10-Q 1 fy2018_q1x10qxdoc.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
December 30, 2017
 
 
 
twdcimagea01a01a01a01a06.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 1,503,675,479 shares of common stock outstanding as of January 31, 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
 
December 30,
2017
 
December 31,
2016
Revenues:
 
 
 
Services
$
12,984

 
$
12,406

Products
2,367

 
2,378

Total revenues
15,351

 
14,784

Costs and expenses:
 
 
 
Cost of services (exclusive of depreciation and amortization)
(7,334
)
 
(7,020
)
Cost of products (exclusive of depreciation and amortization)
(1,403
)
 
(1,386
)
Selling, general, administrative and other
(2,079
)
 
(1,985
)
Depreciation and amortization
(742
)
 
(687
)
Total costs and expenses
(11,558
)
 
(11,078
)
Restructuring and impairment charges
(15
)
 

Other income, net
53

 

Interest expense, net
(129
)
 
(99
)
Equity in the income of investees
43

 
118

Income before income taxes
3,745

 
3,725

Income taxes
728

 
(1,237
)
Net income
4,473

 
2,488

Less: Net income attributable to noncontrolling interests
(50
)
 
(9
)
Net income attributable to The Walt Disney Company (Disney)
$
4,423

 
$
2,479

 
 
 
 
Earnings per share attributable to Disney:
 
 
 
Diluted
$
2.91

 
$
1.55

 
 
 
 
Basic
$
2.93

 
$
1.56

 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
Diluted
1,521

 
1,603

 
 
 
 
Basic
1,512

 
1,592

 
 
 
 
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
 
December 30,
2017
 
December 31,
2016
Net income
$
4,473

 
$
2,488

Other comprehensive income/(loss), net of tax:
 
 
 
Market value adjustments for investments
(1
)
 
(11
)
Market value adjustments for hedges
18

 
280

Pension and postretirement medical plan adjustments
61

 
46

Foreign currency translation and other
87

 
(290
)
Other comprehensive income
165

 
25

Comprehensive income
4,638

 
2,513

Net income attributable to noncontrolling interests, including redeemable noncontrolling interests
(50
)
 
(9
)
Other comprehensive (income)/loss attributable to noncontrolling interests
(41
)
 
99

Comprehensive income attributable to Disney
$
4,547

 
$
2,603

See Notes to Condensed Consolidated Financial Statements





3


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
December 30,
2017
 
September 30,
2017
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
4,677

 
$
4,017

Receivables
9,886

 
8,633

Inventories
1,307

 
1,373

Television costs and advances
846

 
1,278

Other current assets
558

 
588

Total current assets
17,274

 
15,889

Film and television costs
7,937

 
7,481

Investments
3,206

 
3,202

Parks, resorts and other property
 
 
 
Attractions, buildings and equipment
54,617

 
54,043

Accumulated depreciation
(29,647
)
 
(29,037
)
 
24,970

 
25,006

Projects in progress
2,355

 
2,145

Land
1,259

 
1,255

 
28,584

 
28,406

Intangible assets, net
6,930

 
6,995

Goodwill
31,430

 
31,426

Other assets
2,373

 
2,390

Total assets
$
97,734

 
$
95,789

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
9,574

 
$
8,855

Current portion of borrowings
6,009

 
6,172

Deferred revenue and other
4,292

 
4,568

Total current liabilities
19,875

 
19,595

Borrowings
20,082

 
19,119

Deferred income taxes
2,826

 
4,480

Other long-term liabilities
6,726

 
6,443

Commitments and contingencies (Note 12)


 


Redeemable noncontrolling interests
1,142

 
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
36,254

 
36,248

Retained earnings
75,763

 
72,606

Accumulated other comprehensive loss
(3,404
)
 
(3,528
)
 
108,613

 
105,326

Treasury stock, at cost, 1.4 billion shares
(65,324
)
 
(64,011
)
Total Disney Shareholders’ equity
43,289

 
41,315

Noncontrolling interests
3,794

 
3,689

Total equity
47,083

 
45,004

Total liabilities and equity
$
97,734

 
$
95,789

See Notes to Condensed Consolidated Financial Statements

4



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
Quarter Ended
 
December 30,
2017
 
December 31,
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
4,473

 
$
2,488

Depreciation and amortization
742

 
687

Deferred income taxes
(1,726
)
 
(76
)
Equity in the income of investees
(43
)

(118
)
Cash distributions received from equity investees
170

 
203

Net change in film and television costs and advances
34

 
440

Equity-based compensation
94

 
97

Other
139

 
187

Changes in operating assets and liabilities:
 
 
 
Receivables
(1,378
)
 
(1,160
)
Inventories
65

 
102

Other assets
(29
)
 
311

Accounts payable and other accrued liabilities
(1,160
)
 
(2,763
)
Income taxes
856

 
1,047

Cash provided by operations
2,237

 
1,445

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(981
)
 
(1,040
)
Other
(62
)
 
5

Cash used in investing activities
(1,043
)
 
(1,035
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper borrowings, net
1,140

 
732

Borrowings
1,025

 
42

Reduction of borrowings
(1,330
)
 
(194
)
Repurchases of common stock
(1,313
)
 
(1,465
)
Proceeds from exercise of stock options
50

 
65

Other
(156
)
 
(167
)
Cash used in financing activities
(584
)
 
(987
)
 
 
 
 
Impact of exchange rates on cash, cash equivalents and restricted cash
21

 
(112
)
 
 
 
 
Change in cash, cash equivalents and restricted cash
631

 
(689
)
Cash, cash equivalents and restricted cash, beginning of period
4,064

 
4,760

Cash, cash equivalents and restricted cash, end of period
$
4,695

 
$
4,071

See Notes to Condensed Consolidated Financial Statements

5



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
December 30, 2017
 
December 31, 2016
 
Disney
Shareholders
 
Non-
controlling
Interests (1)
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests (1)
 
Total
Equity
Beginning balance
$
41,315

 
$
3,689

 
$
45,004

 
$
43,265

 
$
4,058

 
$
47,323

Comprehensive income/(loss)
4,547

 
97

 
4,644

 
2,603

 
(90
)
 
2,513

Equity compensation activity
6

 

 
6

 
48

 

 
48

Dividends
(1,266
)
 

 
(1,266
)
 
(1,237
)
 

 
(1,237
)
Common stock repurchases
(1,313
)
 

 
(1,313
)
 
(1,465
)
 

 
(1,465
)
Distributions and other

 
8

 
8

 
(4
)
 
(1
)
 
(5
)
Ending balance
$
43,289

 
$
3,794

 
$
47,083

 
$
43,210

 
$
3,967

 
$
47,177

(1) 
Excludes redeemable noncontrolling interest

See Notes to Condensed Consolidated Financial Statements



6



THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
 
1.
Principles of Consolidation
These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the quarter ended December 30, 2017 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 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 (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.
 
 
December 30,
2017
 
September 30,
2017
Cash and cash equivalents
 
$
4,677

 
$
4,017

Restricted cash included in:
 
 
 
 
Other current assets
 
13

 
26

Other assets
 
5

 
21

Total cash, cash equivalents and restricted cash in the statement of cash flows
 
$
4,695

 
$
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.

7

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
 
December 30,
2017
 
December 31,
2016
Media Networks
$
50

 
$
119

Parks and Resorts
(7
)
 
(2
)
Consumer Products & Interactive Media

 
1

Equity in the income of investees included in segment operating income
$
43

 
$
118

Segment revenues and segment operating income are as follows:
 
Quarter Ended
 
December 30,
2017
 
December 31,
2016
Revenues (1):
 
 
 
Media Networks
$
6,243


$
6,233

Parks and Resorts
5,154


4,555

Studio Entertainment
2,504


2,520

Consumer Products & Interactive Media
1,450


1,476

 
$
15,351

 
$
14,784

Segment operating income (1):
 
 
 
Media Networks
$
1,193

 
$
1,362

Parks and Resorts
1,347

 
1,110

Studio Entertainment
829

 
842

Consumer Products & Interactive Media
617

 
642

 
$
3,986

 
$
3,956

(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 $171 million and $181 million for the quarters ended December 30, 2017 and December 31, 2016, respectively.
A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
December 30,
2017
 
December 31,
2016
Segment operating income
$
3,986

 
$
3,956

Corporate and unallocated shared expenses
(150
)
 
(132
)
Restructuring and impairment charges
(15
)
 

Other income, net
53

 

Interest expense, net
(129
)
 
(99
)
Income before income taxes
$
3,745

 
$
3,725

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.

8

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


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 and 2021 for $500 million.
The acquisition date fair value of the noncontrolling interests was estimated at $1.1 billion and calculated using an option pricing model. The MLB noncontrolling interest fair value generally reflects the net present value of MLB’s guaranteed floor value, while the NHL noncontrolling interest reflects their share of the $3.9 billion BAMTech value.
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 December 30, 2017, the redeemable noncontrolling interest subject to accretion would have had a redemption amount of $574 million if it were redeemed at that time. Adjustments to the carrying amount of redeemable noncontrolling interests will 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, their investment would be recorded as a noncontrolling interest transaction when consummated.
We have preliminarily allocated $3.6 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 quarter ended December 30, 2017 were both approximately $0.1 billion.
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 separate certain of its businesses, most notably, the FOX Broadcasting network and stations, FOX News Channel, FOX Business Network, FS1, FS2 and Big Ten Network into a newly listed company (“New Fox”) that will be spun off to 21CF shareholders. Prior to the spin-off, New Fox will pay a dividend to 21CF in the amount of $8.5 billion. Following the spin-off, the significant remaining businesses will include the 21CF film and television studios, certain cable networks (including FX and National Geographic) and 21CF’s international TV businesses.
Under the terms of the Merger Agreement, shareholders of 21CF will receive 0.2745 of a Company share for each 21CF share they hold subject to a two-way adjustment based on an estimate at closing of certain tax liabilities arising from the spin-off and certain other transactions contemplated by the Merger Agreement. In the event that the final estimate of tax liabilities is lower than the estimate used to set the exchange ratio, the first $2.0 billion of that adjustment will be made by a net reduction in the amount of cash dividend to 21CF from New Fox. Based upon 21CF shares outstanding as of September 30, 2017, the Company would be required to issue approximately 515 million new shares, a value of approximately $52.4 billion at the time the exchange ratio was agreed. The value at which the Company will record the equity consideration will be based upon the stock price on the date the transaction closes. In addition, the Company will assume 21CF’s net debt, which was approximately $13.7 billion as of September 30, 2017 (approximately $20.0 billion of debt less approximately $6.3 billion in cash).
The Boards of Directors of the Company and 21CF have approved the transaction, which is also subject to approval by 21CF and the Company’s shareholders, clearance under the Hart-Scott-Rodino Antitrust Improvements Act, a number of other non-United States merger and other regulatory reviews, 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 other customary closing conditions.
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

9

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


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.
Goodwill
The changes in the carrying amount of goodwill for the quarter ended December 30, 2017 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
7

 

 
7

 
2

 
(12
)
 
4

Balance at Dec. 30, 2017
$
16,332

 
$
291

 
$
6,824

 
$
4,395

 
$
3,588

 
$
31,430

(1) 
Goodwill will be allocated to the segments once the BAMTech purchase price allocation is finalized.
5.
Borrowings
During the quarter ended December 30, 2017, the Company’s borrowing activity was as follows: 
 
September 30,
2017
 
Borrowings
 
Payments
 
Other
Activity
 
December 30,
2017
Commercial paper with original maturities less than three months(1)
$
1,151

 
$
2,047

 
$

 
$

 
$
3,198

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

 
712

 
(1,619
)
 
(1
)
 
713

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

 

 
(1,300
)
 
6

 
18,427

BAMTech acquisition payable
1,581

 

 

 

 
1,581

Asia Theme Parks borrowings
1,145

 

 

 
30

 
1,175

Foreign currency denominated debt and other(2)
72

 
1,025

 
(30
)
 
(70
)
 
997

Total
$
25,291

 
$
3,784

 
$
(2,949
)
 
$
(35
)
 
$
26,091

(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

All of the above bank facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. The spread above LIBOR can range from 0.23% to 1.63%. The Company also has the ability to issue up to $800 million of letters of credit under the facility expiring in March 2019, which if utilized, reduces available borrowings under this facility. As of December 30, 2017, the Company has $190 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 and Disneyland Paris, from any representations, covenants, or events of default and contain only one financial covenant relating to interest coverage, which the Company met on December 30, 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)


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
 
December 30,
2017
 
December 31,
2016
Interest expense
$
(146
)
 
$
(121
)
Interest and investment income
17

 
22

Interest expense, net
$
(129
)
 
$
(99
)
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 (together, the Asia Theme Parks 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 December 30, 2017 and September 30, 2017:
 
December 30, 2017
 
September 30, 2017
Cash and cash equivalents
$
844

 
$
843

Other current assets
397

 
376

Total current assets
1,241

 
1,219

Parks, resorts and other property
9,449

 
9,403

Other assets
110

 
111

Total assets (1)
$
10,800

 
$
10,733

 
 
 
 
Current liabilities
$
1,061

 
$
1,163

Borrowings - long-term
1,175

 
1,145

Other long-term liabilities
390

 
371

Total liabilities (1)
$
2,626

 
$
2,679

(1) 
At December 30, 2017 and September 30, 2017, total assets of the Asia Theme Parks were $8.1 billion and primarily consist of parks, resorts and other property of $7.3 billion. At December 30, 2017 and September 30, 2017, total liabilities of the Asia Theme Parks were $2.1 billion.     

11

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 quarter ended December 30, 2017:
 
December 30, 2017
Revenues
$
905

Costs and expenses
(870
)
Equity in the loss of investees
(7
)
Asia Theme Parks’ royalty and management fees of $40 million for the quarter ended December 30, 2017 are eliminated in consolidation but are considered in calculating earnings allocated to noncontrolling interests.
International Theme Parks’ cash flows for the quarter ended December 30, 2017 included in the Company’s Condensed Consolidated Statement of Cash Flows were $167 million generated from operating activities, $158 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 April 30, 2017, the Company and HKSAR have provided loans with outstanding balances of $139 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 December 30, 2017.
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 made by 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 $789 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 $322 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 December 30, 2017. These balances are eliminated upon consolidation.
Shendi has provided Shanghai Disney Resort with loans totaling 6.8 billion yuan (approximately $1.0 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 $209 million) line of credit bearing interest at 8%. There is no outstanding balance under the line of credit at December 30, 2017.
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 existing 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

12

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


Company recognized a one-time benefit from the deferred tax remeasurement of approximately $1.9 billion in the first quarter of fiscal 2018.
A one-time tax is due on certain accumulated foreign earnings (Deemed Repatriation Tax), which is payable over eight years. The 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 $0.3 billion in the first quarter of fiscal 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,
Finalizing the determination of foreign cash and cash equivalents at the end of fiscal 2018, which is required to calculate the Deemed Repatriation Tax, and
Receiving additional information with respect to the income tax attributes of our equity method investments.
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 quarter ended December 30, 2017, 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 $258 million, of which $100 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
 
Quarter Ended
 
December 30, 2017
 
December 31, 2016
 
December 30, 2017
 
December 31, 2016
Service costs
$
88

 
$
91

 
$
3

 
$
3

Interest costs
123

 
112

 
15

 
14

Expected return on plan assets
(225
)
 
(219
)
 
(13
)
 
(12
)
Amortization of prior-year service costs
3

 
3

 

 

Recognized net actuarial loss
87

 
101

 
3

 
4

Net periodic benefit cost
$
76

 
$
88

 
$
8

 
$
9

During the quarter ended December 30, 2017, the Company did not make any material contributions to its pension and postretirement medical plans and currently does not expect to make any material contributions to its pension and postretirement medical plans during the remainder of fiscal 2018. However, 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.

13

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


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
 
December 30,
2017
 
December 31,
2016
Shares (in millions):
 
 
 
Weighted average number of common and common equivalent shares outstanding (basic)
1,512

 
1,592

Weighted average dilutive impact of Awards
9

 
11

Weighted average number of common and common equivalent shares outstanding (diluted)
1,521

 
1,603

Awards excluded from diluted earnings per share
16

 
16

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 quarter ended December 30, 2017, the Company repurchased 13 million shares of its common stock for $1.3 billion. As of December 30, 2017, the Company had remaining authorization in place to repurchase approximately 179 million additional shares. The repurchase program does not have an expiration date.
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 September 30, 2017
$
15

 
$
(108
)
 
$
(4,906
)
 
$
(523
)
 
$
(5,522
)
Quarter Ended December 30, 2017:
 
 
 
 
 
 
 
 


Unrealized gains (losses) arising during the period
(1
)
 
19

 

 
62

 
80

Reclassifications of realized net (gains) losses to net income

 
20

 
96

 

 
116

Balance at December 30, 2017
$
14

 
$
(69
)
 
$
(4,810
)
 
$
(461
)
 
$
(5,326
)
 
 
 
 
 
 
 
 
 
 
Balance at October 1, 2016
$
44

 
$
(38
)
 
$
(5,859
)
 
$
(521
)
 
$
(6,374
)
Quarter Ended December 31, 2016:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(18
)
 
506

 

 
(141
)
 
347

Reclassifications of realized net (gains) losses to net income

 
(70
)
 
108

 

 
38

Balance at December 31, 2016
$
26

 
$
398

 
$
(5,751
)
 
$
(662
)
 
$
(5,989
)

14

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 September 30, 2017
$
(7
)
 
$
46

 
$
1,839

 
$
116

 
$
1,994

Quarter Ended December 30, 2017:
 
 
 
 
 
 
 
 


Unrealized gains (losses) arising during the period

 
(13
)
 

 
(16
)
 
(29
)
Reclassifications of realized net (gains) losses to net income

 
(8
)
 
(35
)
 

 
(43
)
Balance at December 30, 2017
$
(7
)
 
$
25

 
$
1,804

 
$
100

 
$
1,922

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

 
$
2,208

 
$
192

 
$
2,395

Quarter Ended December 31, 2016:
 
 
 
 
 
 
 
 


Unrealized gains (losses) arising during the period
7

 
(182
)
 
(22
)
 
(50
)
 
(247
)
Reclassifications of realized net (gains) losses to net income

 
26

 
(40
)
 

 
(14
)
Balance at December 31, 2016
$
(11
)
 
$
(143
)
 
$
2,146

 
$
142

 
$
2,134

 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
AOCI, after tax
Investments
 
Cash Flow Hedges
 
Balance at September 30, 2017
$
8

 
$
(62
)
 
$
(3,067
)
 
$
(407
)
 
$
(3,528
)
Quarter Ended December 30, 2017:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(1
)
 
6

 

 
46

 
51

Reclassifications of realized net (gains) losses to net income

 
12

 
61

 

 
73

Balance at December 30, 2017
$
7

 
$
(44
)
 
$
(3,006
)
 
$
(361
)
 
$
(3,404
)
 
 
 
 
 
 
 
 
 
 
Balance at October 1, 2016
$
26

 
$
(25
)
 
$
(3,651
)
 
$
(329
)
 
$
(3,979
)
Quarter Ended December 31, 2016:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(11
)
 
324

 
(22
)
 
(191
)
 
100

Reclassifications of realized net (gains) losses to net income

 
(44
)
 
68

 

 
24

Balance at December 31, 2016
$
15

 
$
255

 
$
(3,605
)
 
$
(520
)
 
$
(3,855
)

15

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


Details about AOCI components reclassified to net income are as follows:
Gains/(losses) in net income:
 
Affected line item in the
  Condensed Consolidated
  Statements of Income:
 
Quarter Ended
 
 
December 30,
2017
 
December 31,
2016
Cash flow hedges
 
Primarily revenue
 
$
(20
)
 
$
70

Estimated tax
 
Income taxes
 
8

 
(26
)
 
 
 
 
(12
)
 
44

 
 
 
 
 
 
 
Pension and postretirement
  medical expense
 
Costs and expenses
 
(96
)
 
(108
)
Estimated tax
 
Income taxes
 
35

 
40

 
 
 
 
(61
)
 
(68
)
 
 
 
 
 
 
 
Total reclassifications for the period
 
 
 
$
(73
)
 
$
(24
)
At December 30, 2017 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, stock appreciation rights and restricted stock units (RSUs) is as follows:
 
Quarter Ended
 
December 30,
2017
 
December 31,
2016
Stock options
$
23

 
$
20

RSUs
71

 
77

Total equity-based compensation expense (1)
$
94

 
$
97

Equity-based compensation expense capitalized during the period
$
19

 
$
21

(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 $222 million and $858 million, respectively, as of December 30, 2017.
The weighted average grant date fair values of options granted during the quarter ended December 30, 2017 and December 31, 2016 were $28.01 and $25.78, respectively.
During the quarter ended December 30, 2017, the Company made equity compensation grants consisting of 4.0 million stock options and 4.1 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, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of December 30, 2017, the remaining debt service obligation guaranteed by the Company was $306 million, of which $48 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.

16

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


The Company has guaranteed $113 million of Hulu LLC’s $338 million term loan, which expires in August 2022, and is committed to make a capital contribution of approximately $450 million to Hulu in calendar 2018. 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 December 30, 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 December 30, 2017. 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 of the fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level: 
 
Fair Value Measurement at December 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
32

 
$

 
$

 
$
32

Derivatives
 
 
 
 
 
 
 
Foreign exchange

 
416

 

 
416

Other

 
13

 

 
13

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(188
)
 

 
(188
)
Foreign exchange

 
(459
)
 

 
(459
)
Total recorded at fair value
$
32

 
$
(218
)
 
$

 
$
(186
)
Fair value of borrowings
$

 
$
23,935

 
$
2,793

 
$
26,728


17

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


 
Fair Value Measurement at September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
36

 
$

 
$

 
$
36

Derivatives
 
 
 
 
 
 
 
Interest rate

 
10

 

 
10

Foreign exchange

 
403

 

 
403

Other

 
8

 

 
8

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(122
)
 

 
(122
)
Foreign exchange

 
(427
)
 

 
(427
)
Total recorded at fair value
$
36

 
$
(128
)
 
$

 
$
(92
)
Fair value of borrowings
$

 
$
23,110

 
$
2,764

 
$
25,874

 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 include the Asia Theme Park borrowings and the Company’s other foreign currency denominated borrowings, and generally are valued based on the current borrowing cost and credit risk of the Asia Theme Parks and the Company, respectively, as well as historical market transactions and prevailing market interest rates.
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.
14.
Derivative Instruments
The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.
The Company’s derivative positions measured at fair value are summarized in the following tables: 
 
As of December 30, 2017
 
Current
Assets
 
Other Assets
 
Other Current Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
152

 
$
237

 
$
(187
)
 
$
(184
)
Interest rate

 

 
(161
)
 

Other
11

 
2

 

 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
24

 
3

 
(64
)
 
(25
)
Interest rate

 

 

 
(27
)
Gross fair value of derivatives
187

 
242

 
(412
)
 
(236
)
Counterparty netting
(141
)
 
(238
)
 
204

 
175

Cash collateral (received)/paid
(12
)
 
(1
)
 
35

 

Net derivative positions
$
34

 
$
3

 
$
(173
)
 
$
(61
)

18

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


 
As of September 30, 2017
 
Current
Assets
 
Other Assets
 
Other Current Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
175

 
$
190

 
$
(192
)
 
$
(170
)
Interest rate

 
10

 
(106
)
 

Other
6

 
2

 

 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
38

 

 
(46
)
 
(19
)
Interest rate

 

 

 
(16
)
Gross fair value of derivatives
219

 
202

 
(344
)
 
(205
)
Counterparty netting
(142
)
 
(190
)
 
188

 
144

Cash collateral (received)/paid
(20
)
 
(7
)
 
19

 

Net derivative positions
$
57

 
$
5

 
$
(137
)
 
$
(61
)
Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company primarily uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate risk management activities.
The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of December 30, 2017 and September 30, 2017, the total notional amount of the Company’s pay-floating interest rate swaps was $7.8 billion and $8.2 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
 
December 30,
2017
 
December 31,
2016
Gain (loss) on interest rate swaps
$
(64
)
 
$
(232
)
Gain (loss) on hedged borrowings
64

 
232

In addition, the Company realized net benefits of $7 million and $12 million for the quarters ended December 30, 2017 and December 31, 2016, 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 December 30, 2017 or at September 30, 2017 and gains and losses related to pay-fixed swaps recognized in earnings for the quarters ended December 30, 2017 and December 31, 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 December 30, 2017 was not material. In October 2017, the Company sold an additional option for $0.5 billion in future borrowings with the same terms. The options are not designated as hedges and do not qualify for hedge accounting; accordingly, changes in their fair 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.

19

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


The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the euro, Japanese yen, Canadian dollar and British pound. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings into U.S. dollar denominated borrowings.
The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of December 30, 2017 and September 30, 2017, the notional amounts of the Company’s net foreign exchange cash flow hedges were $6.7 billion and $6.3 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the quarters ended December 30, 2017 and December 31, 2016 were not material. Net deferred losses recorded in AOCI for contracts that will mature in the next twelve months totaled $64 million.
Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at December 30, 2017 and September 30, 2017 were $2.9 billion and $3.6 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 quarters ended December 30, 2017 and December 31, 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:
December 30,
2017
 
December 31,
2016
 
December 30,
2017
 
December 31,
2016
 
December 30,
2017
 
December 31,
2016
Net gains (losses) on foreign currency denominated assets and liabilities
$
17

 
$
(233
)
 
$
3

 
$
7

 
$
3

 
$
23

Net gains (losses) on foreign exchange risk management contracts not designated as hedges
(14
)
 
221

 
(1
)
 
(7
)
 
(1
)
 
(31
)
Net gains (losses)
$
3

 
$
(12
)
 
$
2

 
$

 
$
2

 
$
(8
)
Commodity Price Risk Management
The Company is subject to the volatility of commodities prices and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The notional amount of these commodities contracts at December 30, 2017 and September 30, 2017 and related gains or losses recognized in earnings for the quarters ended December 30, 2017 and December 31, 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 December 30, 2017 and September 30, 2017 were not material. The related gains or losses recognized in earnings for the quarters ended December 30, 2017 and December 31, 2016 were not material.
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

20

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


liability position by counterparty were $269 million and $217 million on December 30, 2017 and September 30, 2017, respectively.
15.
Restructuring and Impairment Charges and Other Income
The Company recorded $15 million of restructuring and impairment charges in the current quarter primarily consisting of severance costs.
The Company recorded a $53 million gain in the current quarter on the sale of property rights.
16.
New Accounting Pronouncements
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board (FASB) issued guidance to improve certain aspects of the hedge accounting model including making more risk management strategies eligible for hedge accounting and simplifying the assessment of hedge effectiveness. We do not expect the adoption of the new standard will have a material impact on our consolidated financial statements as our historical hedging ineffectiveness has been immaterial. The new guidance is effective beginning with the Company’s 2020 fiscal year (with early adoption permitted in any interim period) and requires prospective adoption with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption for existing hedging relationships.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued guidance that requires presentation of all components of net periodic pension and postretirement benefit costs, other than service costs, in an income statement line item outside of a subtotal of income from operations. 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. The guidance is required to be adopted retrospectively with respect to income statement presentation 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 8 of this filing and Note 10 to the Consolidated Financial Statements in the 2017 Annual Report on Form 10-K for the amount of each component of net periodic pension and postretirement benefit costs we have reported historically. These amounts of net periodic pension and postretirement benefit costs are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement.
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. The guidance requires prospective adoption with a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. We do not expect the adoption to have a material impact on our financial statements. We currently estimate that we will record approximately $0.1 billion as an increase to retained earnings upon adoption. Our assessment may change if we enter into new transactions between now and the date of adoption.
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 September 30, 2017, the Company had an estimated $3.3 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). The FASB has recently proposed guidance that would allow adoption of the standard as of the effective date without restating prior periods.
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 (IP). The new guidance, including the amendments, is effective at the beginning of the Company’s 2019 fiscal year.

21

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


We have reviewed our significant revenue streams and identified required changes to our revenue recognition policies. Based on our existing customer contracts and relationships, we do not expect the implementation of the new guidance will have a material impact on our consolidated financial statements upon adoption. The Company’s evaluation of the impact could change if we enter into new revenue arrangements in the future or interpretations of the new guidance further evolve.
While not expected to be material, the more significant changes to the Company’s revenue recognition policies are in the following areas:
For television and film content licensing agreements with multiple availability windows with the same licensee, the Company will defer more revenues to future windows than is currently deferred.
For licenses of character images, brands and trademarks subject to minimum guaranteed license fees, we currently recognize the difference between the minimum guaranteed amount and actual royalties earned from licensee merchandise sales (“shortfalls”) at the end of the contract period. Under the new guidance, projected guarantee shortfalls will be recognized straight-line over the remaining license period once an expected shortfall is identified.
For licenses that include multiple television and film titles subject to minimum guaranteed license fees that are recoupable against the licensee’s aggregate underlying sales from all titles, the Company will allocate the minimum guaranteed license fee to each title and recognize the allocated license fee as revenue when the title is made available to the customer. License fees in excess of the allocated by-title minimum guarantee are deferred until the aggregate contractual minimum guarantee has been exceeded and thereafter recognized as earned based on the licensee’s underlying sales. Under current guidance, an upfront allocation of the minimum guarantee is not required as license fees are recognized as earned based on the licensee’s underlying sales with any shortfalls recognized at the end of the contract period. 
For renewals or extensions of license agreements for television and film content, we will recognize revenue when the licensed content becomes available under the renewal or extension, instead of when the agreement is renewed or extended.
We are continuing our assessment of potential changes to our disclosures and internal controls under the new guidance.
The guidance may be adopted either by restating all years presented in the Company’s financial statements for fiscal 2019, 2018 and 2017 (full retrospective method) or by recording the impact of adoption as an adjustment to retained earnings at the beginning of fiscal 2019 (modified retrospective method). The Company currently expects to adopt the standard using the modified retrospective method.
The Company’s equity method investees are considered private companies for purposes of applying the new guidance and are not required to adopt the new standard until fiscal years beginning after December 15, 2018. We have not yet assessed the impact of the new rules on our equity investees.

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
Business Segment Results
Impact of U.S. tax reform
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
CONSOLIDATED RESULTS AND NON-SEGMENT ITEMS
Our summary consolidated results are presented below: 
 
Quarter Ended
 
% Change
(in millions, except per share data)
December 30,
2017
 
December 31,
2016
 
Better/
(Worse)
Revenues:
 
 
 
 
 
Services
$
12,984

 
$
12,406

 
5
 %
Products
2,367

 
2,378

 
 %
Total revenues
15,351

 
14,784

 
4
 %
Costs and expenses:
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
(7,334
)
 
(7,020
)
 
(4)
 %
Cost of products (exclusive of depreciation and amortization)
(1,403
)
 
(1,386
)
 
(1)
 %
Selling, general, administrative and other
(2,079
)
 
(1,985
)
 
(5)
 %
Depreciation and amortization
(742
)
 
(687
)
 
(8)
 %
Total costs and expenses
(11,558
)
 
(11,078
)
 
(4)
 %
Restructuring and impairment charges
(15
)
 

 
nm

Other income, net
53

 

 
nm

Interest expense, net
(129
)
 
(99
)
 
(30)
 %
Equity in the income of investees
43

 
118

 
(64)
 %
Income before income taxes
3,745

 
3,725

 
1
 %
Income taxes
728

 
(1,237
)
 
nm

Net income
4,473

 
2,488

 
80
 %
Less: Net income attributable to noncontrolling interests
(50
)
 
(9
)
 
>(100)
 %
Net income attributable to Disney
$
4,423

 
$
2,479

 
78
 %
 
 
 
 
 
 
Diluted earnings per share attributable to Disney
$
2.91

 
$
1.55

 
88
 %


23

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


Quarter Results
Revenues for the quarter increased 4%, or $0.6 billion, to $15.4 billion; net income attributable to Disney increased 78%, or $1.9 billion, to $4.4 billion; and diluted earnings per share attributable to Disney (EPS) increased 88% from $1.55 to $2.91. The net income and EPS increase for the quarter was due to the benefit of new federal income tax legislation, the “Tax Cuts and Jobs Act” (Tax Act) (See Note 7 to the Condensed Consolidated Financial Statements). EPS for the quarter also benefited from a decrease in weighted average shares outstanding as a result of our share repurchase program. Segment operating income in the current quarter was comparable to the prior-year quarter, as growth at our Parks and Resorts segment was largely offset by lower results at our Media Networks segment.
Revenues
Service revenues for the quarter increased 5%, or $578 million, to $13.0 billion due to higher guest spending and attendance at our parks and resorts, higher theatrical distribution revenue, an increase in affiliate fees and revenue from BAMTech, which is now consolidated. These increases were partially offset by lower advertising revenue.
Product revenues for the quarter were flat at $2.4 billion as higher guest spending and attendance at our parks and resorts were offset by lower volumes at our home entertainment business.
Costs and expenses
Cost of services for the quarter increased 4%, or $314 million, to $7.3 billion primarily due to higher costs at our parks and resorts, increased production cost write-downs and higher film cost amortization due to higher theatrical revenue. The increase at parks and resorts was driven by cost inflation, higher volumes and new guest offerings.
Cost of products for the quarter increased 1%, or $17 million, to $1.4 billion driven by higher volumes and inflation at our parks and resorts, partially offset by lower home entertainment volumes.
Selling, general, administrative and other costs increased 5%, or $94 million, to $2.1 billion due to the consolidation of BAMTech, costs incurred in connection with our agreement to acquire Twenty-First Century Fox, Inc. and higher marketing spend.
Depreciation and amortization increased 8%, or $55 million, to $0.7 billion, primarily due to depreciation of new attractions at our domestic parks and resorts and the consolidation of BAMTech.
Restructuring and impairment charges
The Company recorded $15 million of restructuring and impairment charges in the quarter primarily consisting of severance costs.
Other income, net
The Company recorded a $53 million gain in the quarter on the sale of property rights.
Interest expense, net
Interest expense, net is as follows: 
 
Quarter Ended
 

(in millions)
December 30,
2017
 
December 31,
2016
 
% Change
Better/(Worse)
Interest expense
$
(146
)
 
$
(121
)
 
(21)
 %
Interest and investment income
17

 
22

 
(23)
 %
Interest expense, net
$
(129
)
 
$
(99
)
 
(30)
 %
The increase in interest expense was due to higher average debt balances and an increase in average interest rates. The decrease in interest and investment income was due to an investment write-down in the current quarter.
Equity in the income of investees
Equity in the income of investees decreased $75 million to $43 million for the quarter due to higher losses from our investment in Hulu and lower operating results from A+E Television Networks (A+E), partially offset by the absence of equity losses from BAMTech, which is now consolidated and reported in the Media Networks segment. The decrease at Hulu was due to higher programming and labor costs, partially offset by subscription and advertising revenue growth. The decrease at A+E was due to lower advertising revenue, higher marketing costs and increased programming costs.

24

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


Effective Income Tax Rate 
 
Quarter Ended
 
 
 
December 30,
2017
 
December 31,
2016
 
Change
Better/(Worse)
Effective income tax rate (benefit) / expense
(19.4
)%
 
33.2
%
 
52.6

ppt
For the current quarter, we recognized an income tax benefit compared to expense in the prior-year quarter. The 52.6 percentage point change in our effective tax rate compared to the prior-year quarter reflected two significant impacts of the Tax Act:
A one-time net benefit of approximately $1.6 billion, which reflected an approximate $1.9 billion benefit from remeasuring our deferred tax balances to the new statutory rate, partially offset by a charge of approximately $0.3 billion from accruing a Deemed Repatriation Tax. This net benefit had an impact of approximately 41.8 percentage points on the effective income tax rate.
A reduction in the Company’s fiscal 2018 U.S. statutory federal income tax rate to 24.5% from 35.0% in the prior year. Net of state tax and other effects, the reduction in the statutory rate had an impact of approximately 9.2 percentage points on the effective income tax rate.
Refer to Note 7 of the Condensed Consolidated Financial Statements for further information on the impacts of the Tax Act on the Company.
Noncontrolling Interests 
 
Quarter Ended
 
 
(in millions)
December 30,
2017
 
December 31,
2016
 
% Change
Better/(Worse) 
Net income attributable to noncontrolling interests
$
50

 
$
9

 
>(100)
 %
The increase in net income attributable to noncontrolling interests was driven by lower tax expense at ESPN, largely due to the one-time benefit from the Tax Act.
Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes.

SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 30, 2017 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
Media Networks revenues are subject to seasonal advertising patterns, changes in viewership levels and timing of program sales. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months.
Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods.
Studio Entertainment revenues fluctuate due to the timing and performance of releases in the theatrical, home entertainment and television markets. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
Consumer Products & Interactive Media revenues are influenced by seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first and fourth fiscal quarter, and the timing and performance of theatrical and game releases and cable programming broadcasts.

25

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


BUSINESS SEGMENT RESULTS
The Company evaluates the performance of its operating segments based on segment operating income, which is shown below along with segment revenues: 
 
Quarter Ended
 
% Change
(in millions)
December 30,
2017
 
December 31,
2016
 
Better/
(Worse)
Revenues:
 
 
 
 
 
Media Networks
$
6,243

 
$
6,233

 
 %
Parks and Resorts
5,154

 
4,555

 
13
 %
Studio Entertainment
2,504

 
2,520

 
(1)
 %
Consumer Products & Interactive Media
1,450

 
1,476

 
(2)
 %
 
$
15,351

 
$
14,784

 
4
 %
Segment operating income:
 
 
 
 
 
Media Networks
$
1,193

 
$
1,362

 
(12)
 %
Parks and Resorts
1,347

 
1,110

 
21
 %
Studio Entertainment
829

 
842

 
(2)
 %
Consumer Products & Interactive Media
617

 
642

 
(4)
 %
 
$
3,986

 
$
3,956

 
1
 %
 The following table reconciles segment operating income to income before income taxes: 
 
Quarter Ended
 
% Change
(in millions)
December 30,
2017
 
December 31,
2016
 
Better/
(Worse)
Segment operating income
$
3,986

 
$
3,956

 
1
 %
Corporate and unallocated shared expenses
(150
)
 
(132
)
 
(14)
 %
Restructuring and impairment charges
(15
)
 

 
nm

Other income, net
53

 

 
nm

Interest expense, net
(129
)

(99
)
 
(30)
 %
Income before income taxes
$
3,745


$
3,725

 
1
 %
Depreciation expense is as follows: 
 
Quarter Ended
 
% Change
(in millions)
December 30,
2017
 
December 31,
2016
 
Better/
(Worse)
Media Networks
 
 
 
 
 
Cable Networks
$
39

 
$
36

 
(8)
 %
Broadcasting
24

 
21

 
(14)
 %
Total Media Networks
63

 
57

 
(11)
 %
Parks and Resorts
 
 
 
 


Domestic
357

 
328

 
(9)
 %
International
177

 
156

 
(13)
 %
Total Parks and Resorts
534

 
484

 
(10)
 %