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 June 27, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

Commission File Number 001-38842

Delaware	83-0940635
State or Other Jurisdiction of	I.R.S. Employer Identification
Incorporation or Organization

500 South Buena Vista Street

Burbank, California 91521

Address of Principal Executive Offices and Zip Code

(818) 560-1000

Registrant’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	DIS	New York Stock Exchange

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  ☒    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    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	☒	Accelerated filer	☐
Non-accelerated filer	☐	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  ☒

There were 1,807,063,365 shares of common stock outstanding as of July 29, 2020.

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				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Revenues:
Services	$	11,235	$	18,039	$	45,519	$	43,918
Products	544		2,223		5,162		6,571
Total revenues	11,779		20,262		50,681		50,489
Costs and expenses:
Cost of services (exclusive of depreciation and amortization)	(7,209)		(11,463)		(29,287)		(26,197)
Cost of products (exclusive of depreciation and amortization)	(687)		(1,374)		(3,580)		(4,020)
Selling, general, administrative and other	(2,455)		(3,368)		(9,557)		(7,850)
Depreciation and amortization	(1,377)		(1,306)		(4,010)		(2,866)
Total costs and expenses	(11,728)		(17,511)		(46,434)		(40,933)
Restructuring and impairment charges	(5,047)		(207)		(5,342)		(869)
Other income (expense), net	382		(123)		382		4,840
Interest expense, net	(412)		(411)		(995)		(617)
Equity in the income (loss) of investees	186		(1)		545		(234)
Income (loss) from continuing operations before income taxes	(4,840)		2,009		(1,163)		12,676
Income taxes on continuing operations	331		(393)		(650)		(2,685)
Net income (loss) from continuing operations	(4,509)		1,616		(1,813)		9,991
Income (loss) from discontinued operations, net of income tax benefit (expense) of $1, ($102), $11 and ($107), respectively	(3)		366		(32)		388
Net income (loss)	(4,512)		1,982		(1,845)		10,379
Net income from continuing operations attributable to noncontrolling interests	(209)		(186)		(309)		(343)
Net income from discontinued operations attributable to noncontrolling interests	—		(36)		—		(36)
Net income (loss) attributable to The Walt Disney Company (Disney)	$	(4,721)	$	1,760	$	(2,154)	$	10,000
Earnings (loss) per share attributable to Disney(1):
Diluted
Continuing operations	$	(2.61)	$	0.79	$	(1.17)	$	5.97
Discontinued operations	—		0.18		(0.02)		0.22
	$	(2.61)	$	0.97	$	(1.19)	$	6.19
Basic
Continuing operations	$	(2.61)	$	0.79	$	(1.17)	$	6.00
Discontinued operations	—		0.18		(0.02)		0.22
	$	(2.61)	$	0.98	$	(1.19)	$	6.22
Weighted average number of common and common equivalent shares outstanding:
Diluted	1,809		1,814		1,807		1,616
Basic	1,809		1,802		1,807		1,607

⁽¹⁾Total may not equal the sum of the column due to rounding.

See Notes to Condensed Consolidated Financial Statements

2

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited; in millions)

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Net income (loss)	$	(4,512)	$	1,982	$	(1,845)	$	10,379
Other comprehensive income (loss), net of tax:
Market value adjustments, primarily for hedges	(128)		(12)		(106)		(105)
Pension and postretirement medical plan adjustments	97		24		277		145
Foreign currency translation and other	51		20		(145)		45
Other comprehensive income (loss)	20		32		26		85
Comprehensive income (loss)	(4,492)		2,014		(1,819)		10,464
Net income from continuing operations attributable to noncontrolling interests	(209)		(222)		(309)		(379)
Other comprehensive income (loss) attributable to noncontrolling interests	—		33		(26)		(3)
Comprehensive income (loss) attributable to Disney	$	(4,701)	$	1,825	$	(2,154)	$	10,082

See Notes to Condensed Consolidated Financial Statements

3

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)

	June 27, 2020		September 28, 2019
ASSETS
Current assets
Cash and cash equivalents	$	23,115	$	5,418
Receivables	12,622		15,481
Inventories	1,559		1,649
Licensed content costs and advances	3,135		4,597
Other current assets	899		979
Total current assets	41,330		28,124
Produced and licensed content costs	25,560		22,810
Investments	3,611		3,224
Parks, resorts and other property
Attractions, buildings and equipment	61,130		58,589
Accumulated depreciation	(34,639)		(32,415)
	26,491		26,174
Projects in progress	4,380		4,264
Land	1,020		1,165
	31,891		31,603
Intangible assets, net	19,589		23,215
Goodwill	77,233		80,293
Other assets	8,435		4,715
Total assets	$	207,649	$	193,984
LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other accrued liabilities	$	16,986	$	17,762
Current portion of borrowings	10,224		8,857
Deferred revenue and other	3,707		4,722
Total current liabilities	30,917		31,341
Borrowings	54,197		38,129
Deferred income taxes	7,055		7,902
Other long-term liabilities	15,855		13,760
Commitments and contingencies (Note 14)
Redeemable noncontrolling interests	9,162		8,963
Equity
Preferred stock	—		—
Common stock, $0.01 par value, Authorized – 4.6 billion shares, Issued – 1.8 billion shares	54,386		53,907
Retained earnings	39,004		42,494
Accumulated other comprehensive loss	(6,617)		(6,617)
Treasury stock, at cost, 19 million shares	(907)		(907)
Total Disney Shareholders’ equity	85,866		88,877
Noncontrolling interests	4,597		5,012
Total equity	90,463		93,889
Total liabilities and equity	$	207,649	$	193,984

See Notes to Condensed Consolidated Financial Statements

4

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)

	Nine Months Ended
	June 27, 2020		June 29, 2019
OPERATING ACTIVITIES
Net income (loss) from continuing operations	$	(1,813)	$	9,991
Depreciation and amortization	4,010		2,866
Goodwill and intangible asset impairments	4,953		—
Net gain on acquisition and investments	(370)		(4,719)
Deferred income taxes	(548)		1,716
Equity in the (income) loss of investees	(545)		234
Cash distributions received from equity investees	567		548
Net change in produced and licensed content costs and advances	(1,483)		59
Net change in operating lease right of use assets / liabilities	16		—
Equity-based compensation	388		591
Other	471		83
Changes in operating assets and liabilities, net of business acquisitions:
Receivables	2,100		(1,428)
Inventories	86		(96)
Other assets	8		450
Accounts payable and other liabilities	(1,986)		219
Income taxes	95		(6,248)
Cash provided by operations - continuing operations	5,949		4,266
INVESTING ACTIVITIES
Investments in parks, resorts and other property	(3,293)		(3,567)
Acquisitions	—		(9,901)
Other	(27)		(317)
Cash used in investing activities - continuing operations	(3,320)		(13,785)
FINANCING ACTIVITIES
Commercial paper borrowings, net	1,373		2,973
Borrowings	18,030		31,348
Reduction of borrowings	(2,297)		(19,039)
Dividends	(1,587)		(1,310)
Proceeds from exercise of stock options	238		278
Contributions from / sales of noncontrolling interests	—		544
Acquisition of noncontrolling and redeemable noncontrolling interests	—		(1,430)
Other	(838)		(831)
Cash provided by financing activities - continuing operations	14,919		12,533
CASH FLOWS FROM DISCONTINUED OPERATIONS
Cash provided by operations - discontinued operations	2		320
Cash provided by investing activities - discontinued operations	198		—
Cash used in financing activities - discontinued operations	—		(179)
Cash provided by discontinued operations	200		141
Impact of exchange rates on cash, cash equivalents and restricted cash	(49)		47
Change in cash, cash equivalents and restricted cash	17,699		3,202
Cash, cash equivalents and restricted cash, beginning of period	5,455		4,155
Cash, cash equivalents and restricted cash, end of period	$	23,154	$	7,357

See Notes to Condensed Consolidated Financial Statements

5

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)

	Quarter Ended
	Equity Attributable to Disney
	Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock		Total Disney Equity		Non-controlling    Interests (1)		Total Equity
Balance at March 28, 2020	1,806	$	54,230	$	43,721		$	(6,637)	$	(907)	$	90,407	$	4,470	$	94,877
Comprehensive income (loss)	—	—		(4,721)			20		—		(4,701)		141		(4,560)
Equity compensation activity	1	156		—			—		—		156		—		156
Distributions and other	—	—		4			—		—		4		(14)		(10)
Balance at June 27, 2020	1,807	$	54,386	$	39,004		$	(6,617)	$	(907)	$	85,866	$	4,597	$	90,463
Balance at March 30, 2019	1,798	$	53,419	$	41,212		$	(3,786)	$	(907)	$	89,938	$	14,401	$	104,339
Comprehensive income	—	—		1,760			65		—		1,825		128		1,953
Equity compensation activity	3	323		—			—		—		323		—		323
Dividends	—	—		(1,585)			—		—		(1,585)		—		(1,585)
Contributions	—	—		—			—		—		—		689		689
Acquisition of TFCF	—	(30)		—			—		—		(30)		(96)		(126)
Reclassification to redeemable noncontrolling interest	—	—		—			—		—		—		(7,797)		(7,797)
Redemption of noncontrolling interest	—	—		—			—		—		—		(1,430)		(1,430)
Distributions and other	—	6		(5)			—		—		1		(11)		(10)
Balance at June 29, 2019	1,801	$	53,718	$	41,382		$	(3,721)	$	(907)	$	90,472	$	5,884	$	96,356

⁽¹⁾Excludes redeemable noncontrolling interests.

See Notes to Condensed Consolidated Financial Statements

6

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)

	Nine Months Ended
	Equity Attributable to Disney
	Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock		Total Disney Equity		Non-controlling    Interests (1)		Total Equity
Balance at September 28, 2019	1,802	$	53,907	$	42,494		$	(6,617)	$	(907)	$	88,877	$	5,012	$	93,889
Comprehensive income (loss)	—	—		(2,154)			—		—		(2,154)		135		(2,019)
Equity compensation activity	5	470		—			—		—		470		—		470
Dividends	—	9		(1,596)			—		—		(1,587)		—		(1,587)
Contributions	—	—		—			—		—		—		53		53
Adoption of new lease accounting guidance	—	—		197			—		—		197		—		197
Distributions and other	—	—		63			—		—		63		(603)		(540)
Balance at June 27, 2020	1,807	$	54,386	$	39,004		$	(6,617)	$	(907)	$	85,866	$	4,597	$	90,463
Balance at September 29, 2018	1,488	$	36,779	$	82,679		$	(3,097)	$	(67,588)	$	48,773	$	4,059	$	52,832
Comprehensive income	—	—		10,000			82		—		10,082		318		10,400
Equity compensation activity	6	738		—			—		—		738		—		738
Dividends	—	8		(2,903)			—		—		(2,895)		—		(2,895)
Contributions	—	—		—			—		—		—		736		736
Acquisition of TFCF	307	33,774		—			—		—		33,774		10,542		44,316
Adoption of new accounting guidance:
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	—	—		691			(691)		—		—		—		—
Intra-Entity Transfers of Assets Other Than Inventory	—	—		129			—		—		129		—		129
Revenues from Contracts with Customers	—	—		(116)			—		—		(116)		—		(116)
Other	—	—		22			(15)		—		7		—		7
Retirement of treasury stock	—	(17,563)		(49,118)			—		66,681		—		—		—
Reclassification to redeemable noncontrolling interest	—	—		—			—		—		—		(7,797)		(7,797)
Redemption of noncontrolling interest	—	—		—			—		—		—		(1,430)		(1,430)
Distributions and other	—	(18)		(2)			—		—		(20)		(544)		(564)
Balance at June 29, 2019	1,801	$	53,718	$	41,382		$	(3,721)	$	(907)	$	90,472	$	5,884	$	96,356

⁽¹⁾Excludes redeemable noncontrolling interests.

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 nine months ended June 27, 2020 are not necessarily indicative of the results that may be expected for the year ending October 3, 2020.

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. The term “TWDC” is used to refer to the parent company.

These financial statements should be read in conjunction with the Company’s 2019 Annual Report on Form 10-K.

On March 20, 2019, the Company acquired Twenty-First Century Fox, Inc., which was subsequently renamed TFCF Corporation (TFCF). As a result of the acquisition, the Company’s ownership in Hulu LLC (Hulu) increased to 60% (67% as of June 27, 2020 and September 28, 2019). The acquired TFCF operations and Hulu have been consolidated since the acquisition. In order to obtain regulatory approval for the acquisition, the Company agreed to sell TFCF’s domestic regional sports networks (sold in August 2019) and sports media operations in Brazil and Mexico. In the third quarter of fiscal 2020, the Company received regulatory approval to retain the sports media operation in Brazil. The sports media operation in Mexico, along with certain other businesses to be divested, are presented as discontinued operations in the Condensed Consolidated Statement of Income. At June 27, 2020 and September 28, 2019, the assets and liabilities of the businesses held for sale are not material and are included in other assets and other liabilities in the Condensed Consolidated Balance Sheet. The sports media operation in Brazil was previously presented as discontinued operations, with its assets and liabilities considered held for sale, but is now reported as continuing operations in the current and prior periods. The impact on the previously reported Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flow is not material.

Variable Interest Entities

The Company enters into relationships with or makes investments in 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 (together 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.

Redeemable Noncontrolling Interests

On May 13, 2019, the Company entered into a put/call agreement with NBC Universal (NBCU) that provided the Company with full operational control of Hulu. Under the agreement, beginning in January 2024, NBCU has the option to require the Company to purchase NBCU’s approximately 33% interest in Hulu and the Company has the option to require NBCU to sell its interest in Hulu, based on NBCU’s equity ownership percentage of the greater of Hulu’s then fair value or $27.5 billion.

NBCU’s interest will generally not be allocated its portion of Hulu’s losses as the redeemable noncontrolling interest is required to be carried at a minimum value. The minimum value is equal to the fair value as of the May 13, 2019 agreement date accreted to the January 2024 redemption value. At June 27, 2020, NBCU’s interest in Hulu is recorded in the Company’s financial statements at $8.1 billion.

8

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

BAMTech LLC (BAMTech) provides streaming technology services to third parties and is owned 75% by the Company, 15% by Major League Baseball (MLB) and 10% by the National Hockey League (NHL), both of which have the right to sell their interests to the Company in the future. MLB can generally sell its interest to the Company starting five years from and ending ten years after the Company’s September 25, 2017 acquisition date of BAMTech at the greater of fair value or a guaranteed floor value ($563 million accreting at 8% annually for eight years from the date of acquisition). The NHL can sell its interest to the Company in fiscal 2021 for $350 million. The Company has the right to purchase MLB’s interest in BAMTech starting five years from and ending ten years after the September 25, 2017 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 2021 for $500 million.

The MLB and NHL interests will generally not be allocated their portion of BAMTech losses as these interests are required to be recorded 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 applicable redemption date. The accretion of the MLB interest to the earliest redemption value (i.e. in five years after the acquisition date) will be recorded using an interest method. As of June 27, 2020, the guaranteed floor value accreted from the date of acquisition was $696 million.

Adjustments to the carrying amount of redeemable noncontrolling interests increase or decrease income available to Company shareholders and are recorded in “Net income from continuing operations attributable to noncontrolling interests” on the Condensed Consolidated Statement of Income.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results may differ from those estimates.

Reclassifications

Certain reclassifications have been made in the fiscal 2019 financial statements and notes to conform to the fiscal 2020 presentation.

2.Segment Information

Our operating segments report separate financial information, which is evaluated regularly by the Chief Executive Officer in order to decide how to allocate resources and to assess performance. The following are the Company’s operating segments:

•Media Networks;

•Parks, Experiences and Products;

•Studio Entertainment; and

•Direct-to-Consumer & International

Segment operating results reflect earnings before corporate and unallocated shared expenses, restructuring and impairment charges, net other income, net interest expense, income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees and excludes impairments of certain equity investments and purchase accounting amortization of TFCF and Hulu assets (i.e. intangible assets and the fair value step-up for film and television costs) recognized in connection with the TFCF acquisition. Corporate and unallocated shared expenses principally consist of corporate functions, executive management and certain unallocated administrative support functions.

Segment operating results include allocations of certain costs, including information technology, pension, legal and other shared services costs, which are allocated based on metrics designed to correlate with consumption.

Intersegment content transactions are presented “gross” (i.e. the segment producing the content reports revenue and profit from intersegment transactions, and the required eliminations are reported on a separate “Eliminations” line when presenting a summary of our segment results). Other intersegment transactions are reported “Net” (i.e. revenue from another segment is recorded as a reduction of costs). Studio Entertainment revenues and operating income include an allocation of Parks, Experiences and Products revenues, which is meant to reflect royalties on revenue generated by Parks, Experiences and Products on merchandise based on intellectual property from Studio Entertainment films.

9

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

As it relates to film and television content that is produced by our Media Networks and Studio Entertainment segments that will be used on our direct-to-consumer (DTC) services, there are four broad categories of content:

•Content produced for exclusive DTC use, “Originals”;

•New Studio Entertainment theatrical releases following the theatrical and home entertainment windows, “Studio Pay 1”;

•New Media Networks episodic television series following their initial airing on our linear networks, “Media Pay 1”; and

•Content in all other windows, “Library”.

The intersegment transfer price, for purposes of segment financial reporting pursuant to ASC 280 Segment Reporting, is generally cost plus a margin for Originals and Media Pay 1 content and generally based on comparable transactions for Studio Pay 1 and Library content. Imputed title by title intersegment license fees that may be necessary for other purposes are established as required by those purposes.

Intersegment revenue is recognized upon availability of the content to the DTC service except with respect to Library content for which revenue is recognized ratably over the license period.

Our DTC services generally amortize intersegment content costs for Originals and Studio Pay 1 content on an accelerated basis and for Media Pay 1 and Library content on a straight line basis.

When the DTC amortization timing is different than the timing of revenue recognition at Studio Entertainment or Media Networks, the difference results in an operating income impact in the elimination segment, which nets to zero over the DTC amortization period.

Impact of COVID-19

The impact of the novel coronavirus (COVID-19) pandemic and measures to prevent its spread are affecting our segments in a number of ways, most significantly at Parks, Experiences and Products where we closed our theme parks and retail stores, some of which have now re-opened, suspended cruise ship sailings and guided tours and have seen an adverse impact on our merchandise licensing business. In addition, we have delayed, or in some instances, shortened, modified or canceled theatrical releases and suspended stage play performances at Studio Entertainment and have experienced an adverse impact on advertising sales at Media Networks and Direct-to-Consumer & International. We have experienced disruptions in the production and availability of content, including the cancellation or deferral of certain sports events and suspension of most film and television production. Many of our businesses have been closed or suspended consistent with government mandates or guidance.

The impact of these disruptions and the extent of their adverse impact on our financial and operating results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19, and among other things, the impact of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward. As some of our businesses have begun to re-open, we have incurred additional costs to address government regulations and the safety of our employees, talent and guests.

For the quarter ended June 27, 2020, the Company recorded goodwill and intangible asset impairments totaling $5.0 billion, in part due to the negative impact COVID-19 has had on the International Channels business (see Note 18).

10

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

Segment revenues and segment operating income are as follows:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Revenues:
Media Networks	$	6,562	$	6,713	$	21,180	$	18,317
Parks, Experiences and Products(1)	983		6,575		13,922		19,570
Studio Entertainment(1)	1,738		3,836		8,041		7,817
Direct-to-Consumer & International	3,969		3,875		12,114		5,940
Eliminations(2)	(1,473)		(737)		(4,576)		(1,155)
	$	11,779	$	20,262	$	50,681	$	50,489
Segment operating income (loss):
Media Networks	$	3,153	$	2,136	$	7,158	$	5,696
Parks, Experiences and Products(1)	(1,960)		1,719		1,017		5,377
Studio Entertainment(1)	668		792		2,082		1,607
Direct-to-Consumer & International	(706)		(562)		(2,226)		(1,084)
Eliminations(2)	(56)		(133)		(529)		(174)
	$	1,099	$	3,952	$	7,502	$	11,422

⁽¹⁾The allocation of Parks, Experiences and Products revenues to Studio Entertainment was $82 million and $126 million for the quarters ended June 27, 2020 and June 29, 2019, respectively, and $383 million and $406 million for the nine months ended June 27, 2020 and June 29, 2019, respectively.

⁽²⁾Intersegment eliminations are as follows:

	Quarter Ended				Nine Months Ended
(in millions)	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Revenues:
Studio Entertainment:
Content transactions with Media Networks	$	(36)	$	(41)	$	(147)	$	(75)
Content transactions with Direct-to-Consumer & International	(506)		(82)		(1,652)		(182)
Media Networks:
Content transactions with Direct-to-Consumer & International	(931)		(614)		(2,777)		(898)
	$	(1,473)	$	(737)	$	(4,576)	$	(1,155)
Operating income:
Studio Entertainment:
Content transactions with Media Networks	$	2	$	(16)	$	(8)	$	(11)
Content transactions with Direct-to-Consumer & International	27		(35)		(246)		(79)
Media Networks:
Content transactions with Direct-to-Consumer & International	(85)		(82)		(275)		(84)
	$	(56)	$	(133)	$	(529)	$	(174)

11

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

Equity in the income (loss) of investees is included in segment operating income as follows: 

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Media Networks	$	217	$	192	$	589	$	553
Parks, Experiences and Products	(6)		—		(15)		(12)
Direct-to-Consumer & International	(18)		7		(6)		(222)
Equity in the income of investees included in segment operating income	193		199		568		319
Impairment of equity investments(1)	—		(185)		—		(538)
Amortization of TFCF intangible assets related to equity investees	(7)		(15)		(23)		(15)
Equity in the income (loss) of investees, net	$	186	$	(1)	$	545	$	(234)

⁽¹⁾The prior-year quarter reflects the impairment of an investment in a cable channel at A+E Television Networks. The prior-year nine month period also includes an impairment of Vice Group Holdings, Inc.

A reconciliation of segment operating income to income from continuing operations before income taxes is as follows:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Segment operating income	$	1,099	$	3,952	$	7,502	$	11,422
Corporate and unallocated shared expenses	(179)		(238)		(604)		(678)
Restructuring and impairment charges (see Note 18)	(5,047)		(207)		(5,342)		(869)
Other income (expense), net (see Note 5)	382		(123)		382		4,840
Interest expense, net	(412)		(411)		(995)		(617)
Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(1)	(683)		(779)		(2,106)		(884)
Impairment of equity investments	—		(185)		—		(538)
Income (loss) from continuing operations before income taxes	$	(4,840)	$	2,009	$	(1,163)	$	12,676

⁽¹⁾For the quarter ended June 27, 2020 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $486 million, $190 million and $7 million, respectively. For the nine months ended June 27, 2020 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $1,470 million, $613 million and $23 million, respectively. For the quarter ended June 29, 2019 amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $490 million, $274 million and $15 million, respectively. For the nine months ended June 29, 2019, amortization of intangible assets, step-up of film and television costs and intangibles related to TFCF equity investees were $562 million, $307 million and $15 million, respectively.

3.Revenues

The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business.

12

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

The following table presents our revenues by segment and major source:

	Quarter Ended June 27, 2020
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
Affiliate fees	$	3,647	$	—	$	—	$	848	$	(191)	$	4,304
Advertising	1,115		1		—		786		—		1,902
Theme park admissions	—		34		—		—		—		34
Resort and vacations	—		80		—		—		—		80
Retail and wholesale sales of merchandise, food and beverage	—		264		—		—		—		264
TV/SVOD distribution licensing	1,675		—		1,058		116		(1,282)		1,567
Theatrical distribution licensing	—		—		51		—		—		51
Merchandise licensing	—		438		82		8		—		528
Subscription fees	—		—		—		2,129		—		2,129
Home entertainment	—		—		395		21		—		416
Other	125		166		152		61		—		504
Total revenues	$	6,562	$	983	$	1,738	$	3,969	$	(1,473)	$	11,779

	Quarter Ended June 29, 2019
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
Affiliate fees	$	3,564	$	—	$	—	$	1,006	$	(108)	$	4,462
Advertising	1,874		—		—		1,492		—		3,366
Theme park admissions	—		1,956		—		—		—		1,956
Resort and vacations	—		1,610		—		—		—		1,610
Retail and wholesale sales of merchandise, food and beverage	—		1,877		—		—		—		1,877
TV/SVOD distribution licensing	1,150		—		746		219		(629)		1,486
Theatrical distribution licensing	—		—		2,240		—		—		2,240
Merchandise licensing	—		631		126		12		—		769
Subscription fees	—		—		—		950		—		950
Home entertainment	—		—		432		24		—		456
Other	125		501		292		172		—		1,090
Total revenues	$	6,713	$	6,575	$	3,836	$	3,875	$	(737)	$	20,262

	Nine Months Ended June 27, 2020
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
Affiliate fees	$	11,041	$	—	$	—	$	2,783	$	(551)	$	13,273
Advertising	4,841		4		—		3,244		—		8,089
Theme park admissions	—		3,655		—		—		—		3,655
Resort and vacations	—		3,088		—		—		—		3,088
Retail and wholesale sales of merchandise, food and beverage	—		4,161		—		—		—		4,161
TV/SVOD distribution licensing	4,913		—		3,532		482		(4,025)		4,902
Theatrical distribution licensing	—		—		2,062		—		—		2,062
Merchandise licensing	—		1,893		383		24		—		2,300
Subscription fees	—		—		—		5,251		—		5,251
Home entertainment	—		—		1,333		67		—		1,400
Other	385		1,121		731		263		—		2,500
Total revenues	$	21,180	$	13,922	$	8,041	$	12,114	$	(4,576)	$	50,681

13

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

	Nine Months Ended June 29, 2019
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
Affiliate fees	$	9,873	$	—	$	—	$	1,742	$	(120)	$	11,495
Advertising	5,521		3		—		2,364		—		7,888
Theme park admissions	—		5,657		—		—		—		5,657
Resort and vacations	—		4,644		—		—		—		4,644
Retail and wholesale sales of merchandise, food and beverage	—		5,767		—		—		—		5,767
TV/SVOD distribution licensing	2,617		—		2,069		276		(1,035)		3,927
Theatrical distribution licensing	—		—		3,365		—		—		3,365
Merchandise licensing	—		2,009		406		40		—		2,455
Subscription fees	—		—		—		1,136		—		1,136
Home entertainment	—		—		1,127		73		—		1,200
Other	306		1,490		850		309		—		2,955
Total revenues	$	18,317	$	19,570	$	7,817	$	5,940	$	(1,155)	$	50,489

The following table presents our revenues by segment and primary geographical markets:

	Quarter Ended June 27, 2020
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
United States and Canada	$	6,208	$	523	$	904	$	2,494	$	(1,156)	$	8,973
Europe	248		154		516		585		(201)		1,302
Asia Pacific	85		290		279		459		(21)		1,092
Latin America	21		16		39		431		(95)		412
Total revenues	$	6,562	$	983	$	1,738	$	3,969	$	(1,473)	$	11,779

	Quarter Ended June 29, 2019
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
United States and Canada	$	6,338	$	4,911	$	1,728	$	1,533	$	(601)	$	13,909
Europe	295		776		889		473		(80)		2,353
Asia Pacific	63		837		874		1,187		(56)		2,905
Latin America	17		51		345		682		—		1,095
Total revenues	$	6,713	$	6,575	$	3,836	$	3,875	$	(737)	$	20,262

	Nine Months Ended June 27, 2020
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
United States and Canada	$	19,954	$	10,798	$	4,149	$	7,062	$	(3,827)	$	38,136
Europe	838		1,569		2,203		1,507		(435)		5,682
Asia Pacific	280		1,427		1,303		1,823		(157)		4,676
Latin America	108		128		386		1,722		(157)		2,187
Total revenues	$	21,180	$	13,922	$	8,041	$	12,114	$	(4,576)	$	50,681

14

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

	Nine Months Ended June 29, 2019
	Media Networks		Parks, Experiences and Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations		Consolidated
United States and Canada	$	17,464	$	14,742	$	3,840	$	2,078	$	(970)	$	37,154
Europe	585		2,261		1,878		846		(118)		5,452
Asia Pacific	195		2,399		1,548		1,566		(67)		5,641
Latin America	73		168		551		1,450		—		2,242
Total revenues	$	18,317	$	19,570	$	7,817	$	5,940	$	(1,155)	$	50,489

Revenues recognized in the current and prior-year periods from performance obligations satisfied (or partially satisfied) in previous reporting periods primarily relate to revenues earned on TV/SVOD and theatrical distribution licensee sales on titles made available to the licensee in previous reporting periods. For the quarter ended June 27, 2020, $425 million was recognized related to performance obligations satisfied as of March 28, 2020. For the nine months ended June 27, 2020, $1,096 million was recognized related to performance obligations satisfied as of September 28, 2019. For the quarter ended June 29, 2019, $551 million was recognized related to performance obligations satisfied as of March 30, 2019. For the nine months ended June 29, 2019, $773 million was recognized related to performance obligations satisfied as of September 29, 2018.

As of June 27, 2020, revenue for unsatisfied performance obligations expected to be recognized in the future is $16 billion, which primarily relates to content to be delivered in the future under existing agreements with television station affiliates and TV/SVOD licensees. Of this amount, we expect to recognize approximately $2 billion in the remainder of fiscal 2020, $6 billion in fiscal 2021, $4 billion in fiscal 2022 and $4 billion thereafter. These amounts include only fixed consideration or minimum guarantees and do not include amounts related to (i) contracts with an original expected term of one year or less (such as most advertising contracts) or (ii) licenses of IP that are solely based on the sales of the licensee.

When the timing of the Company’s revenue recognition is different from the timing of customer payments, the Company recognizes either a contract asset (customer payment is subsequent to revenue recognition and subject to the Company satisfying additional performance obligations) or deferred revenue (customer payment precedes the Company satisfying the performance obligations). Consideration due under contracts with payment in arrears is recognized as accounts receivable. Deferred revenues are recognized as (or when) the Company performs under the contract. Contract assets, accounts receivable and deferred revenues from contracts with customers are as follows:

	June 27, 2020		September 28, 2019
Contract assets	$	104	$	150
Accounts Receivable
Current	10,883		12,755
Non-current	1,653		1,962
Allowance for credit losses	(574)		(375)
Deferred revenues
Current	3,286		4,050
Non-current	701		619

Contract assets primarily relate to certain multi-season TV/SVOD licensing contracts. Activity for the current and prior-year quarters related to contract assets was not material. The allowance for credit losses increased from $375 million at September 28, 2019 to $574 million at June 27, 2020 due to additional provisions in the period.

For the quarter ended June 27, 2020, the Company recognized revenues of $0.3 billion, primarily related to licensing and publishing advances and content sales included in the deferred revenue balance at September 28, 2019. For the nine-months ended June 27, 2020, the Company recognized revenues of $3.1 billion, primarily related to theme park admissions, vacation packages and licensing advances included in the deferred revenue balance at September 28, 2019. For the quarter and nine-months ended June 29, 2019, the Company recognized revenues of $0.3 billion and $2.5 billion, respectively, primarily related to theme park admissions, vacation packages and licensing advances included in the deferred revenue balance at September 30, 2018. As a result of COVID-19, the Company has allowed refunds of certain non-refundable deposits that were previously reported as deferred revenue, the most significant of which related to park admission tickets and deposits for vacation packages. Remaining deferred amounts related to these deposits are now classified in “Accounts payable and other accrued liabilities” in the Condensed Consolidated Balance Sheet.

15

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

We evaluate our allowance for credit losses and estimate collectability of accounts receivable based on our analysis of historical bad debt experience in conjunction with our assessment of the financial condition of individual companies with which we do business. In times of domestic or global economic turmoil, including COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods.

The Company has accounts receivable with original maturities greater than one year related to the sale of film and television program rights and vacation club properties.

The Company estimates the allowance for credit losses related to receivables from the sale of film and 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 film and television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $0.9 billion as of June 27, 2020. The activity in the allowance for credit loss for the quarter and nine-month period ended June 27, 2020 was not material.

The Company estimates the allowance for credit losses related to receivables from sales of its vacation club properties 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 an immaterial allowance for credit losses, was $0.8 billion as of June 27, 2020. The activity in the allowance for credit loss for the quarter and nine-month period ended June 27, 2020 was not material.

4.Acquisitions

TFCF Corporation

On March 20, 2019, the Company acquired the outstanding capital stock of TFCF, a diversified global media and entertainment company. The acquisition purchase price totaled $69.5 billion, of which the Company paid $35.7 billion in cash and $33.8 billion in Disney shares (307 million shares at a price of $110.00 per share).

As part of the TFCF acquisition, the Company acquired TFCF’s 30% interest in Hulu increasing our ownership in Hulu to 60%. As a result, the Company began consolidating Hulu and recorded a one-time gain of $4.9 billion (Hulu gain) in the second quarter of the prior-year from remeasuring our initial 30% interest to its estimated fair value, which was determined based on a discounted cash flow analysis. On April 15, 2019, Hulu redeemed Warner Media LLC’s (WM) 10% interest in Hulu for $1.4 billion. The redemption was funded by the Company and Hulu’s remaining noncontrolling interest holder, NBC Universal (NBCU). This resulted in the Company’s and NBCU’s interests in Hulu increasing to 67% and 33%, respectively. NBCU’s participation in the redemption resulted in an update to the Company’s estimated fair value of its initial 30% interest decreasing the Hulu Gain by $123 million.

The Company is required to allocate the TFCF purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values. The excess of the purchase price over those fair values is recorded as goodwill.

The following table summarizes our final allocation of the purchase price:

Cash and cash equivalents	$	25,701
Receivables	5,096
Film and television costs	17,740
Investments	962
Intangible assets	17,881
Net assets held for sale	11,356
Accounts payable and other liabilities	(12,529)
Borrowings	(21,723)
Deferred income taxes	(5,100)
Other net liabilities acquired	(3,979)
Noncontrolling interests	(10,408)
Goodwill	49,247
Fair value of net assets acquired	74,244
Less: Disney’s previously held 30% interest in Hulu	(4,737)
Total purchase price	$	69,507

16

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 revenues and net loss from continuing operations (including purchase accounting amortization and excluding restructuring and impairment charges and interest income and expense) of TFCF and Hulu included in the Company’s Condensed Consolidated Statement of Income for the quarter and nine months ended June 27, 2020 and June 29, 2019, respectively. In addition, the table provides the impact of intercompany eliminations of transactions between the Company, TFCF and Hulu:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
TFCF (before intercompany eliminations):
Revenues	$	2,969	$	3,654	$	9,822	$	4,027
Net income (loss) from continuing operations	134		(529)		(102)		(582)
Hulu (before intercompany eliminations):
Revenues	$	1,733	$	1,321	$	5,017	$	1,466
Net loss from continuing operations	(278)		(301)		(881)		(352)
Intercompany eliminations:
Revenues	$	(757)	$	(579)	$	(2,149)	$	(591)
Net loss from continuing operations	(41)		(83)		(172)		(83)

The following pro forma summary presents consolidated information of the Company for the nine months ended June 29, 2019 as if the acquisition had occurred on October 1, 2017:

Revenues	$	59,009
Net income	6,362
Net income attributable to Disney	6,208
Earnings per share attributable to Disney:
Diluted	$	3.26
Basic	$	3.27

These pro forma results include adjustments for purposes of consolidating the historical results of TFCF and Hulu (net of adjustments to eliminate transactions between Disney and TFCF, Disney and Hulu and Hulu and TFCF). These pro formas include $2.4 billion (including $0.4 billion of amortization related to the RSNs) of amortization as a result of recording film and television programming and production costs and finite lived intangible assets at fair value. Interest expense of $0.4 billion is included to reflect the cost of borrowings to finance the TFCF acquisition. The pro forma results also include $0.6 billion of net income related to the TFCF businesses that we are required to divest as a condition of the acquisition.

The pro forma results exclude the Hulu gain, compensation expense of $0.2 billion related to TFCF equity and cash awards that were accelerated to vest upon closing of the acquisition, $0.4 billion of acquisition-related expenses, and a $10.8 billion gain on sale recorded by TFCF related to its 39% interest in Sky plc, which was sold by TFCF in October 2018. These amounts were recognized by Disney and TFCF in the nine months ended June 29, 2019.

These pro forma results do not represent financial results that would have been realized had the acquisition actually occurred on October 1, 2017, nor are they intended to be a projection of future results.

Goodwill

The changes in the carrying amount of goodwill for the nine months ended June 27, 2020 are as follows:

	Media Networks		Parks, Experiences and Products		Studio Entertainment			Direct-to-Consumer & International		Total
Balance at September 28, 2019	$	33,423	$	5,535		$	17,797	$	23,538	$	80,293
Acquisitions(1)	133		2			15		10		160
Impairments (see Note 18)	—		—			—		(3,074)		(3,074)
Currency translation adjustments and other, net	—		—			—		(146)		(146)
Balance at June 27, 2020	$	33,556	$	5,537		$	17,812	$	20,328	$	77,233

⁽¹⁾Reflects updates to allocation of purchase price for the acquisition of TFCF.

17

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

5.Other Income (Expense), net

Other income (expense), net is as follows:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
DraftKings gain	$	382	—		$	382	$	—
Hulu gain	—		(123)		—		4,794
Insurance recovery related to a legal matter	—		—		—		46
Other income (expense), net	$	382	$	(123)	$	382	$	4,840

The Company recognized a non-cash gain to adjust its investment in DraftKings, Inc. to fair value following its listing on Nasdaq (DraftKings gain).

6.Cash, Cash Equivalents, Restricted Cash and Borrowings

Cash, 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 Statements of Cash Flows.

	June 27, 2020		September 28, 2019
Cash and cash equivalents	$	23,115	$	5,418
Restricted cash included in:
Other current assets	1		26
Other assets	38		11
Total cash, cash equivalents and restricted cash in the statement of cash flows	$	23,154	$	5,455

Borrowings

During the nine months ended June 27, 2020, the Company’s borrowing activity was as follows: 

	September 28, 2019		Borrowings		Payments		Other Activity		June 27, 2020
Commercial paper with original maturities less than three months(1)	$	1,934	$	—	$	(1,613)	$	29	$	350
Commercial paper with original maturities greater than three months	3,408		10,591		(7,605)		(9)		6,385
U.S. dollar denominated notes(2)	39,424		16,968		(2,257)		(219)		53,916
Asia Theme Parks borrowings	1,114		85		—		43		1,242
Foreign currency denominated debt and other(3)	1,106		977		(40)		485		2,528
	$	46,986	$	28,621	$	(11,515)	$	329	$	64,421

⁽¹⁾Borrowings and reductions of borrowings are reported net.

⁽²⁾The other activity is primarily due to the amortization of purchase price adjustments on debt assumed in the TFCF acquisition and debt issuance fees.

⁽³⁾The other activity is due to market value adjustments for debt with qualifying hedges, partially offset by the impact of changes in foreign currency exchange rates.

18

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

At June 27, 2020, the Company’s bank facilities, which are with a syndicate of lenders, were as follows:

	Committed Capacity		Capacity Used		Unused Capacity
Facility expiring March 2021	$	5,250	$	—	$	5,250
Facility expiring April 2021	5,000		—		5,000
Facility expiring March 2023	4,000		—		4,000
Facility expiring March 2025	3,000		—		3,000
Total	$	17,250	$	—	$	17,250

These bank facilities (other than the facility expiring April 2021) support commercial paper borrowings. All of the facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, or a fixed spread in the case of the facility expiring in April 2021, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard & Poor’s. The spread above LIBOR can range from 0.18% to 1.80%. The bank facilities specifically exclude certain entities, including the Asia Theme Parks, from any representations, covenants or events of default. The bank facilities contain only one financial covenant, which is interest coverage of three times earnings before interest, taxes, depreciation and amortization, including both intangible amortization and amortization of our film and television production and programming costs. On June 27, 2020 the financial covenant was met by a significant margin. 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 June 27, 2020, the Company has $943 million of outstanding letters of credit, of which none were issued under this facility.

U.S. Dollar Denominated Notes

On March 19, 2020, the Company issued $6.0 billion of fixed rate senior notes, with maturities ranging from 5 years to 30 years, stated interest rates ranging from 3.35% to 4.70% and a weighted average stated rate of 4.03%.

On May 11, 2020, the Company issued $11.0 billion of fixed rate senior notes, with maturities ranging from 6 years to 40 years, stated interest rates ranging from 1.75% to 3.80% and a weighted average stated rate of 3.02%.

Foreign Currency Denominated Debt

On March 30, 2020, the Company issued Canadian $1.3 billion ($953 million) of fixed rate senior notes, which bear interest at 3.057% and mature in March 2027.

Cruise Ship Credit Facilities

The Company has credit facilities to finance three new cruise ships, which were originally scheduled to be delivered in calendar 2021, 2022 and 2023. The impact of COVID-19 on the shipyard has resulted in an expected delay to the delivery of the cruise ships. The credit facilities 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. Each tranche of financing may be utilized for a period of 18 months from the initial availability date. If utilized, the interest rates will be fixed at 3.48%, 3.72% and 3.74%, respectively, and the loans 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 expense (net of amounts capitalized), interest and investment income, and net periodic pension and postretirement benefit costs (other than service costs) (see Note 10) are reported net in the Condensed Consolidated Statements of Income and consist of the following:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Interest expense	$	(456)	$	(472)	$	(1,183)	$	(833)
Interest and investment income	41		34		180		139
Net periodic pension and postretirement benefit costs (other than service costs)	3		27		8		77
Interest expense, net	$	(412)	$	(411)	$	(995)	$	(617)

19

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

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

7.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 Asia Theme Parks’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets:

	June 27, 2020		September 28, 2019
Cash and cash equivalents	$	305	$	655
Other current assets	121		102
Total current assets	426		757
Parks, resorts and other property	6,570		6,608
Other assets	191		9
Total assets	$	7,187	$	7,374
Current liabilities	$	444	$	447
Long-term borrowings	1,157		1,114
Other long-term liabilities	381		189
Total liabilities	$	1,982	$	1,750

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 nine months ended June 27, 2020:

Revenues	$	1,377
Costs and expenses	(2,220)
Equity in the loss of investees	(15)

Asia Theme Parks’ royalty and management fees of $49 million for the nine months ended June 27, 2020 are eliminated in consolidation, but are considered in calculating earnings attributable to noncontrolling interests.

International Theme Parks’ cash flows included in the Company’s Condensed Consolidated Statement of Cash Flows for the nine months ended June 27, 2020 were $510 million used in operating activities, $622 million used in investing activities and $138 million generated from financing activities. Approximately half of the cash flows used in operating and investing activities and all of the cash flows generated from financing 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 a 53% and a 47% equity interest in Hong Kong Disneyland Resort, respectively.

The Company and HKSAR have both provided loans to Hong Kong Disneyland Resort with outstanding balances of $146 million and $97 million, respectively. The interest rate is three month HIBOR plus 2%, and the maturity date is September 2025. The Company’s loan is eliminated in consolidation.

The Company has provided Hong Kong Disneyland Resort with a revolving credit facility of HK $2.1 billion ($271 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 June 27, 2020.

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, operates Shanghai Disney Resort.

20

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

The Company has provided Shanghai Disney Resort with loans totaling $853 million, bearing interest at rates up to 8% and maturing in 2036, with early repayment permitted. The Company has also provided Shanghai Disney Resort with a $157 million line of credit bearing interest at 8%. As of June 27, 2020, the total amount outstanding under the line of credit was $64 million. These balances are eliminated in consolidation.

Shendi has provided Shanghai Disney Resort with loans totaling 7.5 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 $0.2 billion) line of credit bearing interest at 8%. As of June 27, 2020 the total amount outstanding under the line of credit was 0.6 billion yuan (approximately $85 million).

8.Produced and Acquired/Licensed Content Costs and Advances

At the beginning of fiscal 2020, the Company adopted, on a prospective basis, new Financial Accounting Standards Board (FASB) guidance that updates the accounting for film and television content costs. Therefore, reporting periods beginning after September 29, 2019 are presented under the new guidance, while prior periods continue to be reported in accordance with our historical accounting. The new guidance does the following:

•Allows for the classification of acquired/licensed television content rights as long-term assets. Previously, we reported a portion of these rights in current assets. The Company has classified approximately $3 billion of these rights as long-term in the Q1 2020 balance sheet. Advances for live programming rights made prior to the live event continue to be reported in current assets.

•Aligns the capitalization of production costs for episodic television content with the capitalization of production costs for theatrical content. Previously, theatrical content production costs could be fully capitalized while episodic television production costs were generally limited to the amount of contracted revenues. We do not expect this change to have a material impact on the Company’s financial statements for fiscal year 2020.

•Introduces the concept of “predominant monetization strategy” to classify capitalized content costs for purposes of amortization and impairment as follows:

•Individual - lifetime value is predominantly derived from third-party revenues that are directly attributable to the specific film or television title (e.g. theatrical revenues or sales to third-party television programmers).

•Group - lifetime value is predominantly derived from third-party revenues that are attributable only to a bundle of titles (e.g. subscription revenue for a DTC service or affiliate fees for a cable television network).

The determination of the predominant monetization strategy is made at commencement of production on a consolidated basis and is based on the means by which we derive third-party revenues from use of the content. Imputed title by title intersegment license fees that may be necessary for other purposes are established as required by those purposes.

For these accounting purposes, we generally classify content that is initially intended for use on our DTC services or on our linear television networks as group assets. Content initially intended for theatrical release or for sale to third-party licensees, we generally classify as individual assets. Because the new accounting guidance is applied prospectively, the predominant monetization strategy for content released prior to the beginning of fiscal 2020 is determined based on the expected means of monetization over the remaining life of the content. Thus for example, film titles that were released theatrically and in home entertainment prior to fiscal year 2020 and are now distributed on Disney+ are generally considered group content.

The classification of content as individual or group only changes if there is a significant change to the title’s monetization strategy relative to its initial assessment (e.g. content that was initially intended for license to a third-party is instead used on an owned DTC service).

Production costs for content predominantly individually monetized will continue to be amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues). For film productions, Ultimate Revenues include revenues from all sources, which may include intersegment license fees, that will be earned within ten years from the date of the initial release for theatrical films. For episodic television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later.

Production costs predominantly monetized as a group are amortized based on projected usage (which may be, for example, derived from historical viewership patterns), typically resulting in an accelerated or straight-line amortization pattern.

Licensed rights to film and television content and other programs for broadcast on our linear networks or distribution on our DTC services are expensed on an accelerated or straight-line basis over their useful life or over the number of times the program is expected to be aired, as appropriate. We amortize rights costs for multi-year sports programming arrangements

21

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

during the applicable seasons based on the estimated relative value of each year in the arrangement. If annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season.

The costs of produced and licensed film and television content are subject to regular recoverability assessments. For content that is predominantly monetized individually, the unamortized costs are compared to the estimated fair value. The fair value is determined based on a discounted cash flow analysis of the cash flows directly attributable to the title. To the extent the unamortized costs exceed the fair value, an impairment charge is recorded for the excess. For content that is predominantly monetized as a group, the aggregate unamortized costs of the group are compared to the present value of the discounted cash flows using the lowest level for which identifiable cash flows are independent of other produced and licensed content. If the unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess and allocated to individual titles based on the relative carrying value of each title in the group. If there are no plans to continue to use an individual film or television program that is part of a group, the unamortized cost of the individual title is written-off immediately. Licensed content is included as part of the group within which it is monetized for purposes of assessing recoverability.

Total capitalized produced and licensed content by predominant monetization strategy is as follows:

	As of June 27, 2020
	Predominantly Monetized Individually		Predominantly Monetized as a Group		Total
Produced content
Theatrical film costs
Released, less amortization	$	3,107	$	2,631	$	5,738
Completed, not released	431		124		555
In-process	3,456		283		3,739
In development or pre-production	425		4		429
	$	7,419	$	3,042	10,461
Television costs
Released, less amortization	$	2,614	$	6,168	$	8,782
Completed, not released	—		254		254
In-process	131		1,752		1,883
In development or pre-production	6		50		56
	$	2,751	$	8,224	10,975
Licensed content - Television programming rights and advances					7,259
Total produced and licensed content					$	28,695
Current portion					$	3,135
Non-current portion					$	25,560

22

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

Amortization of produced and licensed content is as follows:

	Quarter Ended June 27, 2020
	Predominantly Monetized Individually		Predominantly Monetized as a Group		Total
Theatrical film costs	$	333	$	195	$	528
Television costs	637		1,049		1,686
Total produced content costs	$	970	$	1,244	2,214
Television programming rights and advances					1,263
Total produced and licensed content costs(1)					$	3,477
	Nine Months Ended June 27, 2020(1)
	Predominantly Monetized Individually		Predominantly Monetized as a Group		Total
Theatrical film costs	$	1,358	$	738	$	2,096
Television costs	2,117		2,916		5,033
Total produced content costs	$	3,475	$	3,654	7,129
Television programming rights and advances					7,703
Total produced and licensed content costs(1)					$	14,832

⁽¹⁾Amortization for the nine months ended June 27, 2020 reflects a reclassification of amounts for the quarter ended March 28, 2020 between monetized individually and monetized as a group.

⁽²⁾Primarily included in “Costs of services” in the Condensed Consolidated Statement of Income.

Amortization of produced and licensed content for the quarter and nine months ended June 29, 2019 was $5.8 billion and $13.2 billion, respectively.

9.Income Taxes

Interim Period Tax Expense

Because of the implications of COVID-19 on our projections of full-year pre-tax earnings and income tax expense, as well as the projected impact of permanent tax differences and other items that are generally not proportional to full-year earnings (“Permanent Differences”), our normal approach of using an estimated full-year effective income tax rate to determine interim period tax expense produces an income tax provision for the current year-to-date period that is not meaningful. Accordingly, we calculated year-to-date fiscal 2020 tax expense based on year-to-date earnings before tax and using a blended U.S. Federal and state statutory tax rate of approximately 23%, and adjusted for the estimated impact of Permanent Differences. The third quarter tax benefit is the fiscal year-to-date tax expense less tax expense recognized in the first and second quarters.

Intra-Entity Transfers of Assets Other Than Inventory

At the beginning of fiscal 2019, the Company adopted new FASB accounting guidance that requires recognition of the income tax consequences of an intra-entity transfer of an asset (other than inventory) when the transfer occurs instead of when the asset is ultimately sold to an outside party. In the first quarter of fiscal 2019, the Company recorded a $0.1 billion deferred tax asset with an offsetting increase to retained earnings.

Unrecognized Tax Benefits

During the nine months ended June 27, 2020, the Company decreased its gross unrecognized tax benefits by $0.1 billion from $3.0 billion to $2.9 billion (before interest and penalties). 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 $0.2 billion, of which $0.1 billion would reduce our income tax expense and effective tax rate if recognized.

23

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

10.Pension and Other Benefit Programs

The components of net periodic benefit cost are as follows: 

	Pension Plans								Postretirement Medical Plans
	Quarter Ended				Nine Months Ended				Quarter Ended				Nine Months Ended
	Jun. 27, 2020		Jun. 29, 2019		Jun. 27, 2020		Jun. 29, 2019		Jun. 27, 2020		Jun. 29, 2019		Jun. 27, 2020		Jun. 29, 2019
Service costs	$	102	$	89	$	307	$	255	$	3	$	2	$	8	$	6
Other costs (benefits):
Interest costs	133		152		399		441		14		17		42		50
Expected return on plan assets	(273)		(250)		(819)		(729)		(14)		(14)		(43)		(42)
Amortization of previously deferred service costs	3		3		10		10		—		—		—		—
Recognized net actuarial loss	131		65		393		196		3		—		10		—
Total other costs (benefits)	(6)		(30)		(17)		(82)		3		3		9		8
Net periodic benefit cost	$	96	$	59	$	290	$	173	$	6	$	5	$	17	$	14

During the nine months ended June 27, 2020, the Company did not make any material contributions to its pension and postretirement medical plans. The Company originally intended to make fiscal 2020 total pension and postretirement medical plan contributions of approximately $600 million to $675 million. However, in light of COVID-19, contributions will be determined based on the funded status of the plans. The Company will receive its January 1, 2020 actuarial valuation by the end of the fourth quarter of fiscal 2020, which will determine minimum funding requirements for fiscal 2020.

11.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		Nine Months Ended
	June 27, 2020	June 29, 2019	June 27, 2020	June 29, 2019
Shares (in millions):
Weighted average number of common and common equivalent shares outstanding (basic)	1,809	1,802	1,807	1,607
Weighted average dilutive impact of Awards(1)	—	12	—	9
Weighted average number of common and common equivalent shares outstanding (diluted)	1,809	1,814	1,807	1,616
Awards excluded from diluted earnings per share	24	4	21	10

⁽¹⁾Amounts exclude all potential common and common equivalent shares for periods when there is a net loss from continuing operations.

24

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

12.Equity

The Company paid the following dividends in fiscal 2020 and 2019:

Per Share	Total Paid	Payment Timing	Related to Fiscal Period
$0.88	$1.6 billion	Second Quarter of Fiscal 2020	Second Half 2019
$0.88	$1.6 billion	Fourth Quarter of Fiscal 2019	First Half 2019
$0.88	$1.3 billion	Second Quarter of Fiscal 2019	Second Half 2018

The Board of Directors elected not to declare a dividend payable in July 2020 with respect to the first half of fiscal year 2020.

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:

	Market Value Adjustments(1)		Unrecognized Pension and  Postretirement Medical  Expense		Foreign Currency Translation and Other		AOCI
AOCI, before tax
Third quarter of fiscal 2020
Balance at March 28, 2020	$	158	$	(7,268)	$	(1,368)	$	(8,478)
Quarter Ended June 27, 2020:
Unrealized gains (losses) arising during the period	(87)		(6)		23		(70)
Reclassifications of realized net (gains) losses to net income	(78)		132		—		54
Balance at June 27, 2020	$	(7)	$	(7,142)	$	(1,345)	$	(8,494)
Third quarter of fiscal 2019
Balance at March 30, 2019	$	57	$	(4,163)	$	(728)	$	(4,834)
Quarter Ended June 29, 2019:
Unrealized gains (losses) arising during the period	40		(37)		48		51
Reclassifications of realized net (gains) losses to net income	(55)		69		—		14
Balance at June 29, 2019	$	42	$	(4,131)	$	(680)	$	(4,769)
Nine months ended fiscal 2020
Balance at September 28, 2019	$	129	$	(7,502)	$	(1,086)	$	(8,459)
Nine Months Ended June 27, 2020:
Unrealized gains (losses) arising during the period	44		(49)		(259)		(264)
Reclassifications of realized net (gains) losses to net income	(180)		409		—		229
Balance at June 27, 2020	$	(7)	$	(7,142)	$	(1,345)	$	(8,494)
Nine months ended fiscal 2019
Balance at September 29, 2018	$	201	$	(4,323)	$	(727)	$	(4,849)
Nine Months Ended June 29, 2019:
Unrealized gains (losses) arising during the period	(20)		(18)		47		9
Reclassifications of realized net (gains) losses to net income	(116)		210		—		94
Reclassifications to retained earnings	(23)		—		—		(23)
Balance at June 29, 2019	$	42	$	(4,131)	$	(680)	$	(4,769)

25

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

	Market Value Adjustments(1)		Unrecognized Pension and  Postretirement Medical  Expense		Foreign Currency Translation and Other		AOCI
Tax on AOCI
Third quarter of fiscal 2020
Balance at March 28, 2020	$	(36)	$	1,702	$	175	$	1,841
Quarter Ended June 27, 2020:
Unrealized gains (losses) arising during the period	19		2		28		49
Reclassifications of realized net (gains) losses to net income	18		(31)		—		(13)
Balance at June 27, 2020	$	1	$	1,673	$	203	$	1,877
Third quarter of fiscal 2019
Balance at March 30, 2019	$	(13)	$	984	$	77	$	1,048
Quarter Ended June 29, 2019:
Unrealized gains (losses) arising during the period	(10)		8		5		3
Reclassifications of realized net (gains) losses to net income	13		(16)		—		(3)
Balance at June 29, 2019	$	(10)	$	976	$	82	$	1,048
Nine months ended fiscal 2020
Balance at September 28, 2019	$	(29)	$	1,756	$	115	$	1,842
Nine Months Ended June 27, 2020:
Unrealized gains (losses) arising during the period	(12)		12		88		88
Reclassifications of realized net (gains) losses to net income	42		(95)		—		(53)
Balance at June 27, 2020	$	1	$	1,673	$	203	$	1,877
Nine months ended fiscal 2019
Balance at September 29, 2018	$	(41)	$	1,690	$	103	$	1,752
Nine Months Ended June 29, 2019:
Unrealized gains (losses) arising during the period	4		2		(5)		1
Reclassifications of realized net (gains) losses to net income	27		(49)		—		(22)
Reclassifications to retained earnings(2)	—		(667)		(16)		(683)
Balance at June 29, 2019	$	(10)	$	976	$	82	$	1,048

26

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

	Market Value Adjustments(1)		Unrecognized Pension and  Postretirement Medical  Expense		Foreign Currency Translation and Other		AOCI
AOCI, after tax
Third quarter of fiscal 2020
Balance at March 28, 2020	$	122	$	(5,566)	$	(1,193)	$	(6,637)
Quarter Ended June 27, 2020:
Unrealized gains (losses) arising during the period	(68)		(4)		51		(21)
Reclassifications of realized net (gains) losses to net income	(60)		101		—		41
Balance at June 27, 2020	$	(6)	$	(5,469)	$	(1,142)	$	(6,617)
Third quarter of fiscal 2019
Balance at March 30, 2019	$	44	$	(3,179)	$	(651)	$	(3,786)
Quarter Ended June 29, 2019:
Unrealized gains (losses) arising during the period	30		(29)		53		54
Reclassifications of realized net (gains) losses to net income	(42)		53		—		11
Balance at June 29, 2019	$	32	$	(3,155)	$	(598)	$	(3,721)
Nine months ended fiscal 2020
Balance at September 28, 2019	$	100	$	(5,746)	$	(971)	$	(6,617)
Nine Months Ended June 27, 2020:
Unrealized gains (losses) arising during the period	32		(37)		(171)		(176)
Reclassifications of realized net (gains) losses to net income	(138)		314		—		176
Balance at June 27, 2020	$	(6)	$	(5,469)	$	(1,142)	$	(6,617)
Nine months ended fiscal 2019
Balance at September 29, 2018	$	160	$	(2,633)	$	(624)	$	(3,097)
Nine Months Ended June 29, 2019:
Unrealized gains (losses) arising during the period	(16)		(16)		42		10
Reclassifications of realized net (gains) losses to net income	(89)		161		—		72
Reclassifications to retained earnings(2)	(23)		(667)		(16)		(706)
Balance at June 29, 2019	$	32	$	(3,155)	$	(598)	$	(3,721)

⁽¹⁾Primarily reflects market value adjustments for cash flow hedges.

⁽²⁾At the beginning of fiscal 2019, the Company adopted new FASB accounting guidance, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, and reclassified $691 million from AOCI to retained earnings.

In addition, at the beginning of fiscal 2019, the Company adopted new FASB accounting guidance, Recognition and Measurement of Financial Assets and Liabilities, and reclassified $24 million ($15 million after tax) of market value adjustments on investments previously recorded in AOCI to retained earnings.

27

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:

Gain (loss) in net income:	Affected line item in the   Condensed Consolidated   Statements of Income:	Quarter Ended				Nine Months Ended
		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Market value adjustments, primarily cash flow hedges	Primarily revenue	$	78	$	55	$	180	$	116
Estimated tax	Income taxes	(18)		(13)		(42)		(27)
		60		42		138		89
Pension and postretirement medical expense	Interest expense, net	(132)		(69)		(409)		(210)
Estimated tax	Income taxes	31		16		95		49
		(101)		(53)		(314)		(161)
Total reclassifications for the period		$	(41)	$	(11)	$	(176)	$	(72)

13.Equity-Based Compensation

Compensation expense related to stock options and restricted stock units (RSUs) is as follows:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Stock options	$	25	$	21	$	74	$	64
RSUs(1)	117		114		314		527
Total equity-based compensation expense(2)	$	142	$	135	$	388	$	591
Equity-based compensation expense capitalized during the period	$	21	$	22	$	66	$	60

⁽¹⁾The nine months ended June 29, 2019 includes a $164 million charge for the acceleration of TFCF performance RSUs converted to Company RSUs in connection with the TFCF acquisition.

⁽²⁾Equity-based compensation expense is net of capitalized equity-based compensation and estimated forfeitures and excludes amortization of previously capitalized equity-based compensation costs.

Unrecognized compensation cost related to unvested stock options and RSUs was $172 million and $859 million, respectively, as of June 27, 2020.

The weighted average grant date fair values of options granted during the nine months ended June 27, 2020 and June 29, 2019 were $36.20 and $28.74, respectively.

During the nine months ended June 27, 2020, the Company made equity compensation grants consisting of 4.3 million stock options and 5.1 million RSUs.

14.Commitments and Contingencies

Legal Matters

The Company, together with, in some instances, certain of its directors and officers, is a defendant 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, which mature in 2037. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As

28

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

of June 27, 2020, the remaining debt service obligation guaranteed by the Company was $237 million. 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.

15.Leases

At the beginning of fiscal 2020, the Company adopted new lease accounting guidance issued by the FASB. The most significant change requires lessees to record the present value of operating lease payments as right-of-use assets and lease liabilities on the balance sheet. The new guidance continues to require lessees to classify leases between operating and finance leases (formerly “capital leases”).

We adopted the new guidance using the modified retrospective method at the beginning of fiscal year 2020. Reporting periods beginning after September 29, 2019 are presented under the new guidance, while prior periods continue to be reported in accordance with our historical accounting. The Company adopted the new guidance by applying practical expedients that permit us not to reassess our prior conclusions concerning whether:

•Any of our existing arrangements contain a lease;

•Our existing lease arrangements are operating or finance leases;

•To capitalize indirect costs; and

•Existing land easements are leases.

The adoption of the new guidance resulted in the recognition on the Condensed Consolidated Balance Sheet of right-of-use assets and lease liabilities of approximately $3.7 billion, which were measured by the present value of the remaining minimum lease payments. In accordance with the guidance, the Company elected to exclude from the measurement of the right-of-use asset and lease liability leases with a remaining term of one year (“Short-term leases”).

The present value of the lease payments was calculated using the Company’s incremental borrowing rate applicable to the lease, which is determined by estimating what it would cost the Company to borrow a collateralized amount equal to the total lease payments over the lease term based on the contractual terms of the lease and the location of the leased asset.

At adoption, in the Condensed Consolidated Balance Sheet we also reclassified:

•Deferred rent of approximately $0.3 billion for operating leases at the end of fiscal year 2019 from “Accounts payable and other accrued liabilities” (current portion) and “Other long-term liabilities” (non-current portion) to “Other assets” (right-of-use asset);

•A deferred sale leaseback gain of approximately $0.3 billion from “Deferred revenue and other” (current portion) and “Other long-term liabilities” (non-current portion) to “Retained earnings”; and

•Capitalized lease assets of approximately $0.2 billion from “Parks, resorts and other property” to “Other assets” related to finance leases.

Lessee Arrangements

The Company’s operating leases primarily consist of real estate and equipment, including office space for general and administrative purposes, production facilities, retail outlets and distribution centers for consumer products, land and content broadcast equipment. The Company also has finance leases, primarily for land and broadcast equipment.

We determine whether a new contract is a lease at contract inception or for a modified contract at the modification date. Our leases may require us to make fixed rental payments, variable lease payments based on usage or sales and fixed non-lease costs relating to the leased asset. Variable lease payments are generally not included in the measurement of the right-of-use asset and lease liability. Fixed non-lease costs, for example common-area maintenance costs, are included in the measurement of the right-of-use asset and lease liability as the Company does not separate lease and non-lease components.

Some of our leases include renewal and/or termination options. If it is reasonably certain that a renewal or termination option will be exercised, the exercise of the option is considered in calculating the term of the lease. As of June 27, 2020, our operating leases have a weighted-average remaining lease term of approximately 10 years, and our finance leases have a weighted-average remaining lease term of approximately 23 years. The weighted-average incremental borrowing rate is 2.5% and 6.5%, for our operating leases and finance leases, respectively. Additionally, as of June 27, 2020, the Company had signed non-cancelable lease agreements with total estimated future lease payments of approximately $250 million that had not yet commenced and therefore are not included in the measurement of the right-of-use asset and lease liability.

29

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

The Company’s operating and finance right-of-use assets and lease liabilities as of June 27, 2020 are as follows:

Right-of-use assets(1)
Operating leases	$	3,905
Finance leases	341
Total right-of-use assets	$	4,246
Short-term lease liabilities(2)
Operating leases	$	804
Finance leases	38
	842
Long-term lease liabilities(3)
Operating leases	2,779
Finance leases	271
	3,050
Total lease liabilities	$	3,892

⁽¹⁾Included in “Other assets” in the Condensed Consolidated Balance Sheets. Includes approximately $0.6 billion of long-term prepaid rent that was presented as a right-of-use asset upon adoption.

⁽²⁾Included in “Accounts payable and other accrued liabilities” in the Condensed Consolidated Balance Sheets

⁽³⁾Included in “Other long-term liabilities” in the Condensed Consolidated Balance Sheet

The components of lease expense for the quarter and nine months ended June 27, 2020 are as follows:

	Quarter		Nine Months
Finance lease cost
Amortization of right-of-use assets	$	12	$	29
Interest on lease liabilities	5		13
Operating lease cost	228		680
Variable fees and other(1)	117		390
Total lease cost	$	362	$	1,112

⁽¹⁾Includes variable lease payments related to our operating and finance leases and costs of Short-term leases, net of sublease income.

Cash paid during the quarter and nine months ended June 27, 2020 for amounts included in the measurement of lease liabilities as of the beginning of the reporting period are as follows:

	Quarter		Nine Months
Operating cash flows for operating leases	$	180	$	675
Operating cash flows for finance leases	5		13
Financing cash flows for finance leases	5		28
Total	$	190	$	716

30

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

Future minimum lease payments, as of June 27, 2020, are as follows:

	Operating		Financing
Fiscal year:
2020	$	241	$	16
2021	823		59
2022	638		55
2023	496		49
2024	376		38
Thereafter	1,830		517
Total undiscounted future lease payments	4,404		734
Less: Imputed interest	(821)		(425)
Total reported lease liability	$	3,583	$	309

Future minimum lease payments under non-cancelable operating leases and non-cancelable capital leases at September 28, 2019, presented based on our historical accounting prior to the adoption of the new lease guidance, are as follows:

	Operating Leases		Capital Leases
Fiscal year:
2020	$	982	$	19
2021	849		20
2022	670		19
2023	532		17
2024	407		16
Thereafter	2,491		458
Total minimum obligations	$	5,931	549
Less: amount representing interest			(398)
Present value of net minimum obligations			$	151

16. 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

31

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level: 

	Fair Value Measurement at June 27, 2020
	Level 1		Level 2		Level 3		Total
Assets
Investments	$	469	$	—	$	—	$	469
Derivatives
Interest rate	—		532		—		532
Foreign exchange	—		753		—		753
Other	—		8		—		8
Liabilities
Derivatives
Interest rate	—		(7)		—		(7)
Foreign exchange	—		(707)		—		(707)
Other	—		(21)		—		(21)
Total recorded at fair value	$	469	$	558	$	—	$	1,027
Fair value of borrowings	$	—	$	68,385	$	1,385	$	69,770

	Fair Value Measurement at September 28, 2019
	Level 1		Level 2		Level 3		Total
Assets
Investments	$	13	$	—	$	—	$	13
Derivatives
Interest rate	—		89		—		89
Foreign exchange	—		771		—		771
Other	—		1		—		1
Liabilities
Derivatives
Interest rate	—		(93)		—		(93)
Foreign exchange	—		(544)		—		(544)
Other	—		(4)		—		(4)
Total recorded at fair value	$	13	$	220	$	—	$	233
Fair value of borrowings	$	—	$	48,709	$	1,249	$	49,958

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, U.S. dollar denominated notes and certain foreign currency denominated borrowings, are valued based on quoted prices for similar instruments in active markets or identical instruments in markets that are not active.

Level 3 borrowings include the Asia Theme Park borrowings, which are valued based on the current borrowing cost and credit risk of the Asia Theme Parks as well as 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.

The Company also has assets that are required to be recorded at fair value on a non-recurring basis. These assets are evaluated when certain triggering events occur (including a decrease in estimated future cash flows) that indicate the asset

32

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

should be evaluated for impairment. For the quarter-ended June 27, 2020, the Company recorded impairment charges for goodwill and intangible assets as disclosed in Note 18. The fair value of these assets reflected the estimated discounted future cash flows, which is a Level 3 valuation technique (see Note 18 for a discussion of the more significant inputs used in our discounted cash flow analysis).

17.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 June 27, 2020
	Current Assets		Other Assets		Other Current Liabilities		Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	298	$	220	$	(76)	$	(322)
Interest rate	—		532		(6)		—
Other	1		—		(16)		(5)
Derivatives not designated as hedges
Foreign exchange	48		187		(158)		(151)
Interest rate	—		—		—		(1)
Other	7		—		—		—
Gross fair value of derivatives	354		939		(256)		(479)
Counterparty netting	(204)		(491)		256		439
Cash collateral (received) paid	(73)		(158)		—		11
Net derivative positions	$	77	$	290	$	—	$	(29)

	As of September 28, 2019
	Current Assets		Other Assets		Other Current Liabilities		Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	302	$	241	$	(67)	$	(244)
Interest rate	—		89		(82)		—
Other	1		—		(3)		(1)
Derivatives not designated as hedges
Foreign exchange	65		163		(107)		(126)
Interest rate	—		—		—		(11)
Gross fair value of derivatives	368		493		(259)		(382)
Counterparty netting	(231)		(345)		258		318
Cash collateral (received) paid	(55)		(6)		—		7
Net derivative positions	$	82	$	142	$	(1)	$	(57)

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.

33

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of June 27, 2020 and September 28, 2019, the total notional amount of the Company’s pay-floating interest rate swaps was $16.1 billion and $9.9 billion, respectively.

The following table summarizes fair value hedge adjustments to hedged borrowings at June 27, 2020 and September 28, 2019:

	Carrying Amount of Hedged Borrowings(1)				Fair Value Adjustments Included in Hedged Borrowings(1)
	June 27, 2020		September 28, 2019		June 27, 2020		September 28, 2019
Borrowings:
Current	$	1,132	$	1,121	$	7	$	(3)
Long-term	16,188		9,562		518		34
	$	17,320	$	10,683	$	525	$	31

⁽¹⁾Includes $35 million and $37 million of gains on terminated interest rate swaps as of June 27, 2020 and September 28, 2019, respectively.

The following amounts are included in “Interest expense, net” in the Condensed Consolidated Statements of Income:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Gain (loss) on:
Pay-floating swaps	$	63	$	112	$	492	$	346
Borrowings hedged with pay-floating swaps	(63)		(112)		(492)		(346)
Benefit (expense) associated with interest accruals on pay-floating swaps	11		(15)		(8)		(47)

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 June 27, 2020 or at September 28, 2019, and gains and losses related to pay-fixed swaps recognized in earnings for the quarter ended June 27, 2020 and June 29, 2019 were not material.

To facilitate its interest rate risk management activities, the Company sold options in November 2016, October 2017 and April 2018 to enter into future pay-floating interest rate swaps indexed to LIBOR for $2.0 billion in future borrowings. The fair values of these contracts as of June 27, 2020 and September 28, 2019 were $1 million and $11 million, respectively. The options are not designated as hedges and do not qualify for hedge accounting; accordingly, changes in their fair value are recorded in earnings. Gains and losses on the options for the quarter ended June 27, 2020 and June 29, 2019 were not material.

Foreign Exchange Risk Management

The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.

The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings into U.S. dollar denominated borrowings.

34

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of June 27, 2020 and September 28, 2019, the notional amounts of the Company’s net foreign exchange cash flow hedges were $5.3 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. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months total $237 million. The following table summarizes the effect of foreign exchange cash flow hedges on AOCI for the quarter and nine months ended June 27, 2020:

Quarter Ended:
Gain (loss) recognized in Other Comprehensive Income	$	(92)
Gain (loss) reclassified from AOCI into the Statement of Income(1)	81
Nine Months Ended:
Gain/(loss) recognized in Other Comprehensive Income	$	57
Gain/(loss) reclassified from AOCI into the Statement of Income(1)	184

⁽¹⁾Primarily recorded in revenue.

The Company designates cross currency swaps as fair value hedges of foreign currency denominated borrowings. The impact of the designated exposure is recorded to “Interest Expense, net” to offset the foreign currency impact of the foreign currency denominated borrowing. The non-hedged exposure is recorded to AOCI and is amortized over the life of the cross currency swap. As of June 27, 2020, the total notional amount of the Company’s designated cross currency swaps was Canadian $1.3 billion ($1.0 billion). There were no designated cross currency swaps as of September 28, 2019.

The following amounts are included in “Interest expense, net” in the Condensed Consolidated Statements of Income:

	Quarter Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Gain (loss) on:
Cross currency swaps	$	27	$	—	$	27	$	—
Borrowings hedged with cross currency swaps	(27)		—		(27)		—

35

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at June 27, 2020 and September 28, 2019 were $3.8 billion and $3.8 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 nine months ended June 27, 2020 and June 29, 2019 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:	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Net gains (losses) on foreign currency denominated assets and liabilities	$	80	$	13	$	(26)	$	(25)	$	(4)	$	(1)
Net gains (losses) on foreign exchange risk management contracts not designated as hedges	(103)		(25)		25		23		8		(6)
Net gains (losses)	$	(23)	$	(12)	$	(1)	$	(2)	$	4	$	(7)
Nine Months Ended:
Net gains (losses) on foreign currency denominated assets and liabilities	$	(92)	$	(13)	$	26	$	3	$	(11)	$	14
Net gains (losses) on foreign exchange risk management contracts not designated as hedges	56		(5)		(27)		(5)		5		(28)
Net gains (losses)	$	(36)	$	(18)	$	(1)	$	(2)	$	(6)	$	(14)

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 June 27, 2020 and September 28, 2019 and related gains or losses recognized in earnings for the quarter and nine months ended June 27, 2020 and June 29, 2019 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 June 27, 2020 and September 28, 2019 were not material. The related gains or losses recognized in earnings for the quarter and nine months ended June 27, 2020 and June 29, 2019 were not material. The swap contracts were terminated in July 2020.

Contingent Features and Cash Collateral

The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or the counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $40 million and $65 million on June 27, 2020 and September 28, 2019, respectively.

36

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

18.Restructuring and Impairment Charges

Goodwill and Intangible Asset Impairment

As discussed in the Critical Accounting Policies and Estimates section of our fiscal 2019 Annual Report on Form 10-K, the fair value of our International Channels reporting unit previously exceeded the carrying value by less than 10% at September 28, 2019. Our International Channels reporting unit, which is part of the Direct-to-Consumer & International segment, comprises the Company’s international television networks. Our international television networks primarily derive revenues from affiliate fees charged to multi-channel video programming distributors (i.e. cable, satellite, telecommunications and digital over-the-top service providers) (MVPDs) for the right to deliver our programming under multi-year licensing agreements and the sales of advertising time/space on the networks. A majority of the operations in this reporting unit were acquired in the TFCF acquisition and therefore the fair value of these businesses approximated the carrying value at the date of the acquisition of TFCF.

The International Channels business has been negatively impacted by the COVID-19 pandemic resulting in decreased viewership and lower advertising revenue related to the availability of content, including the deferral or cancellation of certain live sporting events. The Company’s increased focus on DTC distribution in international markets is expected to negatively impact the International Channels business as we shift the primary means of monetizing our film and television content from licensing of linear channels to use on our DTC services because the International Channels reporting unit valuation does not include the value derived from this shift, which is reflected in other reporting units. In addition, the industry shift to DTC, including by us and many of our distributors, who are pursuing their own DTC strategies, has changed the competitive dynamics for the International Channels business and resulted in unfavorable renewal terms for certain of our distribution agreements.

Due to the current circumstances, for the third quarter of fiscal 2020, we performed an impairment test of the International Channels’ goodwill and long-lived asset groups including intangible assets.

The impairment test requires a comparison of cash flows expected to be generated over the useful life of an asset group to the carrying value of the asset group. Assets are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets. If the carrying value of an asset group exceeds the estimated undiscounted future cash flows, an impairment is measured as the difference between the fair value of the group’s long-lived assets and the carrying value of the group’s long-lived assets.

We determined the appropriate asset groups for our International Channels to be the regions in which they operate. We estimated the projected undiscounted cash flows over the remaining useful life of an asset group. The more significant inputs used in determining our estimate of the projected undiscounted cash flows included future revenue growth and projected margins as well as the estimate of the remaining useful life of an asset group.

If the carrying value of an asset group exceeded the estimated undiscounted cash flows, the impairment loss is the excess of the carrying value over the fair value. The determination of fair value requires us to make assumptions and estimates about how market participants would value the asset groups. The most sensitive factors affecting the fair value of an asset group are the future revenue growth and projected margins for these businesses as well as the discount rates used to calculate the present value of future cash flows.

For the quarter-ended June 27, 2020, we recorded a non-cash impairment charge on our MVPD agreement intangible assets of $1.9 billion. After impairment, the remaining balance of the International Channels MVPD agreement intangible assets is approximately $3.0 billion.

We tested the International Channels reporting unit goodwill for impairment on an interim basis by comparing the fair value of the International Channels reporting unit to its carrying value. The fair value was determined using a discounted cash flow analysis. The determination of fair value requires us to make assumptions and estimates about how market participants would value the International Channels. The more sensitive inputs used in the discounted cash flow analysis include future revenue growth and projected margins as well as the discount rates used to calculate the present value of future cash flows. Given the ongoing impacts of COVID-19, the projected cash flows and underlying assumptions are subject to greater uncertainty than normal.

For the quarter-ended June 27, 2020, the carrying value of the International Channels exceeded the fair value, and we recorded a non-cash impairment charge of $3.1 billion to fully impair the International Channels reporting unit’s goodwill.

The $1.9 billion impairment of our MVPD relationships and $3.1 billion impairment of goodwill are recorded in “Restructuring and impairment charges” in the Condensed Consolidated Statements of Income.

37

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

Restructuring

In fiscal 2019, the Company implemented a restructuring and integration plan as a part of its initiative to realize cost synergies from the acquisition of TFCF. We expect to substantially complete the restructuring plan by the end of fiscal 2021. In connection with this plan, during the quarter ended June 27, 2020, the Company recorded $94 million of restructuring charges, which included $51 million of severance. To date, we have recorded restructuring charges of $1.6 billion, including $1.2 billion related to severance (including employee contract terminations) in connection with the plan and $0.3 billion of equity based compensation costs, primarily for TFCF awards that were accelerated to vest upon the closing of the TFCF acquisition. TFCF integration efforts with respect to headcount reductions are nearly complete, and the Company expects that total severance and other restructuring charges will be approximately $1.7 billion.

The changes in restructuring reserves related to TFCF integration for fiscal 2019 and the nine months ended June 27, 2020 are as follows:

Balance at September 29, 2018	$	—
Additions in fiscal 2019:
Media Networks	90
Parks, Experiences and Products	11
Studio Entertainment	197
Direct-to-Consumer & International	426
Corporate	182
Total additions in fiscal 2019	906
Payments in fiscal 2019	(230)
Balance at September 28, 2019	$	676
Additions in fiscal 2020:
Media Networks	20
Parks, Experiences and Products	9
Studio Entertainment	90
Direct-to-Consumer & International	197
Corporate	40
Total additions in fiscal 2020	356
Payments in fiscal 2020	(574)
Balance at June 27, 2020	$	458

19.New Accounting Pronouncements

Accounting Pronouncements Adopted in Fiscal 2020

•Leases - See Note 15

•Improvements to Accounting for Costs of Films and License Agreements for Program Materials - See Note 8

Facilitation of the Effects of Reference Rate Reform

In March 2020, the FASB issued guidance which provides optional expedients and exceptions for applying current GAAP to contracts, hedging relationships, and other transactions affected by the transition from the use of LIBOR to an alternative reference rate. We are currently evaluating our contracts and hedging relationships that reference LIBOR and the potential effects of adopting this new guidance. The guidance can be adopted immediately and is applicable to contracts entered into on or before December 31, 2022.

Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued guidance which simplifies the accounting for income taxes. The guidance amends the rules for recognizing deferred taxes for investments, performing intraperiod tax allocations and calculating income taxes in interim periods. It also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group. The guidance is effective at the beginning of

38

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited; tabular dollars in millions, except for per share data)

the Company’s 2022 fiscal year (with early adoption permitted). We currently do not expect the new guidance will have a material impact on our financial statements.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued new accounting guidance which modifies existing guidance related to the measurement of credit losses on financial instruments, including trade and loan receivables. The new guidance requires the allowance for credit losses to be measured based on expected losses over the life of the asset rather than incurred losses. We currently do not expect the new guidance will have a material impact on our financial statements. The guidance is effective at the beginning of the Company’s 2021 fiscal year.

39

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

•Significant Developments

•Current Quarter Results Compared to Prior-Year Quarter

•Current Period Results Compared to Prior-Year Period

•Seasonality

•Business Segment Results

•Corporate and Unallocated Shared Expenses

•Restructuring in Connection with the Acquisition of TFCF

•Financial Condition

•Supplemental Guarantor Financial Information

•Commitments and Contingencies

•Other Matters

•Market Risk

40

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

CONSOLIDATED RESULTS

Our summary consolidated results are presented below: 

	Quarter Ended				% Change		Nine Months Ended				% Change
(in millions, except per share data)	June 27, 2020		June 29, 2019		Better/ (Worse)		June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues:
Services	$	11,235	$	18,039	(38)	%	$	45,519	$	43,918	4	%
Products	544		2,223		(76)	%	5,162		6,571		(21)	%
Total revenues	11,779		20,262		(42)	%	50,681		50,489		—	%
Costs and expenses:
Cost of services (exclusive of depreciation and amortization)	(7,209)		(11,463)		37	%	(29,287)		(26,197)		(12)	%
Cost of products (exclusive of depreciation and amortization)	(687)		(1,374)		50	%	(3,580)		(4,020)		11	%
Selling, general, administrative and other	(2,455)		(3,368)		27	%	(9,557)		(7,850)		(22)	%
Depreciation and amortization	(1,377)		(1,306)		(5)	%	(4,010)		(2,866)		(40)	%
Total costs and expenses	(11,728)		(17,511)		33	%	(46,434)		(40,933)		(13)	%
Restructuring and impairment charges	(5,047)		(207)		>(100) %		(5,342)		(869)		>(100) %
Other income (expense), net	382		(123)		nm		382		4,840		(92)	%
Interest expense, net	(412)		(411)		—	%	(995)		(617)		(61)	%
Equity in the income (loss) of investees	186		(1)		nm		545		(234)		nm
Income (loss) from continuing operations before income taxes	(4,840)		2,009		nm		(1,163)		12,676		nm
Income taxes on continuing operations	331		(393)		nm		(650)		(2,685)		76	%
Net income (loss) from continuing operations	(4,509)		1,616		nm		(1,813)		9,991		nm
Income (loss) from discontinued operations, net of income tax benefit (expense) of $1, ($102), $11 and ($107), respectively	(3)		366		nm		(32)		388		nm
Net income (loss)	(4,512)		1,982		nm		(1,845)		10,379		nm
Net income from continuing operations attributable to noncontrolling interests	(209)		(186)		(12)	%	(309)		(343)		10	%
Net income from discontinued operations attributable to noncontrolling interests	—		(36)		100	%	—		(36)		100	%
Net income attributable to Disney	$	(4,721)	$	1,760	nm		$	(2,154)	$	10,000	nm
Diluted earnings per share from continuing operations attributable to Disney	$	(2.61)	$	0.79	nm		$	(1.17)	$	5.97	nm

SIGNIFICANT DEVELOPMENTS

COVID-19 Pandemic

The impact of COVID-19 and measures to prevent its spread are affecting our businesses in a number of ways. We closed our theme parks and retail stores, some of which have now re-opened; suspended our cruise ship sailings, stage play performances and guided tours; delayed or, in some instances, shortened, modified or cancelled theatrical distribution of films both domestically and internationally; and have experienced adverse impacts on advertising sales and on our merchandise licensing business. Many of our businesses have been closed or suspended consistent with government mandates or guidance. We have experienced disruptions in the production and availability of content, including the deferral or cancellation of certain sports events and suspension of production of most film and television content. We have continued to pay for certain sports rights, including for certain events that have been deferred or canceled. The impacts to our content have resulted in decreased viewership and advertising revenues, and demands for affiliate fee reductions related to certain of our television networks. These impacts are likely to be exacerbated the longer such content is not available. Other of our offerings will be exposed to additional financial impacts in the event of future significant unavailability of content. We have experienced increased returns and refunds and customer requests for payment deferrals, reduced usage of certain of our products and services and decreased merchandise licensing royalties.

41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

We have taken a number of mitigation efforts in response to the impacts of COVID-19 on our businesses. We have significantly increased cash balances through the issuance of senior notes in March and May 2020, and we entered into an additional $5.0 billion credit facility in April 2020. The Company (or our Board of Directors, as applicable) has also elected to not declare a dividend payable in July 2020 with respect to the first half of fiscal year 2020; suspended certain capital projects; reduced certain discretionary expenditures (such as spending on marketing); temporarily reduced management compensation; temporarily eliminated Board of Director retainers and committee fees; and furloughed over 120,000 of our employees (who will continue to receive Company provided medical benefits), of which approximately 35% have returned from furlough through the end of July 2020 as certain business operations have re-opened. We may take additional mitigation actions in the future such as raising additional financing; not declaring future dividends; reducing, or not making, certain payments, such as some contributions to our pension and postretirement medical plans; further suspending capital spending, reducing film and television content investments; or implementing additional furloughs or reductions in force. Some of these measures may have an adverse impact on our businesses.

The most significant impact in the current quarter and nine-month period from COVID-19 was an adverse impact of approximately $3.5 billion and $4.6 billion, respectively, on lower operating income at our Parks, Experiences and Products segment due to revenue lost as a result of the closures. The negative impact at Parks, Experiences and Products was partially offset by a positive impact at Media Networks. The benefit at Media Networks was due to the deferral of sports programming rights to future quarters when we currently anticipate the events will air, partially offset by lower advertising revenue. The impacts at Direct-to-Consumer & International and Studio Entertainment were less significant as lower advertising revenue at Direct-to-Consumer & International was partially offset by the deferral of sports programming costs, while lower amortization, marketing and distribution costs at Studio Entertainment were largely offset by lower revenues as a result of theater closures. In total, we estimate the net adverse impact of COVID-19 on our current quarter and nine-month period on segment operating income across all of our businesses was approximately $2.9 billion and $4.3 billion, respectively, inclusive of the impact at Parks, Experiences and Products. The estimated impact in the current quarter and nine-month period is net of approximately $230 million and $375 million, respectively, in government credits, pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the United States and a similar program in France, both primarily at our Parks, Experiences and Products segment. These impacts are not necessarily indicative of the results that may be expected in future periods, including the net benefit of sports programming deferrals.

The impact of these disruptions and the extent of their adverse impact on our financial and operational results will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and severity of the impacts of COVID-19, and among other things, the impact and duration of governmental actions imposed in response to COVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward. While we cannot be certain as to the duration of the impacts of COVID-19, we expect impacts of COVID-19 to affect our financial results at least through fiscal 2021.

Some of our businesses have begun to re-open with limited operations. We have incurred and will continue to incur additional costs to address government regulations and the safety of our employees, talent and guests. For example, as we open our theme parks and retail stores, we incurred and will continue to incur costs for such things as additional custodial services, personal protection equipment, temperature screenings and testing, sanitizer and cleaning supplies and signage, among other items. As we resume production of film and television content, including live sporting events, we anticipate incurring similar costs and productions may take longer to complete. The timing, duration and extent of these costs will depend on the timing and scope of the resumption of our operations and we estimate these costs may total approximately $1 billion over the next 15 months. Some of these costs may be capitalized and amortized over future periods. With the unknown duration of COVID-19 and yet to be determined timing of the phased re-opening of many of our businesses, it is not possible to precisely estimate the impact in future quarters. As we re-open our businesses, we will no longer benefit from certain savings related to the closure of those businesses, such as related furloughs. The re-opening of our businesses is dependent on applicable government requirements, which vary by location and are subject to ongoing changes.

Additionally, see Part II. Other Information, Item 1A. Risk Factors - The adverse impact of COVID-19 on our businesses will continue for an unknown length of time and may hasten the erosion of certain of our historic sources of revenue.

Direct-to-Consumer

In November 2019, the Company launched Disney+, a subscription based DTC streaming service with Disney, Pixar, Marvel, Star Wars and National Geographic branded programming in the U.S. and four other countries and has expanded to select Western European countries in the Spring of 2020. In April 2020, our India Hotstar service was converted to Disney+ Hotstar, and in June 2020, current subscribers of the Disney Deluxe service in Japan were converted to Disney+. Further launches are planned for Latin America in the fall of 2020, and Europe and various Asia-Pacific territories throughout calendar 2020 and calendar 2021.

42

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

The Company plans to launch an international DTC general entertainment offering under the Star brand in calendar year 2021.

As we will use our branded film and television content on our DTC offerings, we are forgoing certain licensing revenue from the sale of this content to third parties in TV/SVOD markets. We also expect to forgo revenue from linear channels in certain markets as a result of investment in our DTC offerings. In addition, we are increasing programming and production investments to create exclusive content for our DTC offerings.

CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER

As discussed in Note 4 to the Condensed Consolidated Financial Statements, the Company acquired TFCF on March 20, 2019. Additionally, in connection with the acquisition of TFCF, we acquired a controlling interest in Hulu. The Company began consolidating the results of TFCF and Hulu effective March 20, 2019.

Revenues for the quarter decreased 42%, or $8.5 billion, to $11.8 billion; net income attributable to Disney decreased $6.5 billion, to a loss of $4.7 billion; and diluted earnings per share from continuing operations attributable to Disney (EPS) decreased to a loss of $2.61 compared to income of $0.79 in the prior-year quarter. The EPS decrease for the quarter was due to goodwill and intangible asset impairments at our International Channels business and lower segment operating income. These decreases were partially offset by a non-cash investment gain in the current quarter and the comparison to an investment impairment in the prior-year quarter. The decrease in segment operating income was due to lower results at Parks, Experiences and Products and Studio Entertainment and higher losses at Direct-to-Consumer & International, partially offset by higher results at Media Networks.

Revenues

Service revenues for the quarter decreased 38%, or $6.8 billion, to $11.2 billion due to the closure of our theme parks and resorts, lower theatrical revenues due to theater closures, lower advertising revenue, the suspension of our cruise line operations and, to a lesser extent, decreased merchandise licensing revenue, all of which were driven by the impact of COVID-19. These decreases were partially offset by higher subscription revenue from Disney+ and Hulu.

Product revenues for the quarter decreased 76%, or $1.7 billion, to $0.5 billion due to lower merchandise, food and beverage sales due to the closure of our theme parks, resorts and retail stores.

Costs and expenses

Cost of services for the quarter decreased 37%, or $4.3 billion, to $7.2 billion due to decreased sports and other programming costs, lower film cost amortization and theatrical distribution costs, the closure of our theme parks and resorts and the suspension of our cruise line operations. These decreases were partially offset by higher programming, production and technology costs for Disney+ and Hulu.

Cost of products for the quarter decreased 50%, or $0.7 billion, to $0.7 billion due to the closure of our theme parks and resorts.

Selling, general, administrative and other costs decreased 27%, or $0.9 billion, to $2.5 billion due to lower marketing cost driven by a decrease in spending at the theatrical distribution and theme parks and resorts businesses, partially offset by an increase at Disney+.

Depreciation and amortization increased 5%, or $0.1 billion, to $1.4 billion, due to new attractions at our domestic parks and resorts.

Restructuring and impairment charges

Restructuring and impairment charges of $5,047 million for the current quarter were due to $4,953 million of impairment charges for goodwill and intangible assets at our International Channels business and $94 million of restructuring costs. Restructuring costs were primarily for severance and contract termination charges in connection with the acquisition and integration of TFCF.

Restructuring and impairment charges of $207 million for the prior-year quarter were primarily for severance and equity based compensation costs in connection with the acquisition and integration of TFCF.

Other income (expense), net

Other income of $382 million in the current quarter was due to the DraftKings gain.

Other expense of $123 million in the prior-year quarter was due to an adjustment to the Hulu gain.

43

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Interest expense, net

Interest expense, net is as follows: 

	Quarter Ended
(in millions)	June 27, 2020		June 29, 2019		% Change Better/(Worse)
Interest expense	$	(456)	$	(472)	3	%
Interest income, investment income and other	44		61		(28)	%
Interest expense, net	$	(412)	$	(411)	—	%

The decrease in interest expense was due to lower average interest rates, partially offset by higher average debt balances and lower capitalized interest.

The decrease in interest income, investment income and other was driven by a lower benefit related to pension and postretirement benefit costs, other than service cost and a decrease in interest income on cash balances due to lower average rates, partially offset by lower investment impairments.

Equity in the income (loss) of investees

Equity in the income (loss) of investees reflected income of $186 million in the current quarter compared to a loss of $1 million in the prior-year quarter. The change reflected the absence of an impairment that was recorded in the prior-year quarter on an investment in a cable channel at A+E Television Network.

Effective Income Tax Rate 

	Quarter Ended
	June 27, 2020		June 29, 2019		Change Better/(Worse)
Effective income tax rate - continuing operations	6.8	%	19.6	%	12.8	ppt

The decrease in the effective income tax rate was due to the impairment of International Channels goodwill, which is not tax deductible.

Noncontrolling Interests 

	Quarter Ended
(in millions)	June 27, 2020		June 29, 2019		% Change Better/(Worse)
Net income from continuing operations attributable to noncontrolling interests	$	(209)	$	(186)	(12)	%

The increase in net income from continuing operations attributable to noncontrolling interests was driven by higher operating results at ESPN and accretion of the redeemable noncontrolling interest in Hulu, partially offset by lower results at Shanghai Disney Resort and Hong Kong Disneyland Resort.

Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable.

Certain Items Impacting Comparability

Results for the quarter ended June 27, 2020 were impacted by the following:

•Goodwill and intangible asset impairments of $4,953 million and restructuring charges of $94 million

•Amortization expense of $683 million related to TFCF and Hulu intangible assets and fair value step-up on film and television costs

•The DraftKings gain of $382 million

Results for the quarter ended June 29, 2019 were impacted by the following:

•Amortization expense of $779 million related to TFCF and Hulu intangible assets and fair value step-up on film and television costs

•Restructuring charges of $207 million

•Equity investment impairments totaling $185 million

•An adjustment of $123 million to the Hulu gain recognized in the second quarter of fiscal 2019

44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

A summary of the impact of these items on EPS is as follows:

(in millions, except per share data)	Pre-Tax Income (Loss)		Tax Benefit (Expense)(1)		After-Tax Income (Loss)		EPS Favorable (Adverse)(2)
Quarter Ended June 27, 2020:
Restructuring and impairment charges	$	(5,047)	$	408	$	(4,639)	$	(2.56)
Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(3)	(683)		159		(524)		(0.28)
DraftKings gain	382		(89)		293		0.16
Total	$	(5,348)	$	478	$	(4,870)	$	(2.68)
Quarter Ended June 29, 2019:
Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(3)	$	(779)	$	168	$	(611)	$	(0.34)
Restructuring charges	(207)		48		(159)		(0.09)
Impairment of equity investments	(185)		42		(143)		(0.08)
Hulu gain adjustment	(123)		28		(95)		(0.05)
Total	$	(1,294)	$	286	$	(1,008)	$	(0.55)

⁽¹⁾Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item.

⁽²⁾EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.

⁽³⁾Includes amortization of intangibles related to TFCF equity investees.

CURRENT PERIOD RESULTS COMPARED TO PRIOR-YEAR PERIOD

The prior-year nine-month period includes the consolidated results of TFCF and Hulu for the period March 20, 2019 through June 29, 2019, whereas the current year results of TFCF and Hulu are included for the full nine month period. The impact of the approximately six month non-comparable period is referred to as the consolidation of TFCF and Hulu.

Revenues for the nine-month period increased $0.2 billion, to $50.7 billion; net income attributable to Disney decreased $12.2 billion, to a loss of $2.2 billion; and EPS decreased to a loss of $1.17 compared to income of $5.97 in the prior-year nine-month period. The EPS decrease for the nine-month period was due to the goodwill and intangible asset impairments at our International Channels business, the comparison to the Hulu gain recognized in the prior-year period, lower segment operating income and higher amortization of intangible assets and fair value step-up on film and television costs from the TFCF acquisition and the consolidation of Hulu. These decreases were partially offset by the comparison to non-cash investment impairments recorded in the prior-year period and an investment gain in the current period. The decrease in segment operating income was due to lower results at Parks, Experiences and Products and higher losses at Direct-to-Consumer & International, partially offset by increases at our Media Networks and Studio Entertainment segments. Segment operating results for the current period include a $0.5 billion net benefit from the consolidation of TFCF and Hulu.

Revenues

Service revenues for the nine-month period increased 4%, or $1.6 billion, to $45.5 billion, due to the consolidation of TFCF and Hulu and an increase in subscription revenue from Disney+ and Hulu. These increases were partially offset by lower volumes at our theme parks, resorts and cruise line, lower advertising revenue, a decrease in theatrical distribution revenues, a decrease in sales of our television and film programs to third parties and lower affiliate fees. Theme park, resort and cruise line volumes, theatrical distribution revenue and advertising revenue were impacted by COVID-19 reflecting the suspension of the operations, closure of theaters and cancellations of and a shift in the timing of major sporting events, respectively.

Product revenues for the nine-month period decreased 21%, or $1.4 billion, to $5.2 billion, due to lower volumes at our theme parks and resorts, which were impacted by the shutdown of operations, partially offset by the consolidation of TFCF and Hulu.

Costs and expenses

Cost of services for the nine-month period increased 12%, or $3.1 billion, to $29.3 billion, due to the consolidation of TFCF and Hulu, partially offset by lower theatrical and TV/SVOD amortization and distribution costs, lower volumes at our theme parks, resorts and cruise line and a decrease in programming and production costs. The decrease in programming and

45

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

production costs reflected a shift in timing of major sporting events to later periods partially offset by costs for Disney+ programming.

Cost of products for the nine-month period decreased 11%, or $0.4 billion, to $3.6 billion, due to lower volumes at our theme parks and resorts, partially offset by the consolidation of TFCF.

Selling, general, administrative and other costs for the nine-month period increased 22%, or $1.7 billion, to $9.6 billion, due to the consolidation of TFCF and Hulu, partially offset by lower marketing costs. The decrease in marketing costs reflected lower spending at the theatrical distribution and theme parks and resorts businesses, partially offset by spend for Disney+.

Depreciation and amortization increased 40%, or $1.1 billion, to $4.0 billion, due to the amortization of intangible assets arising from the acquisition of TFCF and Hulu and, to a lesser extent, new attractions at our domestic parks and resorts.

Restructuring and impairment charges

Restructuring and impairment charges of $5,342 million for the current period were due to $4,953 million of impairment charges for goodwill and intangible assets at our International Channels business and $389 million of restructuring costs. Restructuring costs were primarily for severance costs and contract termination charges in connection with the acquisition and integration of TFCF.

Restructuring and impairment charges of $869 million in the prior-year period were primarily for severance and equity based compensation costs in connection with the acquisition and integration of TFCF.

Other income (expense), net

Other income (expense), net of $382 million in the current period was due to the DraftKings gain.

Other income (expense), net of $4.8 billion for the prior-year period was due to the Hulu gain.

Interest expense, net

Interest expense, net is as follows: 

	Nine Months Ended
(in millions)	June 27, 2020		June 29, 2019		% Change Better/(Worse)
Interest expense	$	(1,183)	$	(833)	(42)	%
Interest income, investment income and other	188		216		(13)	%
Interest expense, net	$	(995)	$	(617)	(61)	%

The increase in interest expense for the nine-month period was due to higher average debt balances, partially offset by lower average interest rates.

The decrease in interest income, investment income and other was due to a lower benefit related to pension and postretirement benefit costs, other than service cost and lower interest income on cash balances, partially offset by lower investment impairments and higher interest on long-term receivables for film and television program sales.

Equity in the income (loss) of investees

Equity in the income (loss) of investees reflected income of $545 million in the current period compared to a loss of $234 million in the prior-year period. The change reflected the comparison to impairments in the prior year period on our investment in Vice Group Holdings, Inc. and on an investment in a cable channel at A+E Television Networks and the impact of consolidating Hulu.

Effective Income Tax Rate 

	Nine Months Ended
	June 27, 2020		June 29, 2019		Change Better/(Worse)
Effective income tax rate - continuing operations	(55.9)	%	21.2	%	nm

The effective income tax rate was negative in the current quarter due to the impairment of International Channels goodwill, which is not tax deductible.

46

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Noncontrolling Interests 

	Nine Months Ended
(in millions)	June 27, 2020		June 29, 2019		% Change Better/(Worse)
Net income from continuing operations attributable to noncontrolling interests	$	(309)	$	(343)	10	%

The decrease in net income from continuing operations attributable to noncontrolling interests for the nine-month period was primarily due to lower results at Hong Kong Disneyland Resort and Shanghai Disney Resort and a higher loss from our DTC sports business. These decreases were partially offset by accretion of the redeemable noncontrolling interest in Hulu and higher operating results at ESPN.

Certain Items Impacting Comparability

Results for the nine months ended June 27, 2020 were impacted by the following:

•Goodwill and intangible asset impairments of $4,953 million and restructuring charges of $389 million

•Amortization expense of $2,106 million related to TFCF and Hulu intangible assets and fair value step-up on film and television costs

•The DraftKings gain of $382 million

Results for the nine months ended June 29, 2019 were impacted by the following:

•The Hulu gain of $4,794 million

•A benefit of $46 million from an insurance recovery related to a legal matter

•A benefit of $34 million from the U.S federal income tax legislation enacted in fiscal 2018

•Amortization expense of $884 million related to TFCF and Hulu intangible assets and fair value step-up on film and television costs

•Restructuring charges of $869 million

•Equity investment impairments totaling $538 million

47

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

A summary of the impact of these items on EPS is as follows:

(in millions, except per share data)	Pre-Tax Income/(Loss)		Tax Benefit/(Expense)(1)		After-Tax Income/(Loss)		EPS Favorable/(Adverse)(2)
Nine Months Ended June 27, 2020:
Restructuring and impairment charges	$	(5,342)	$	477	$	(4,865)	$	(2.69)
Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(3)	(2,106)		490		(1,616)		(0.86)
DraftKings gain	382		(89)		293		0.16
Total	$	(7,066)	878		$	(6,188)	$	(3.39)
Nine Months Ended June 29, 2019:
Hulu gain	$	4,794	$	(1,103)	$	3,691	$	2.28
Insurance recoveries related to a legal matter	46		(11)		35		0.02
Net benefit from U.S. federal income tax legislation enacted in fiscal 2018	—		34		34		0.02
Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(3)	(884)		191		(693)		(0.43)
Restructuring and impairment charges	(869)		200		(669)		(0.42)
Impairment of equity investments	(538)		123		(415)		(0.26)
Total	$	2,549	$	(566)	$	1,983	$	1.23

⁽¹⁾Tax benefit/expense adjustments are determined using the tax rate applicable to the individual item affecting comparability.

⁽²⁾EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.

⁽³⁾Includes amortization of intangibles related to TFCF equity investees.

SEASONALITY

The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the nine months ended June 27, 2020 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.

Media Networks revenues are subject to seasonal advertising patterns, changes in viewership levels and timing of program sales. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Affiliate fees are generally recognized ratably throughout the year.

Parks, Experiences and Products revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities and seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first and fourth fiscal quarter. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early winter and spring holiday periods. In addition, licensing revenues fluctuate with the timing and performance of our theatrical releases and cable programming broadcasts.

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.

Direct-to-Consumer & International revenues fluctuate based on: changes in subscriber levels; the timing and performance of releases of our digital media content; viewership levels on our cable channels and digital platforms; and the demand for sports and our content. Each of these may depend on the availability of content, which varies from time to time throughout the year based on, among other things, sports seasons and content production schedules.

48

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

BUSINESS SEGMENT RESULTS

The following table reconciles income (loss) from continuing operations before income taxes to total segment operating income:

	Quarter Ended				% Change		Nine Months Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)		June 27, 2020		June 29, 2019		Better/ (Worse)
Income (loss) from continuing operations before income taxes	$	(4,840)	$	2,009	nm		$	(1,163)	$	12,676	nm
Add:
Corporate and unallocated shared expenses	179		238		25	%	604		678		11	%
Restructuring and impairment charges	5,047		207		>(100)	%	5,342		869		>(100)	%
Other income	(382)		123		nm		(382)		(4,840)		92	%
Interest expense, net	412		411		—	%	995		617		(61)	%
Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(1)	683		779		12	%	2,106		884		>(100)	%
Impairment of equity investments	—		185		100	%	—		538		100	%
Total segment operating income	$	1,099	$	3,952	(72)	%	$	7,502	$	11,422	(34)	%

⁽¹⁾Includes amortization of intangibles related to TFCF equity investees.

The following is a summary of segment revenue and operating income: 

	Quarter Ended				% Change		Nine Months Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)		June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues:
Media Networks	$	6,562	$	6,713	(2)	%	$	21,180	$	18,317	16	%
Parks, Experiences and Products	983		6,575		(85)	%	13,922		19,570		(29)	%
Studio Entertainment	1,738		3,836		(55)	%	8,041		7,817		3	%
Direct-to-Consumer & International	3,969		3,875		2	%	12,114		5,940		>100	%
Eliminations	(1,473)		(737)		(100)	%	(4,576)		(1,155)		>(100)	%
	$	11,779	$	20,262	(42)	%	$	50,681	$	50,489	—	%
Segment operating income (loss):
Media Networks	$	3,153	$	2,136	48	%	$	7,158	$	5,696	26	%
Parks, Experiences and Products	(1,960)		1,719		nm		1,017		5,377		(81)	%
Studio Entertainment	668		792		(16)	%	2,082		1,607		30	%
Direct-to-Consumer & International	(706)		(562)		(26)	%	(2,226)		(1,084)		>(100)	%
Eliminations	(56)		(133)		58	%	(529)		(174)		>(100)	%
	$	1,099	$	3,952	(72)	%	$	7,502	$	11,422	(34)	%

49

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Depreciation expense is as follows: 

	Quarter Ended				% Change		Nine Months Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)		June 27, 2020		June 29, 2019		Better/ (Worse)
Media Networks
Cable Networks	$	36	$	29	(24)	%	$	89	$	79	(13)	%
Broadcasting	26		22		(18)	%	64		62		(3)	%
Total Media Networks	62		51		(22)	%	153		141		(9)	%
Parks, Experiences and Products
Domestic	426		366		(16)	%	1,232		1,085		(14)	%
International	176		181		3	%	520		549		5	%
Total Parks, Experiences and Products	602		547		(10)	%	1,752		1,634		(7)	%
Studio Entertainment	26		22		(18)	%	70		53		(32)	%
Direct-to-Consumer & International	80		88		9	%	224		157		(43)	%
Corporate	52		43		(21)	%	129		124		(4)	%
Total depreciation expense	$	822	$	751	(9)	%	$	2,328	$	2,109	(10)	%

Amortization of intangible assets is as follows:

	Quarter Ended				% Change		Nine Months Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)		June 27, 2020		June 29, 2019		Better/ (Worse)
Media Networks	$	1	$	—	nm		$	3	$	—	nm
Parks, Experiences and Products	27		27		—	%	81		81		—	%
Studio Entertainment	14		15		7	%	44		46		4	%
Direct-to-Consumer & International	27		23		(17)	%	84		68		(24)	%
TFCF and Hulu	486		490		1	%	1,470		562		>(100) %
Total amortization of intangible assets	$	555	$	555	—	%	$	1,682	$	757	>(100) %

Media Networks

Operating results for the Media Networks segment are as follows: 

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Affiliate fees	$	3,647	$	3,564	2	%
Advertising	1,115		1,874		(41)	%
TV/SVOD distribution and other	1,800		1,275		41	%
Total revenues	6,562		6,713		(2)	%
Operating expenses	(2,980)		(4,092)		27	%
Selling, general, administrative and other	(583)		(626)		7	%
Depreciation and amortization	(63)		(51)		(24)	%
Equity in the income of investees	217		192		13	%
Operating Income	$	3,153	$	2,136	48	%

50

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Revenues

The increase in affiliate fees was due to an increase of 7% from higher contractual rates, partially offset by a decrease of 4% from fewer subscribers. The subscriber decline was net of a benefit from the ACC Network launch in August 2019.

The decrease in advertising revenues was due to decreases of $617 million at Cable Networks, from $1,015 million to $398 million and $142 million at Broadcasting, from $859 million to $717 million. Cable Networks advertising revenue reflected decreases of 50% from lower impressions reflecting lower average viewership and, to a lesser extent, units delivered and 8% from lower rates. Lower average viewership was due to the absence of major sporting events as a result of COVID-19. Broadcasting advertising revenue reflected decreases of 11% from the owned television stations and 7% from lower network impressions reflecting lower average viewership and units delivered.

The increase in TV/SVOD distribution and other revenue of $525 million was due to sales of Disney Television Studios (i.e. ABC and 20th Century Fox Television studios), FX and Disney Channel programs. The increase in Disney Television Studios program sales was due to third-party sales and sales to Hulu. Third-party sales were driven by The Wilds, How To Get Away With Murder, Lost, Modern Family, Homeland and The Politician. Sales to Hulu were due to Love, Victor and Helstrom. Higher sales of FX and Disney Channel programs were due to sales to Hulu and Disney+, respectively.

Costs and Expenses

Operating expenses include programming and production costs, which decreased $963 million, from $3,781 million to $2,818 million. At Cable Networks, programming and production costs decreased $1,194 million due to the shift in the timing of major sporting events as a result of COVID-19. Programming costs for the NBA and MLB were shifted to later quarters when we expect the events to occur. At Broadcasting, programming and production costs increased $231 million due to higher program sales and a timing impact from new accounting guidance, partially offset by lower network programming and production costs due to production shutdowns as a result of COVID-19. The new accounting guidance generally results in lower amortization of capitalized episodic television costs during the network airings for shows we also expect to utilize on our DTC services. The new guidance also removed certain limitations on the capitalization of episodic television costs. See Note 8 to the Condensed Consolidated Financial Statements. Compared to the previous accounting, programming and production expense will generally be lower in the first half of the fiscal year and higher in the second half of the fiscal year as the capitalized costs are amortized.

Selling, general, administrative and other costs decreased $43 million, from $626 million to $583 million, due to lower marketing costs at the FX and ABC Television Networks.

Equity in the Income of Investees

Income from equity investees increased $25 million, from $192 million to $217 million, driven by higher income from A +E Television Networks due to lower programming and marketing costs.

Segment Operating Income

Segment operating income increased 48%, or $1,017 million to $3,153 million due to higher results at ESPN, the ABC Television Network and FX Networks and an increase in income from program sales. These increases were partially offset by lower results at the owned television stations.

The following table presents supplemental revenue and operating income detail for the Media Networks segment: 

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Supplemental revenue detail
Cable Networks	$	4,034	$	4,464	(10)	%
Broadcasting	2,528		2,249		12	%
	$	6,562	$	6,713	(2)	%
Supplemental operating income detail
Cable Networks	$	2,459	$	1,637	50	%
Broadcasting	477		307		55	%
Equity in the income of investees	217		192		13	%
	$	3,153	$	2,136	48	%

51

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Items Excluded from Segment Operating Income Related to Media Networks

The following table presents supplemental information for items related to the Media Network segment that are excluded from segment operating income:

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Amortization of TFCF intangible assets and fair value step-up on film and television costs(1)	$	(315)	$	(322)	2	%
Restructuring and impairment charges	(4)		(20)		80	%
Impairment of equity investments	—		(185)		100	%

⁽¹⁾In the current quarter, amortization of step-up on film and television costs was $163 million and amortization of intangible assets was $152 million. In the prior-year quarter, amortization of step-up on film and television costs was $186 million and amortization of intangible assets was $136 million.

Parks, Experiences and Products

Operating results for the Parks, Experiences and Products segment are as follows: 

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Theme park admissions	$	34	$	1,956	(98)	%
Parks & Experiences merchandise, food and beverage	63		1,515		(96)	%
Resorts and vacations	80		1,610		(95)	%
Merchandise licensing and retail	639		993		(36)	%
Parks licensing and other	167		501		(67)	%
Total revenues	983		6,575		(85)	%
Operating expenses	(1,801)		(3,482)		48	%
Selling, general, administrative and other	(507)		(800)		37	%
Depreciation and amortization	(629)		(574)		(10)	%
Equity in the loss of investees	(6)		—		nm
Operating Income (Loss)	$	(1,960)	$	1,719	nm

Revenues

Revenues at the Parks, Experiences and Products segment were impacted by COVID-19, which led to the closure of our domestic and international theme parks and resorts, suspension of cruise ship sailings, disruptions in our merchandise licensing business and closure of our retail stores. Walt Disney World Resort, Disneyland Resort and Disneyland Paris were closed for all of the current quarter, while Shanghai Disney Resort re-opened in May and Hong Kong Disneyland Resort re-opened in late June (and closed again in July). We estimate that the impact of COVID-19 on current quarter segment operating income was approximately $3.5 billion, which is net of cost reductions from initiatives to mitigate the impacts of COVID-19.

The decrease in revenues from theme park admissions, merchandise, food and beverage sales, and resorts and vacations was due to the closure of the parks and resorts and suspension of cruise ship sailings.

Merchandise licensing and retail revenue was lower due to decreases of 21% from merchandise licensing and 13% from retail reflecting the impact of COVID-19 on retailers and the closure of our owned retail stores.

The decrease in parks licensing and other revenue was due to lower sponsorship revenue and a decrease in Tokyo Disney Resort royalties due to the closure of the parks.

52

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business: 

	Domestic				International(1)				Total
	Quarter Ended				Quarter Ended				Quarter Ended
	Jun 27, 2020		Jun 29, 2019		Jun 27, 2020		Jun 29, 2019		Jun 27, 2020		Jun 29, 2019
Parks
Increase/(decrease)
Attendance(2)	(100)	%	(3)	%	(90)	%	(7)	%	(97)	%	(4)	%
Per Capita Guest Spending(3)	nm		10	%	(12)	%	17	%	nm		12	%
Hotels(4)
Occupancy(5)	nm		88	%	nm		83	%	nm		87	%
Available Room Nights (in thousands)(6)	nm		2,503		nm		793		nm		3,296
Per Room Guest Spending(7)	nm		$366		nm		$331		nm		$358

⁽¹⁾Per capita guest spending growth rate is stated on a constant currency basis. Per room guest spending is stated at the average foreign exchange rate for the same period in the prior year.

⁽²⁾Attendance is used to analyze volume trends at our theme parks and is based on the number of unique daily entries, i.e. a person visiting multiple theme parks in a single day is counted only once. Our attendance count includes complimentary entries but excludes entries by children under the age of three.

⁽³⁾Per capita guest spending is used to analyze guest spending trends and is defined as total revenue from ticket sales and sales of food, beverage and merchandise in our theme parks, divided by total theme park attendance.

⁽⁴⁾Hotel metrics in the current quarter are not meaningful given the closure of our resorts.

⁽⁵⁾Occupancy is used to analyze the usage of available capacity at hotels and is defined as the number of room nights occupied by guests as a percentage of available hotel room nights.

⁽⁶⁾Available hotel room nights are defined as the total number of room nights that are available at our hotels and at Disney Vacation Club (DVC) properties located at our theme parks and resorts that are not utilized by DVC members. Available hotel room nights include rooms temporarily taken out of service.

⁽⁷⁾Per room guest spending is used to analyze guest spending at our hotels and is defined as total revenue from room rentals and sales of food, beverage and merchandise at our hotels, divided by total occupied hotel room nights.

Costs and Expenses

Operating expenses include operating labor, which decreased $943 million from $1,587 million to $644 million, cost of goods sold and distribution costs, which decreased $460 million from $698 million to $238 million, and infrastructure costs, which decreased $45 million from $607 million to $562 million, all of which were lower as a result of the closure of our theme parks, resorts and retail stores and the suspension of cruise ship sailings. The decrease in labor costs also included the benefit of government credits for certain employee costs. Lower infrastructure costs from the closures were partially offset by the write-down of assets at our retail stores. Other operating expenses, which include costs for such items as supplies, commissions/fees and entertainment offerings, decreased $233 million, from $590 million to $357 million due to the suspension of operations, partially offset by higher charges for capital project abandonments.

Selling, general, administrative and other costs decreased $293 million from $800 million to $507 million due to marketing and general and administrative cost reductions resulting from initiatives to mitigate the impacts of COVID-19.

Depreciation and amortization increased $55 million from $574 million to $629 million due to new attractions at our domestic parks and resorts.

Equity in the Loss of Investees

Loss from equity investees was $6 million, reflecting a loss from Villages Nature, in which Disneyland Paris has a 50% interest.

53

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Segment Operating Income (Loss)

Segment operating income decreased $3.7 billion to a loss of $2.0 billion due to decreases at our domestic and international parks and experiences and to a lesser extent, our merchandise licensing and retail businesses.

The following table presents supplemental revenue and operating income (loss) detail for the Parks, Experiences and Products segment:

	Quarter Ended				% Change Better/ (Worse)
(in millions)	June 27, 2020		June 29, 2019
Supplemental revenue detail
Parks & Experiences
Domestic	$	213	$	4,420	(95)	%
International	116		1,126		(90)	%
Consumer Products	654		1,029		(36)	%
	$	983	$	6,575	(85)	%
Supplemental operating income (loss) detail
Parks & Experiences
Domestic	$	(1,584)	$	1,157	nm
International	(438)		189		nm
Consumer Products	62		373		(83)	%
	$	(1,960)	$	1,719	nm

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows: 

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Theatrical distribution	$	51	$	2,240	(98)	%
Home entertainment	395		432		(9)	%
TV/SVOD distribution and other	1,292		1,164		11	%
Total revenues	1,738		3,836		(55)	%
Operating expenses	(777)		(2,013)		61	%
Selling, general, administrative and other	(253)		(994)		75	%
Depreciation and amortization	(40)		(37)		(8)	%
Operating Income	$	668	$	792	(16)	%

Revenues

The decrease in theatrical distribution revenue reflected no releases in the current quarter compared to the release of Avengers: Endgame and Aladdin in the prior-year quarter. The current quarter results were impacted by theater closures globally due to COVID-19. The prior-year quarter also included Toy Story 4, Dumbo, Dark Phoenix and Captain Marvel.

Lower home entertainment revenue was driven by a decrease of 12% from lower unit sales, partially offset by an increase of 5% from higher average net effective pricing. The decrease in worldwide unit sales was driven by fewer new release titles in the current quarter, including Star Wars: The Rise of Skywalker and Frozen II, compared to Captain Marvel, Bohemian Rhapsody, Ralph Breaks the Internet and Mary Poppins Returns in the prior-year quarter. The increase in average net effective pricing was due to higher rates, partially offset by lower mix of higher priced new release titles.

Growth in TV/SVOD distribution and other revenue was due to an increase of 27% from TV/SVOD distribution, partially offset by decreases of 14% from stage plays reflecting the impact of theater closures in response to COVID-19 and 4% from lower Parks, Experiences and Products segment revenue share. The increase in TV/SVOD distribution was due to sales of

54

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

content to Disney+, which included Artemis Fowl, Star Wars: The Rise of Skywalker, Onward, Maleficent: Mistress of Evil and various library titles, partially offset by lower sales to third parties in the pay television window.

Costs and Expenses

Operating expenses include film cost amortization, which decreased $913 million, from $1,555 million to $642 million. The decrease in film cost amortization was due to a decrease in theatrical distribution revenue, lower film cost impairments and a decrease in Parks, Experiences and Products segment revenue share, partially offset by higher TV/SVOD distribution revenues. Operating expenses also include cost of goods sold and distribution costs, which decreased $323 million, from $458 million to $135 million. Lower cost of goods sold and distribution costs were due to decreases in theatrical and stage play distribution costs driven by theater closures.

Selling, general, administrative and other costs decreased $741 million from $994 million to $253 million due to lower theatrical and, to a lesser extent, home entertainment marketing costs.

Segment Operating Income

Segment operating income decreased $124 million, to $668 million due to lower theatrical distribution results, partially offset by increases in TV/SVOD and home entertainment distribution results and lower film cost impairments.

Items Excluded from Segment Operating Income Related to Studio Entertainment

The following table presents supplemental information for items related to the Studio Entertainment segment that are excluded from segment operating income:

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Amortization of TFCF intangible assets and fair value step-up on film and television costs(1)	$	(49)	$	(121)	60	%
Restructuring and impairment charges	(45)		(59)		24	%

⁽¹⁾In the current quarter, amortization of step-up on film and television costs was $22 million and amortization of intangible assets was $27 million. In the prior-year quarter, amortization of step-up on film and television costs was $92 million and amortization of intangible assets was $29 million.

Direct-to-Consumer & International

Operating results for the Direct-to-Consumer & International segment are as follows: 

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Affiliate fees	$	848	$	1,006	(16)	%
Advertising	786		1,492		(47)	%
Subscription fees	2,129		950		>100	%
TV/SVOD distribution and other	206		427		(52)	%
Total revenues	3,969		3,875		2	%
Operating expenses	(3,565)		(3,580)		—	%
Selling, general, administrative and other	(985)		(753)		(31)	%
Depreciation and amortization	(107)		(111)		4	%
Equity in the income / (loss) of investees	(18)		7		nm
Operating Loss	$	(706)	$	(562)	(26)	%

Revenues

The decrease in affiliate fees was due to decreases of 7% from fewer subscribers driven by the expiration of certain contracts and channel closures in Europe, 7% from an unfavorable foreign exchange impact and 2% from lower rates.

The decrease in advertising revenues was due to decreases of 37% from our International Channels and 10% from lower addressable advertising sales. Lower advertising revenues at our International Channels was driven by decreased impressions, which reflected a shift in the timing of Indian Premier League (IPL) cricket matches to later quarters as a result of COVID-19

55

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

and the comparison to the prior-year broadcast of the International Cricket Council World Cup (ICC WC) matches. The ICC WC is held every four years. The decrease in addressable advertising sales was due to lower rates and impressions.

The increase in subscription fees was due to subscriber growth reflecting the launch of Disney+ starting in November 2019 and increased subscribers at Hulu and ESPN+, and higher rates driven by an increase in retail pricing for the Hulu Live TV + SVOD service.

Lower TV/SVOD distribution and other revenue was primarily due to the comparison to the sub-licensing of ICC WC rights to third-party broadcasters in the prior-year quarter.

The following table presents the number of paid subscribers⁽¹⁾ (in millions) for Disney+, ESPN+ and Hulu as of:

			% Change
	June 27, 2020	June 29, 2019	Better/ (Worse)
Disney+(3)	57.5	—	nm
ESPN+	8.5	2.4	>100	%
Hulu
SVOD Only	32.1	25.7	25	%
Live TV + SVOD	3.4	2.2	55	%
Total Hulu	35.5	27.9	27	%

The following table presents the average monthly revenue per paid subscriber⁽²⁾ for the quarter ended:

					% Change
	June 27, 2020		June 29, 2019		Better/ (Worse)
Disney+ (3)	$	4.62	$	—	nm
ESPN+ (4)	$	4.18	$	5.33	(22)	%
Hulu
SVOD Only	$	11.39	$	12.68	(10)	%
Live TV + SVOD	$	68.11	$	58.42	17	%

⁽¹⁾A subscriber for which we recognized subscription revenue. A subscriber ceases to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method. A subscription bundle is considered a paid subscriber for each service included in the bundle. Subscribers include those who receive the service through wholesale arrangements in which we receive a fee for the distribution of Disney+ to each subscriber to an existing content distribution tier. When we aggregate the total number of paid subscribers across our DTC services, whether acquired individually, through a wholesale arrangement or via the bundle, we refer to them as paid subscriptions.

⁽²⁾Revenue per paid subscriber is calculated based upon the average of the monthly average paid subscribers for each month in the period. The monthly average paid subscribers is calculated as the sum of the beginning of the month and end of the month paid subscriber count, divided by two. Disney+ average monthly revenue per paid subscriber is calculated using a daily average of paid subscribers for the period beginning at launch and ending on the last day of the quarter. The average revenue per subscriber is net of discounts offered on bundled services. The discount is allocated to each service based on the relative retail price of each service on a standalone basis. In general, wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third party platforms like Apple.

⁽³⁾Disney+ Hotstar launched on April 3, 2020 (as a conversion of the preexisting Hotstar service in India) and is included in the number of paid subscribers and average monthly revenue per paid subscriber. The average monthly revenue per paid subscriber for Disney+ Hotstar is significantly lower than the average monthly revenue per paid subscriber in North America and Europe.

⁽⁴⁾Excludes Pay-Per-View revenue.

The average monthly revenue per paid subscriber for ESPN+ decreased from $5.33 to $4.18 due to the introduction of a bundled subscription package offering of Disney+, ESPN+ and Hulu beginning in November 2019 and lower per-subscriber advertising revenue. The bundled offering has a lower retail price than the aggregate standalone retail prices of the individual services.

56

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

The average monthly revenue per paid subscriber for the Hulu SVOD Only service decreased from $12.68 to $11.39 due to lower per-subscriber advertising revenue. The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $58.42 to $68.11 due to an increase in retail pricing and higher per-subscriber advertising revenue, partially offset by the introduction of the bundled subscription package.

Costs and Expenses

Operating expenses include a $115 million decrease in programming and production costs, from $3,011 million to $2,896 million and a $100 million increase in other operating expenses, from $569 million to $669 million. The decrease in programming and production costs includes lower costs for sports programming and, to a lesser extent, cost reductions due to production shutdowns and channel closures and a favorable foreign exchange impact. These decreases were partially offset by higher costs for the launch of Disney+ and an increase at Hulu driven by subscriber growth. Lower sports programming costs were primarily due to the comparison to ICC WC in the prior-year quarter and the shift in timing of IPL. Programming costs for IPL were shifted to later quarters when we expect the events to occur. Programming and production costs include the costs of content provided by other segments. Other operating expenses, which include technical support and distribution costs, increased due to the launch of Disney+.

Selling, general, administrative and other costs increased $232 million from $753 million to $985 million due to the launch of Disney+.

Equity in the Income (Loss) of Investees

Income from equity investees in the prior-year quarter of $7 million decreased by $25 million to a loss of $18 million in the current quarter, reflecting lower results at Tata Sky.

Segment Operating Loss

Segment operating loss increased to $706 million from $562 million due to costs associated with the launch of Disney+, partially offset by increases at Star and ESPN+.

The following table presents supplemental revenue and operating income (loss) detail for the Direct-to-Consumer & International segment:

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Supplemental revenue detail
International Channels	$	1,098	$	1,974	(44)	%
Direct-to-Consumer services	2,680		1,529		75	%
Other(1)	191		372		(49)	%
	$	3,969	$	3,875	2	%
Supplemental operating income (loss) detail
International Channels	$	223	$	193	16	%
Direct-to-Consumer services	(801)		(600)		(34)	%
Other(1)	(110)		(162)		32	%
Equity in the loss of investees	(18)		7		nm
	$	(706)	$	(562)	(26)	%

⁽¹⁾Primarily addressable ad sales related to domestic Media Networks branded properties (addressable ad sales related to our Direct-to-Consumer services, principally Hulu, are reflected in “Direct-to-Consumer services”)

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Items Excluded from Segment Operating Loss Related to Direct-to-Consumer & International

The following table presents supplemental information for items related to the Direct-to-Consumer & International segment that are excluded from segment operating loss:

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Amortization of TFCF and Hulu intangible assets and fair value step-up on film and television costs(1)	$	(317)	$	(334)	5	%
Hulu gain	—		(123)		(100)	%
Restructuring and impairment charges(2)	(4,988)		(106)		>(100) %

⁽¹⁾In the current quarter, amortization of intangible assets was $305 million, amortization of intangible assets related to TFCF equity investees was $7 million and amortization of step-up on film and television costs was $5 million. In the prior-year quarter, amortization of intangible assets was $323 million, amortization of intangible assets related to TFCF equity investees was $15 million and amortization of step-up on film and television costs was a benefit of $4 million.

⁽²⁾The current quarter includes goodwill and intangible asset impairments at our International Channels business ($4,953 million).

Eliminations

Intersegment content transactions are as follows:

	Quarter Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Studio Entertainment:
Content transactions with Media Networks	$	(36)	$	(41)	12	%
Content transactions with Direct-to-Consumer & International	(506)		(82)		>(100) %
Media Networks:
Content transactions with Direct-to-Consumer & International	(931)		(614)		(52)	%
Total	$	(1,473)	$	(737)	(100)	%
Operating income
Studio Entertainment:
Content transactions with Media Networks	$	2	$	(16)	nm
Content transactions with Direct-to-Consumer & International	27		(35)		nm
Media Networks:
Content transactions with Direct-to-Consumer & International	(85)		(82)		(4)	%
Total	$	(56)	$	(133)	58	%

Revenues

The increase in revenue eliminations was due to sales of Studio Entertainment content to Disney + and sales of Media Networks content to Disney+ and Hulu. Studio Entertainment titles sold to Disney+ included Artemis Fowl, Star Wars: The Rise of Skywalker and Onward. Media Networks sales to Disney+ reflected the sale of library series, including The Simpsons and Disney Channel titles. The increase in Media Networks sales to Hulu reflected sales of Mrs. America, Love Victor and Helstrom, and an increase in affiliate fees received from Hulu reflecting subscriber growth to our networks included in the Hulu Live TV service.

Operating Income

The decrease in the impact from eliminations was due to the recognition of previously deferred profit on sales of Studio Entertainment titles to Disney+, the International Channels and the FX Networks.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

BUSINESS SEGMENT RESULTS - Nine Month Results

Media Networks

Operating results for the Media Networks segment are as follows: 

	Nine Months Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Affiliate Fees	$	11,041	$	9,873	12	%
Advertising	4,841		5,521		(12)	%
TV/SVOD distribution and other	5,298		2,923		81	%
Total revenues	21,180		18,317		16	%
Operating expenses	(12,529)		(11,439)		(10)	%
Selling, general, administrative and other	(1,926)		(1,594)		(21)	%
Depreciation and amortization	(156)		(141)		(11)	%
Equity in the income of investees	589		553		7	%
Operating Income	$	7,158	$	5,696	26	%

Revenues

The increase in affiliate fees was due to increases of 9% from the consolidation of TFCF and 7% from higher contractual rates, partially offset by a decrease of 3% from fewer subscribers. The subscriber decline was net of a benefit from the ACC Network launch in August 2019.

The decrease in advertising revenues was due to decreases of $487 million at Cable Networks, from $2,774 million to $2,287 million and $193 million at Broadcasting, from $2,747 million to $2,554 million. Cable Networks advertising revenue reflected decreases of 23% from lower impressions reflecting lower average viewership, due to the impact COVID-19 had on live sports events, and 2% from lower rates. These decreases were partially offset by an increase of 9% from the consolidation of TFCF. Broadcasting advertising revenue reflected decreases of 5% from lower average network viewership and 5% from the owned television stations, partially offset by increases of 3% from higher network rates and 2% from the consolidation of TFCF.

The increase in TV/SVOD distribution and other revenue of $2,375 million was due to the consolidation of TFCF, which consisted primarily of program sales, and higher program sales at Disney Television Studios, FX and Disney Channel. The increase in Disney Television Studios was due to program sales to Hulu and Disney+ driven by sales of Little Fires Everywhere, The Simpsons and High Fidelity, while the increases at FX and Disney Channel were due to program sales to Hulu and Disney+, respectively.

Costs and Expenses

Operating expenses include programming and production costs, which increased $1,090 million from $10,828 million to $11,918 million. At Cable Networks, programming and production costs decreased $260 million due to the shift in timing of cost for NBA and MLB to later quarters when we expect the events to occur, partially offset by the consolidation of TFCF and contractual increases for NFL, college football playoffs and other college sports. At Broadcasting, programming and production costs increased $1,350 million due to the consolidation of TFCF and higher program sales at Disney Television Studios.

Selling, general, administrative and other costs increased $332 million from $1,594 million to $1,926 million, due to the consolidation of TFCF.

Equity in the Income of Investees

Income from equity investees increased $36 million, from $553 million to $589 million, driven by higher income from A +E Television Networks due to lower programming costs, higher program sales and a decrease in marketing costs, partially offset by lower advertising revenue.

Segment Operating Income

Segment operating income increased 26%, or $1,462 million to $7,158 million due to the consolidation of TFCF and increases at ESPN, Disney Television Studios and FX Networks. These increases were partially offset by lower results at the owned television stations.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

The following table provides supplemental revenue and segment operating income detail for the Media Networks segment: 

	Nine Months Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Cable Networks	$	13,245	$	12,243	8	%
Broadcasting	7,935		6,074		31	%
	$	21,180	$	18,317	16	%
Segment operating income
Cable Networks	$	5,120	$	4,169	23	%
Broadcasting	1,449		974		49	%
Equity in the income of investees	589		553		7	%
	$	7,158	$	5,696	26	%

Items Excluded from Segment Operating Income Related to Media Networks

The following table presents supplemental information for items related to the Media Networks segment that are excluded from segment operating income:

	Nine Months Ended
(in millions)	June 27, 2020		June 29, 2019		% Change Better/(Worse)
Amortization of TFCF intangible assets and fair value step-up on film and television costs(1)	$	(926)	$	(372)	>(100)	%
Restructuring and impairment charges	(26)		(84)		69	%
Impairment of equity investments	—		(185)		100	%

⁽¹⁾In the current nine-month period, amortization of step-up on film and television costs was $468 million and amortization of intangible assets was $458 million. In the prior-year nine-month period, amortization of step-up on film and television costs was $218 million and amortization of intangible assets was $154 million.

Parks, Experiences and Products

Operating results for the Parks, Experiences and Products segment are as follows: 

	Nine Months Ended				% Change
(in millions)	June 27, 2020		June 29, 2019		Better/ (Worse)
Revenues
Theme park admissions	$	3,655	$	5,657	(35)	%
Parks & Experiences merchandise, food and beverage	3,030		4,491		(33)	%
Resorts and vacations	3,088		4,644		(34)	%
Merchandise licensing and retail	3,024		3,285		(8)	%
Parks licensing and other	1,125		1,493		(25)	%
Total revenues	13,922		19,570		(29)	%
Operating expenses	(9,059)		(10,229)		11	%
Selling, general, administrative and other	(1,998)		(2,237)		11	%
Depreciation and amortization	(1,833)		(1,715)		(7)	%
Equity in the loss of investees	(15)		(12)		(25)	%
Operating Income	$	1,017	$	5,377	(81)	%

Revenues

The decrease in theme park admissions revenue was due to a decrease of 38% from lower attendance driven by the closure of the parks, partially offset by an increase of 5% from higher average ticket prices prior to the closure.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Parks & Experiences merchandise, food and beverage revenue was lower compared to the prior-year nine-month period due to a decrease of 38% from lower volumes driven by the closure of the parks and resorts, partially offset by an increase of 5% from higher average guest spending prior to the closure.

The decrease in resorts and vacations revenue was due to decreases of 18% from lower occupied room nights and 11% from fewer passenger cruise days driven by the closure of the resorts and suspension of cruise ship sailings, respectively.

Merchandise licensing and retail revenue was lower due to decreases of 4% from merchandise licensing, 3% from retail and 2% from games. The decrease at merchandise licensing was primarily due to lower minimum guarantee shortfall recognition and a decrease in sales of merchandise based on Mickey and Minnie, Avengers, Disney Princesses, Toy Story and Cars, partially offset by higher sales of Frozen merchandise. Merchandise licensing revenues for the current nine-month period were adversely impacted by COVID-19. The decrease in revenues at retail was due to the closure of our retail stores as a result of COVID-19, partially offset by higher online sales. The decrease at games was driven by the prior-year sale of rights to a video game.

The decrease in parks licensing and other revenue was primarily due to lower sponsorship revenue and a decrease in Tokyo Disney Resort royalties due to the closure of the parks.

The following table presents supplemental park and hotel statistics: 

	Domestic				International(1)				Total
	Nine Months Ended				Nine Months Ended				Nine Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Parks
Increase/(decrease)
Attendance(2)	(35)	%	—	%	(51)	%	(5)	%	(40)	%	(2)	%
Per Capita Guest Spending(3)	9	%	7	%	(3)	%	12	%	9	%	8	%
Hotels
Occupancy(4)	53	%	92	%	41	%	83	%	51	%	89	%
Available Room Nights (in thousands)(5)	8,127		7,477		2,388		2,381		10,515		9,858
Per Room Guest Spending(6)	$373		$359		$306		$306		$361		$347

⁽¹⁾Per capita guest spending growth rate is stated on a constant currency basis. Per room guest spending is stated at the average foreign exchange rate for the same period in the prior year.

⁽²⁾Attendance is used to analyze volume trends at our theme parks and is based on the number of unique daily entries, i.e. a person visiting multiple theme parks in a single day is counted only once. Our attendance count includes complimentary entries but excludes entries by children under the age of three.

⁽³⁾Per capita guest spending is used to analyze guest spending trends and is defined as total revenue from ticket sales and sales of food, beverage and merchandise in our theme parks, divided by total theme park attendance.

⁽⁴⁾Occupancy is used to analyze the usage of available capacity at hotels and is defined as the number of room nights occupied by guests as a percentage of available hotel room nights.

⁽⁵⁾Available hotel room nights are defined as the total number of room nights that are available at our hotels and at DVC properties located at our theme parks and resorts that are not utilized by DVC members. Available hotel room nights include rooms temporarily taken out of service.

⁽⁶⁾Per room guest spending is used to analyze guest spending at our hotels and is defined as total revenue from room rentals and sales of food, beverage and merchandise at our hotels, divided by total occupied hotel room nights.

Costs and Expenses

Operating expenses include operating labor, which decreased $698 million from $4,595 million to $3,897 million, cost of goods sold and distribution costs, which decreased $384 million from $2,151 million to $1,767 million, and infrastructure costs, which increased $67 million from $1,754 million to $1,821 million. The decrease in operating labor was primarily due to lower volumes and the benefit of government credits for certain employee costs, partially offset by inflation and new guest offerings. Lower cost of goods sold and distribution costs were due to lower volumes. The increase in infrastructure costs includes the

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF