Reclassifications of net (gains) losses to net income

 
(17
)
 
(58
)
 

 
(75
)
Balance at March 31, 2018
$
(10
)
 
$
41

 
$
1,778

 
$
67

 
$
1,876

 
 
 
 
 
 
 
 
 
 
Balance at October 1, 2016
$
(18
)
 
$
13

 
$
2,208

 
$
192

 
$
2,395

Six Months Ended April 1, 2017:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
4

 
(108
)
 
(15
)
 
(55
)
 
(174
)
Reclassifications of net (gains) losses to net income
2

 
45

 
(80
)
 

 
(33
)
Balance at April 1, 2017
$
(12
)
 
$
(50
)
 
$
2,113

 
$
137

 
$
2,188


18

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


 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
AOCI, after tax
Investments
 
Cash Flow Hedges
 
Balance at December 30, 2017
$
7

 
$
(44
)
 
$
(3,006
)
 
$
(361
)
 
$
(3,404
)
Quarter Ended March 31, 2018:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
7

 
(140
)
 
21

 
70

 
(42
)
Reclassifications of realized net (gains) losses to net income

 
28

 
73

 

 
101

Balance at March 31, 2018
$
14

 
$
(156
)
 
$
(2,912
)
 
$
(291
)
 
$
(3,345
)
 
 
 
 
 
 
 
 
 
 
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 September 30, 2017
$
8

 
$
(62
)
 
$
(3,067
)
 
$
(407
)
 
$
(3,528
)
Six Months Ended March 31, 2018:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
6

 
(134
)
 
21

 
116

 
9

Reclassifications of net (gains) losses to net income

 
40

 
134

 

 
174

Balance at March 31, 2018
$
14

 
$
(156
)
 
$
(2,912
)
 
$
(291
)
 
$
(3,345
)
 
 
 
 
 
 
 
 
 
 
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
)

19

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
 
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Investments, net
 
Interest expense, net
 
$

 
$
6

 
$

 
$
6

Estimated tax
 
Income taxes
 

 
(2
)
 

 
(2
)
 
 
 
 

 
4

 

 
4

 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
Primarily revenue
 
(37
)
 
51

 
(57
)
 
121

Estimated tax
 
Income taxes
 
9

 
(19
)
 
17

 
(45
)
 
 
 
 
(28
)
 
32

 
(40
)
 
76

 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement
  medical expense
 
Costs and expenses
 
(96
)
 
(108
)
 
(192
)
 
(216
)
Estimated tax
 
Income taxes
 
23

 
40

 
58

 
80

 
 
 
 
(73
)
 
(68
)
 
(134
)
 
(136
)
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
 
 
$
(101
)
 
$
(32
)
 
$
(174
)
 
$
(56
)
At March 31, 2018 and September 30, 2017, unrealized gains and losses on available-for-sale investments were not material.
11.
Equity-Based Compensation
Compensation expense related to stock options and restricted stock units (RSUs) is as follows:
 
Quarter Ended
 
Six Months Ended
 
March 31,
2018
 
April 1,
2017
 
March 31,
2018
 
April 1,
2017
Stock options
$
23

 
$
22

 
$
46

 
$
42

RSUs
77

 
70

 
148

 
147

Total equity-based compensation expense (1)
$
100

 
$
92

 
$
194

 
$
189

Equity-based compensation expense capitalized during the period
$
18

 
$
21

 
$
37

 
$
42

(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 $178 million and $618 million, respectively, as of March 31, 2018.
The weighted average grant date fair values of options granted during the six months ended March 31, 2018 and April 1, 2017 were $28.01 and $25.79, respectively.
During the six months ended March 31, 2018, the Company made equity compensation grants consisting of 4.0 million stock options and 4.2 million RSUs.
12.
Commitments and Contingencies
Legal Matters
The Company, together with, in some instances, certain of its directors and officers, is a defendant or codefendant in various 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 those 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,

20

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


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 March 31, 2018, the remaining debt service obligation guaranteed by the Company was $301 million, of which $47 million was principal. To the extent that tax revenues exceed the debt service payments subsequent to the Company funding a shortfall, 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 August 2022. The Company is also committed to make a capital contribution of approximately $450 million to Hulu in calendar 2018. For the six months ended March 31, 2018, the Company made capital contributions of $114 million against this commitment. 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 $0.8 billion as of March 31, 2018. 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 March 31, 2018. The activity in the current period related to the allowance for credit losses was not material.
13.
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 generally classified in one of the following 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 March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets