10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
 
Commission File Number 1-11605
January 2, 2016
 
 
 
 
 
 
 
 
Incorporated in Delaware
 
I.R.S. Employer Identification
 
 
No. 95-4545390
500 South Buena Vista Street, Burbank, California 91521
(818) 560-1000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer (do not check if smaller reporting company)
 
¨
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
There were 1,631,570,150 shares of common stock outstanding as of February 3, 2016.




PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per share data)
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Revenues:
 
 
 
Services
$
12,622

 
$
10,727

Products
2,622

 
2,664

Total revenues
15,244

 
13,391

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

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

 
212

Income before income taxes
4,358

 
3,362

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

 
2,244

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

 
$
2,182

 
 
 
 
Earnings per share attributable to Disney:
 
 
 
Diluted
$
1.73

 
$
1.27

 
 
 
 
Basic
$
1.74

 
$
1.28

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

 
1,717

 
 
 
 
Basic
1,654

 
1,700

 
 
 
 
Dividends declared per share
$
0.71

 
$
1.15

See Notes to Condensed Consolidated Financial Statements

2



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

 
$
2,244

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

Pension and postretirement medical plan adjustments
42

 
44

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

Comprehensive income
2,811

 
2,312

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

 
20

Comprehensive income attributable to Disney
$
2,832

 
$
2,270

See Notes to Condensed Consolidated Financial Statements





3


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

 
$
4,269

Receivables
10,298

 
8,019

Inventories
1,434

 
1,571

Television costs and advances
811

 
1,170

Deferred income taxes

 
767

Other current assets
924

 
962

Total current assets
17,768

 
16,758

Film and television costs
6,330

 
6,183

Investments
3,268

 
2,643

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

 
42,745

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

 
17,901

Projects in progress
6,485

 
6,028

Land
1,244

 
1,250

 
25,487

 
25,179

Intangible assets, net
7,104

 
7,172

Goodwill
27,818

 
27,826

Other assets
2,346

 
2,421

Total assets
$
90,121

 
$
88,182

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

 
$
7,844

Current portion of borrowings
5,950

 
4,563

Unearned royalties and other advances
3,526

 
3,927

Total current liabilities
18,796

 
16,334

Borrowings
12,965

 
12,773

Deferred income taxes
3,874

 
4,051

Other long-term liabilities
6,288

 
6,369

Commitments and contingencies (Note 10)


 


Equity
 
 
 
Preferred stock, $.01 par value, Authorized – 100 million shares, Issued – none

 

Common stock, $.01 par value, Authorized – 4.6 billion shares, Issued – 2.9 billion
shares at January 2, 2016 and 2.8 billion shares at October 3, 2015
35,249

 
35,122

Retained earnings
60,734

 
59,028

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

 
91,729

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

 
44,525

Noncontrolling interests
4,240

 
4,130

Total equity
48,198

 
48,655

Total liabilities and equity
$
90,121

 
$
88,182

See Notes to Condensed Consolidated Financial Statements

4



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

 
$
2,244

Depreciation and amortization
607

 
592

Gains on sales of investments
(27
)
 

Deferred income taxes
551

 
290

Equity in the income of investees
(474
)

(212
)
Cash distributions received from equity investees
206

 
197

Net change in film and television costs and advances
705

 
114

Equity-based compensation
106

 
104

Other
144

 
171

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

 
92

Other assets
91

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

 
617

Cash provided by operations
2,362

 
1,855

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

 

Acquisitions
(400
)
 

Other
(32
)
 
7

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

 
2,747

Borrowings
382

 
69

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

 
65

Contributions from noncontrolling interest holders

 
351

Other
107

 
66

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

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

 
1,656

Cash and cash equivalents, beginning of period
4,269

 
3,421

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

 
$
5,077

See Notes to Condensed Consolidated Financial Statements

5



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

 
$
4,130

 
$
48,655

 
$
44,958

 
$
3,220

 
$
48,178

Comprehensive income
2,832

 
(21
)
 
2,811

 
2,270

 
42

 
2,312

Equity compensation activity
128

 

 
128

 
179

 

 
179

Dividends
(1,168
)
 

 
(1,168
)
 
(1,948
)
 

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

 
(2,352
)
 
(1,303
)
 

 
(1,303
)
Contributions

 

 

 

 
351

 
351

Distributions and other
(7
)
 
131

 
124

 
9

 
15

 
24

Ending balance
$
43,958

 
$
4,240

 
$
48,198

 
$
44,165

 
$
3,628

 
$
47,793

See Notes to Condensed Consolidated Financial Statements



6



THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
 
1.
Principles of Consolidation
These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the quarter ended January 2, 2016 are not necessarily indicative of the results that may be expected for the year ending October 1, 2016. Certain reclassifications have been made in the prior-year financial statements to conform to the current-year presentation.
These financial statements should be read in conjunction with the Company’s 2015 Annual Report on Form 10-K.
The Company enters into relationships or investments with other entities that may be a variable interest entity (VIE). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE (as defined by ASC 810-10-25-38). Disneyland Paris, Hong Kong Disneyland Resort (HKDL) and Shanghai Disney Resort (collectively the International Theme Parks) are VIEs. Company subsidiaries (the Management Companies) have management agreements with the International Theme Parks, which provide the Management Companies, subject to certain protective rights of joint venture partners, with the ability to direct the day-to-day operating activities and the development of business strategies that we believe most significantly impact the economic performance of the International Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the International Theme Parks. Therefore, the Company has consolidated the International Theme Parks in its financial statements.
The terms “Company,” “we,” “us,” and “our” are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted.
 
2.
Segment Information
The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. Fiscal 2015 segment financial information has been restated to reflect the combination of the Consumer Products and Interactive segments into a single segment effective at the beginning of fiscal 2016.
Segment operating results reflect earnings before corporate and unallocated shared expenses, restructuring and impairment charges, interest expense, income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees. Corporate and unallocated shared expenses principally consist of corporate functions, executive management and certain unallocated administrative support functions.
Equity in the income of investees is included in segment operating income as follows: 
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Media Networks
 
 
 
Cable Networks
$
214

 
$
242

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

 
213

Vice Gain
332

 

Other

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

 
$
212

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

7

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


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

 
$
5,860

Parks and Resorts
4,281

 
3,910

Studio Entertainment
2,721

 
1,858

Consumer Products & Interactive Media
1,910

 
1,763

 
$
15,244

 
$
13,391

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

 
$
1,495

Parks and Resorts
981

 
805

Studio Entertainment
1,014

 
544

Consumer Products & Interactive Media
860

 
701

 
$
4,267

 
$
3,545


(1) Studio Entertainment segment revenues and operating income include an allocation of Consumer Products & Interactive Media revenues, which is meant to reflect royalties on sales of merchandise based on certain film properties. The increase to Studio Entertainment revenues and operating income and corresponding decrease to Consumer Products & Interactive Media revenues and operating income totaled $262 million and $145 million for the quarters ended January 2, 2016 and December 27, 2014, respectively.
A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Segment operating income
$
4,267

 
$
3,545

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

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

 

Income before income taxes
$
4,358

 
$
3,362

 
3.
Acquisitions
Vice/A&E
Vice is a media company targeting a millennial audience through news and pop culture content and creative brand integration. During the first quarter of fiscal 2016, A&E acquired an 8% interest in Vice in exchange for a 49.9% interest in one of A&E’s cable channels, H2, which will be rebranded as VICELAND and programmed with Vice content. As a result of this exchange, A&E recognized a net non-cash gain based on the estimated fair value of H2. The Company’s share of the Vice Gain totaled $332 million and was recorded in "Equity in the income of investees" in the Condensed Consolidated Statement of Income for the quarter ended January 2, 2016. At January 2, 2016, A&E had a 20% interest in Vice.
In addition, during the first quarter of fiscal 2016, the Company acquired an 11% interest in Vice for $400 million of cash.
The Company accounts for its interests in A&E and Vice as equity method investments.
Maker Studios
On May 7, 2014, the Company acquired Maker Studios, Inc. (Maker), a leading network of online video content, for approximately $500 million of cash consideration. Maker shareholders were eligible to receive up to $450 million of additional

8

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


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

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

 
$
408

 
$

 
$
1

 
$
2,739

Commercial paper with original maturities greater than three months
100

 
1,599

 
(100
)
 
1

 
1,600

U.S. medium-term notes
13,873

 

 
(500
)
 
4

 
13,377

Foreign currency denominated debt and other obligations(2)
714

 
91

 
(64
)
 
(74
)
 
667

International Theme Parks borrowings(3)
319

 
291

 

 
(78
)
 
532

Total
$
17,336

 
$
2,389

 
$
(664
)
 
$
(146
)
 
$
18,915

(1) 
Borrowings and payments are reported net.
(2) 
The other activity is primarily market value adjustments for debt with qualifying hedges.
(3) 
The other activity is primarily the conversion of HKDL debt into equity. See Note 5 for further discussion of the transaction.
The Company has bank facilities with a syndicate of lenders to support commercial paper borrowings. The following is a summary of the bank facilities at January 2, 2016:
 
Committed
Capacity
 
Capacity
Used
 
Unused
Capacity
Facility expiring March 2016
$
1,500

 
$

 
$
1,500

Facility expiring June 2017
2,250

 

 
2,250

Facility expiring March 2019
2,250

 

 
2,250

Total
$
6,000

 
$

 
$
6,000

All of the above bank facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. The spread above LIBOR can range from 0.23% to 1.63%. The Company also has the ability to issue up to $800 million of letters of credit under the facility expiring in March 2019, which if utilized, reduces available borrowings under this facility. As of January 2, 2016, $187 million of letters of credit were outstanding, of which none were issued under this facility. The facilities contain only one financial covenant, relating to interest coverage, which the Company met on January 2, 2016 by a significant margin, and specifically exclude certain entities, including the International Theme Parks, from any representations, covenants, or events of default.
On January 8, 2016, the Company issued $3.0 billion in debt under its U.S. medium-term note program. The proceeds will be used for general corporate purposes.


9

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


Interest expense, net
Interest and investment income and interest expense are reported net in the Condensed Consolidated Statements of Income and consist of the following (net of capitalized interest):
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Interest expense
$
(66
)
 
$
(69
)
Interest and investment income
42

 
11

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

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

5.
International Theme Park Investments
At January 2, 2016, the Company had an 81% effective ownership interest in the operations of Disneyland Paris, a 47% ownership interest in the operations of HKDL and a 43% ownership interest in the operations of Shanghai Disney Resort, all of which are VIEs consolidated in the Company’s financial statements. See Note 1 for the Company’s policy on consolidating VIEs.
The following tables present summarized balance sheet information for the Company as of January 2, 2016 and October 3, 2015, reflecting the impact of consolidating the International Theme Parks balance sheets.
 
As of January 2, 2016
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
3,489

 
$
812

 
$
4,301

Other current assets
13,231

 
236

 
13,467

Total current assets
16,720

 
1,048

 
17,768

Investments/Advances
7,759

 
(4,491
)
 
3,268

Parks, resorts and other property
17,445

 
8,042

 
25,487

Other assets
43,533

 
65

 
43,598

Total assets
$
85,457

 
$
4,664

 
$
90,121

 
 
 
 
 
 
Current portion of borrowings
$
5,950

 
$

 
$
5,950

Other current liabilities
11,994

 
852

 
12,846

Total current liabilities
17,944

 
852

 
18,796

Borrowings
12,433

 
532

 
12,965

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

 
200

 
10,162

Equity
45,118

 
3,080

 
48,198

Total liabilities and equity
$
85,457

 
$
4,664

 
$
90,121

 

10

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


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

 
$
781

 
$
4,269

Other current assets
12,237

 
252

 
12,489

Total current assets
15,725

 
1,033

 
16,758

Investments/Advances
7,505

 
(4,862
)
 
2,643

Parks, resorts and other property
17,431

 
7,748

 
25,179

Other assets
43,540

 
62

 
43,602

Total assets
$
84,201

 
$
3,981

 
$
88,182

 
 
 
 
 
 
Current portion of borrowings
$
4,562

 
$
1

 
$
4,563

Other current liabilities
11,331

 
440

 
11,771

Total current liabilities
15,893

 
441

 
16,334

Borrowings
12,454

 
319

 
12,773

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

 
195

 
10,420

Equity
45,629

 
3,026

 
48,655

Total liabilities and equity
$
84,201

 
$
3,981

 
$
88,182

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

 
$
493

 
$
15,244

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

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

 
67

 
474

Income before income taxes
4,387

 
(29
)
 
4,358

Income taxes
(1,448
)
 

 
(1,448
)
Net income
$
2,939

 
$
(29
)
 
$
2,910

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

11

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


The following table presents summarized cash flow statement information of the Company for the quarter ended January 2, 2016, reflecting the impact of consolidating the International Theme Parks cash flow statements. 
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash provided by operations
$
2,288

 
$
74

 
$
2,362

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

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

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

 
31

 
32

Cash and cash equivalents, beginning of period
3,488

 
781

 
4,269

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

 
$
812

 
$
4,301

Disneyland Paris    
During calendar 2015, Disneyland Paris completed a recapitalization consisting of the following:
A €0.4 billion equity rights offering of which the Company funded €0.2 billion in February 2015. The Company purchased shares that were unsubscribed by other Disneyland Paris shareholders, which increased the Company’s effective ownership by approximately four percentage points.
In February 2015, the Company converted €0.6 billion of its loans to Disneyland Paris into equity at a conversion price of €1.25 per share. The conversion increased the Company’s effective ownership by an additional 23 percentage points. In addition, Disneyland Paris repaid €0.3 billion that was outstanding under then existing lines of credit from the Company. These lines of credit have been replaced by a new €0.4 billion line of credit from the Company bearing interest at EURIBOR plus 2% and maturing in 2023. There is no outstanding balance under the new line of credit at January 2, 2016. As of January 2, 2016, the total outstanding balance of loans provided by the Company to Disneyland Paris was €1.0 billion.
In September 2015, the Company completed a mandatory tender offer to the other Disneyland Paris shareholders and acquired €0.1 billion in shares at €1.25 per share, which increased the Company’s effective ownership by an additional eight percentage points.
Following the completion of the mandatory tender offer and to offset the dilution caused by the loan conversion, in November 2015 certain Disneyland Paris shareholders purchased €0.05 billion in shares from the Company at €1.25 per share, which decreased the Company’s effective ownership by four percentage points.
As of January 2, 2016, the Company had an 81% effective ownership interest in Disneyland Paris.
Hong Kong Disneyland Resort
At January 2, 2016, the Government of the Hong Kong Special Administrative Region (HKSAR) and the Company had 53% and 47% equity interests in HKDL, respectively. HKSAR holds a right to receive additional shares over time to the extent HKDL exceeds certain return on asset performance targets. The amount of additional shares HKSAR can receive is capped on both an annual and cumulative basis and could decrease the Company’s equity interest by up to an additional 7 percentage points over a period no shorter than 16 years.
HKDL is building a third hotel at the resort, which is expected to open in 2017 and cost approximately $550 million. To fund the construction, the Company will contribute approximately $219 million of equity, and HKSAR will convert an equal amount of its outstanding loan to HKDL into equity. Additionally, the Company and HKSAR will provide shareholder loans of up to approximately $149 million and $104 million, respectively. The loans will mature on dates from fiscal 2022 through fiscal 2025 and bear interest at a rate of three month HIBOR plus 2%. As of January 2, 2016, the Company has funded $181 million of equity and HKSAR has converted $181 million of its loan to equity. To date, neither the Company nor HKSAR have funded any of the shareholder loans.

12

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


Shanghai Disney Resort
The Company and Shanghai Shendi (Group) Co., Ltd (Shendi) are constructing a Disney Resort (Shanghai Disney Resort) in the Pudong district of Shanghai that initially includes a theme park, two hotels and a retail, dining and entertainment complex. The park opening is planned for June 16, 2016.
The investment in Shanghai Disney Resort will be funded in accordance with each shareholder’s ownership percentage, with approximately 67% from equity contributions and 33% from shareholder loans. As of January 2, 2016, the outstanding balance of loans provided by the Company and Shendi to Shanghai Disney Resort were 2.2 billion yuan ($345 million) and 2.9 billion yuan ($450 million), respectively. The Company and Shendi have committed to fund an additional 2.6 billion yuan ($400 million) and 3.4 billion yuan ($531 million) of loans, respectively. Shanghai Disney Resort is owned through two joint venture companies, in which Shendi owns 57% and the Company owns 43%. A management company, in which the Company has a 70% interest and Shendi a 30% interest, is responsible for designing, constructing and operating Shanghai Disney Resort.

6.
Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows: 
 
Pension Plans
 
Postretirement Medical Plans
 
Quarter Ended
 
Quarter Ended
 
January 2, 2016
 
December 27, 2014
 
January 2, 2016
 
December 27, 2014
Service costs
$
80

 
$
83

 
$
3

 
$
4

Interest costs
115

 
131

 
15

 
17

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

 
4

 

 

Recognized net actuarial loss/(gain)
61

 
62

 
2

 
3

Net periodic benefit cost
$
71

 
$
102

 
$
9

 
$
14

During the quarter ended January 2, 2016, the Company did not make any material contributions to its pension and postretirement medical plans. The Company expects total pension and postretirement medical plan contributions in fiscal 2016 of approximately $900 million to $950 million. Final minimum pension plan funding requirements for fiscal 2016 will be determined based on our January 1, 2016 funding actuarial valuation, which will be available in the fourth quarter of fiscal 2016.

7.
Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period and are calculated using the treasury stock method for equity-based compensation awards (Awards). A reconciliation of the weighted average number of common and common equivalent shares outstanding and Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, are as follows: 
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Shares (in millions):
 
 
 
Weighted average number of common and common equivalent shares outstanding (basic)
1,654

 
1,700

Weighted average dilutive impact of Awards
14

 
17

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

 
1,717

Awards excluded from diluted earnings per share
4

 
9

 

13

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


8.
Equity
The Company paid the following dividends in fiscal 2016 and 2015:
Per Share
 
Total Paid
 
Payment Timing
 
Related to Fiscal Period
$0.71
$1.2 billion
 
Second Quarter of Fiscal 2016
Second Half 2015
$0.66
 
$1.1 billion
 
Fourth Quarter of Fiscal 2015
 
First Half 2015
$1.15
$1.9 billion
 
Second Quarter of Fiscal 2015
2014
During the quarter ended January 2, 2016, the Company repurchased 21 million shares of its common stock for $2.4 billion. As of January 2, 2016, the Company had remaining authorization in place to repurchase approximately 334 million additional shares. The repurchase program does not have an expiration date.
The following table summarizes the changes in each component of accumulated other comprehensive income (loss) (AOCI) including our proportional share of equity method investee amounts, net of 37% estimated tax:
 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
 
Investments, net
 
Cash Flow Hedges
 
Balance at October 3, 2015
$
13

 
$
334

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

 

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

 
(66
)
 
42

 

 
(24
)
Balance at January 2, 2016
$
10

 
$
309

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

 
$
204

 
$
(2,196
)
 
$
(76
)
 
$
(1,968
)
Quarter Ended December 27, 2014:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising
  during the period
(16
)
 
176

 

 
(75
)
 
85

Reclassifications of net (gains)
  losses to net income

 
(41
)
 
44

 

 
3

Balance at December 27, 2014
$
84

 
$
339

 
$
(2,152
)
 
$
(151
)
 
$
(1,880
)


14

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


Details about AOCI components reclassified to net income are as follows:
Gains/(losses) in net income:
 
Affected line item in the
  Condensed Consolidated
  Statements of Income:
 
Quarter Ended
 
 
January 2,
2016
 
December 27,
2014
Cash flow hedges
 
Primarily revenue
 
$
105

 
$
65

Estimated tax
 
Income taxes
 
(39
)
 
(24
)
 
 
 
 
66

 
41

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

 
26

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

 
$
(3
)
At January 2, 2016 and October 3, 2015, the Company held available-for-sale investments in unrecognized gain positions totaling $20 million and $21 million, respectively, and no investments in significant unrecognized loss positions.

9.
Equity-Based Compensation
Compensation expense related to stock options, stock appreciation rights and restricted stock units (RSUs) is as follows:
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Stock options/rights (1)
$
23

 
$
25

RSUs
83

 
79

Total equity-based compensation expense (2)
$
106

 
$
104

Equity-based compensation expense capitalized during the period
$
15

 
$
15

 
(1) 
Includes stock appreciation rights.
(2) 
Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. During the quarters ended January 2, 2016 and December 27, 2014, amortization of previously capitalized equity-based compensation totaled $17 million and $9 million, respectively.
Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $233 million and $798 million, respectively, as of January 2, 2016.
The weighted average grant date fair values of options issued during the quarters ended January 2, 2016 and December 27, 2014 were $31.17 and $22.61, respectively.
During the quarter ended January 2, 2016, the Company made equity compensation grants consisting of 3.8 million stock options and 3.2 million RSUs.

10.
Commitments and Contingencies
Legal Matters
Beef Products, Inc. v. American Broadcasting Companies, Inc. On September 13, 2012, plaintiffs filed an action in South Dakota state court against certain subsidiaries and employees of the Company and others, asserting claims for defamation arising from alleged false statements and implications, statutory and common law product disparagement, and tortious interference with existing and prospective business relationships. The claims arise out of ABC News reports published in March and April 2012 that discussed the subject of labeling requirements for production processes related to a product one plaintiff produces that is added to ground beef before sale to consumers. Plaintiffs seek actual and consequential damages in excess of

15

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


$400 million, statutory damages (including treble damages) pursuant to South Dakota’s Agricultural Food Products Disparagement Act, and punitive damages. On July 9, 2013, the Company moved in state court to dismiss all claims and on March 27, 2014, the state court dismissed certain common law disparagement counts as preempted by South Dakota’s produce disparagement statute, but denied the motion on the remaining claims. On April 23, 2014, the Company petitioned the South Dakota Supreme Court to allow a discretionary appeal seeking reversal of the state court’s order permitting the remaining common law disparagement claims to proceed and also seeking reversal of its decision to allow certain claims to proceed as defamation claims. On May 22, 2014, the South Dakota Supreme Court denied the Company’s petition. On May 23, 2014, the Company answered the Complaint. Trial is set for June 2017. At this time, the Company is not able to predict the ultimate outcome of this matter, nor can it estimate the range of possible loss.
The Company, together with, in some instances, certain of its directors and officers, is a defendant or codefendant in various other legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses.
Management does not believe that the Company has incurred a probable material loss by reason of any of the above actions.
Contractual Guarantees
The Company has guaranteed bond issuances by the Anaheim Public Authority that were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the Disneyland Resort. Revenues from sales, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of January 2, 2016, the remaining debt service obligation guaranteed by the Company was $325 million, of which $60 million was principal. To the extent that tax revenues exceed the debt service payments in subsequent periods, the Company would be reimbursed for any previously funded shortfalls. To date, tax revenues have exceeded the debt service payments for these bonds.
Long-Term Receivables and the Allowance for Credit Losses
The Company has accounts receivable with original maturities greater than one year related to the sale of television program rights and vacation ownership units. Allowances for credit losses are established against these receivables as necessary.
The Company estimates the allowance for credit losses related to receivables from the sale of television programs based upon a number of factors, including historical experience and the financial condition of individual companies with which we do business. The balance of television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $0.9 billion as of January 2, 2016. The activity in the current period related to the allowance for credit losses was not material.
The Company estimates the allowance for credit losses related to receivables from sales of its vacation ownership units based primarily on historical collection experience. Estimates of uncollectible amounts also consider the economic environment and the age of receivables. The balance of mortgage receivables recorded in other non-current assets, net of a related allowance for credit losses of approximately 4%, was approximately $0.7 billion as of January 2, 2016. The activity in the current period related to the allowance for credit losses was not material.
Income Taxes
During the quarter ended January 2, 2016, the Company decreased its gross unrecognized tax benefits by $18 million to $894 million including a $10 million decrease to income tax expense.
In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to resolutions of open tax matters. These resolutions would reduce our unrecognized tax benefits by approximately $161 million, of which $60 million would reduce our income tax expense and effective tax rate if recognized. 


16

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


11. Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and is classified in one of the following three categories:
Level 1 - Quoted prices for identical instruments in active markets
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level: 
 
Fair Value Measurement at January 2, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
35

 
$

 
$

 
$
35

Derivatives
 
 
 
 
 
 
 
Interest rate

 
69

 

 
69

Foreign exchange

 
926

 

 
926

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(23
)
 

 
(23
)
Foreign exchange

 
(184
)
 

 
(184
)
Other

 
(36
)
 

 
(36
)
Other

 

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

 
$
752

 
$
(70
)
 
$
717

Fair value of borrowings
$

 
$
18,355

 
$
1,009

 
$
19,364

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

 
$

 
$

 
$
36

Derivatives
 
 
 
 
 
 
 
Interest rate

 
101

 

 
101

Foreign exchange

 
910

 

 
910

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Foreign exchange

 
(178
)
 

 
(178
)
Other

 
(38
)
 

 
(38
)
Other

 

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

 
$
795

 
$
(96
)
 
$
735

Fair value of borrowings
$

 
$
17,036

 
$
752

 
$
17,788

 The fair values of Level 2 derivatives are primarily determined by internal discounted cash flow models that use observable inputs such as interest rates, yield curves and foreign currency exchange rates. Counterparty credit risk, which is mitigated by master netting agreements and collateral posting arrangements with certain counterparties, did not have a material impact on derivative fair value estimates.

17

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


Level 2 borrowings, which include commercial paper and U.S. medium-term notes, are valued based on quoted prices for similar instruments in active markets.
The fair value of the Level 3 other liabilities represents the fair value of the contingent consideration for Maker.
Level 3 borrowings, which include International Theme Park borrowings and other foreign currency denominated borrowings, are generally valued based on historical market transactions, prevailing market interest rates and the Company’s current borrowing cost and credit risk.
The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.

12. Derivative Instruments
The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.
The Company’s derivative positions measured at fair value are summarized in the following tables: 
 
As of January 2, 2016
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
393

 
$
257

 
$
(51
)
 
$
(15
)
Interest rate

 
69

 
(23
)
 

Other

 

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

 
101

 
(111
)
 
(7
)
Other

 

 

 
(10
)
Gross fair value of derivatives
568

 
427

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

 
24

Cash collateral received
(260
)
 
(146
)
 

 

Net derivative positions
$
153

 
$
207

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

 
$
271

 
$
(54
)
 
$
(17
)
Interest rate

 
101

 

 

Other

 

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

 
87

 
(102
)
 
(5
)
Other

 

 

 
(17
)
Gross fair value of derivatives
552

 
459

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

 
23

Cash collateral received
(238
)
 
(191
)
 

 

Net derivative positions
$
178

 
$
212

 
$
(5
)
 
$
(19
)

18

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


Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company typically uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate management activities.
The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of January 2, 2016 and October 3, 2015, the total notional amount of the Company’s pay-floating interest rate swaps was $5.9 billion and $6.4 billion, respectively. The following table summarizes adjustments related to fair value hedges included in "Interest expense, net" in the Condensed Consolidated Statements of Income. 
 
Quarter Ended
 
January 2,
2016
 
December 27,
2014
Gain (loss) on interest rate swaps
$
(55
)
 
$
10

Gain (loss) on hedged borrowings
55

 
(10
)
In addition, during the quarters ended January 2, 2016 and December 27, 2014, the Company realized net benefits of $23 million and $25 million, respectively, in interest expense, net related to the pay-floating interest rate swaps.
The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at January 2, 2016 or at October 3, 2015 and gains and losses related to pay-fixed swaps recognized in earnings for the quarters ended January 2, 2016 and December 27, 2014 were not material.
Foreign Exchange Risk Management
The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.
 
The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed four years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the euro, Japanese yen, Canadian dollar and British pound. Cross-currency swaps are used to effectively convert foreign currency-denominated borrowings into U.S. dollar denominated borrowings.
The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of January 2, 2016 and October 3, 2015, the notional amounts of the Company’s net foreign exchange cash flow hedges were $6.2 billion and $6.5 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the quarters ended January 2, 2016 and December 27, 2014 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $336 million.
Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at January 2, 2016 and October 3, 2015 were $3.1 billion and $3.3 billion, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the net foreign exchange gains or losses on the foreign exchange contracts we entered into to mitigate our exposure with respect to foreign currency

19

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


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

 
$
12

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

 
205

 
(12
)
 
(12
)
Net gains (losses)
$
(10
)
 
$
(10
)
 
$
(2
)
 
$

Commodity Price Risk Management
The Company is subject to the volatility of commodities prices and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The notional amount of these commodities contracts at January 2, 2016 and October 3, 2015 and related gains or losses recognized in earnings for the quarters ended January 2, 2016 and December 27, 2014 were not material.
Risk Management – Other Derivatives Not Designated as Hedges
The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which include certain commodity swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings. The fair value of these contracts at January 2, 2016 and October 3, 2015 were not material. The related gains or losses recognized in earnings were not material for the quarters ended January 2, 2016 and December 27, 2014.
Contingent Features and Cash Collateral
The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or the counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $4 million and $7 million on January 2, 2016 and October 3, 2015, respectively.
 
13. Restructuring and Impairment Charges
The Company recorded $81 million of restructuring and impairment charges in the current quarter for an investment impairment and contract termination and severance costs.

14. New Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance that replaces the existing accounting standards for revenue recognition. The guidance provides a five step framework to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services. Subsequently, the FASB has issued exposure drafts to amend certain aspects of the guidance, including revenue recognition associated with the licensing of intellectual property (IP). The FASB has indicated that it expects to issue the final guidance on IP licensing in the next few months. The new guidance is effective beginning the first quarter of the Company’s 2019 fiscal year (with early adoption permitted beginning fiscal year 2018). The guidance may be adopted either by restating all years presented in the Company’s financial statements or by recording the impact of adoption as an adjustment to

20

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


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


21



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
Consolidated Results and Non-segment Items
Seasonality
Segment Results
Corporate and Unallocated Shared Expenses
Significant Developments
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
CONSOLIDATED RESULTS AND NON-SEGMENT ITEMS
Our summary consolidated results are presented below: 
 
Quarter Ended
 
% Change
(in millions, except per share data)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues:
 
 
 
 
 
Services
$
12,622

 
$
10,727

 
18
 %
Products
2,622

 
2,664

 
(2)
 %
Total revenues
15,244

 
13,391

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

 
nm

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

 
212

 
>100
 %
Income before income taxes
4,358

 
3,362

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

 
2,244

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

 
$
2,182

 
32
 %
Diluted earnings per share attributable to Disney
$
1.73

 
$
1.27

 
36
 %


22

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


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

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

 
11

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

23

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


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

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

 
$
62

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

SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended January 2, 2016 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
Media Networks revenues are subject to seasonal advertising patterns, changes in viewership levels and timing of program sales. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Affiliate revenues are typically collected ratably throughout the year.
Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods.
Studio Entertainment revenues fluctuate due to the timing and performance of releases in the theatrical, home entertainment and television markets. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
Consumer Products & Interactive Media revenues are influenced by seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first fiscal quarter, and the timing and performance of theatrical and game releases and cable programming broadcasts.


24

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


SEGMENT RESULTS
The Company evaluates the performance of its operating segments based on segment operating income, which is shown below along with segment revenues: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues:
 
 
 
 
 
Media Networks
$
6,332

 
$
5,860

 
8
 %
Parks and Resorts
4,281

 
3,910

 
9
 %
Studio Entertainment
2,721

 
1,858

 
46
 %
Consumer Products & Interactive Media
1,910

 
1,763

 
8
 %
 
$
15,244

 
$
13,391

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

 
$
1,495

 
(6)
 %
Parks and Resorts
981

 
805

 
22
 %
Studio Entertainment
1,014

 
544

 
86
 %
Consumer Products & Interactive Media
860

 
701

 
23
 %
 
$
4,267

 
$
3,545

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

 
$
3,545

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

 
nm

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

 

 
nm

Income before income taxes
$
4,358


$
3,362

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

 
$
37

 
 %
Broadcasting
21

 
21

 
 %
Total Media Networks
58

 
58

 
 %
Parks and Resorts
 
 
 
 


Domestic
318

 
297

 
(7)
 %
International
84

 
89

 
6
 %
Total Parks and Resorts
402

 
386

 
(4)
 %
Studio Entertainment
13

 
14

 
7
 %
Consumer Products & Interactive Media
14

 
16

 
13
 %
Corporate
63

 
61

 
(3)
 %
Total depreciation expense
$
550

 
$
535

 
(3)
 %

25

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


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

 
$
5

 
 %
Parks and Resorts
1

 
1

 
 %
Studio Entertainment
20

 
21

 
5
 %
Consumer Products & Interactive Media
31

 
30

 
(3)
 %
Total amortization of intangible assets
$
57

 
$
57

 
 %

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

 
$
2,854

 
4
 %
Advertising
2,619

 
2,335

 
12
 %
TV/SVOD distribution and other
753

 
671

 
12
 %
Total revenues
6,332

 
5,860

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

 
213

 
(33)
 %
Operating Income
$
1,412

 
$
1,495

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

26

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


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

 
$
4,166

 
9
 %
Broadcasting
1,811

 
1,694

 
7
 %
 
$
6,332

 
$
5,860

 
8
 %
Segment operating income
 
 
 
 
 
Cable Networks
$
1,189

 
$
1,255

 
(5)
 %
Broadcasting
223

 
240

 
(7)
 %
 
$
1,412

 
$
1,495

 
(6)
 %
Restructuring and impairment charges
The Company recorded restructuring and impairment charges of $81 million related to Media Networks in the quarter for an investment impairment and contract termination and severance costs.

Parks and Resorts
Operating results for the Parks and Resorts segment are as follows: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues
 
 
 
 
 
Domestic
$
3,674

 
$
3,233

 
14
 %
International
607

 
677

 
(10)
 %
Total revenues
4,281

 
3,910

 
9
 %
Operating expenses
(2,475
)
 
(2,283
)
 
(8)
 %
Selling, general, administrative and other
(422
)
 
(435
)
 
3
 %
Depreciation and amortization
(403
)
 
(387
)
 
(4)
 %
Operating Income
$
981

 
$
805

 
22
 %
Revenues
Parks and Resorts revenues increased 9%, or $371 million, to $4.3 billion due to an increase of $441 million at our domestic operations, partially offset by a decrease of $70 million at our international operations. Operations benefited from a shift in the timing of the New Year’s holiday relative to our fiscal periods.
Revenue growth of 14% at our domestic operations reflected an 8% increase from higher average guest spending and a 6% increase from volume growth. Guest spending growth was due to higher average ticket prices for theme park admissions and cruise line sailings, increased food, beverage and merchandise spending and higher average hotel room rates. Higher volumes were due to attendance growth.
Revenues at our international operations reflected a 9% FX Impact and a 4% decrease from lower volumes, partially offset by an increase of 3% from higher average guest spending. Lower volumes were primarily due to a decrease in attendance

27

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


at Disneyland Paris driven by the closure of the park for four days in November 2015. Guest spending growth was primarily due to increased merchandise, food and beverage spending and higher average ticket prices at Disneyland Paris.
The following table presents supplemental park and hotel statistics: 
 
Domestic
 
International (2)
 
Total
 
Quarter Ended
 
Quarter Ended
 
Quarter Ended
 
Jan. 2, 2016
 
Dec. 27, 2014
 
Jan. 2, 2016
 
Dec. 27, 2014
 
Jan. 2, 2016
 
Dec. 27, 2014
Parks
 
 
 
 
 
 
 
 
 
 
 
Increase/(decrease)
 
 
 
 
 
 
 
 
 
 
 
Attendance
10
%
 
7
%
 
(7)
 %
 
4
%
 
6
%
 
6
%
Per Capita Guest Spending
7
%
 
4
%
 
5
 %
 
5
%
 
7
%
 
4
%
Hotels (1)
 
 
 
 
 
 
 
 
 
 
 
Occupancy
92
%
 
89
%
 
77
 %
 
79
%
 
89
%
 
87
%
Available Room Nights (in thousands)
2,608

 
2,591

 
620

 
621

 
3,228

 
3,212

Per Room Guest Spending

$314

 

$288

 

$311

 

$319

 

$314

 

$293

(1)
Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverage and merchandise at the hotels. Hotel statistics include rentals of Disney Vacation Club units.
(2)
Per capita guest spending growth rate is stated on a constant currency basis. Per room guest spending is stated at the fiscal 2015 quarter average foreign exchange rate. The euro to U.S. dollar weighted average foreign currency exchange rate was $1.10 and $1.25 for the quarters ended January 2, 2016 and December 27, 2014, respectively.
Costs and Expenses
Operating expenses include operating labor, which increased $43 million from $1,119 million to $1,162 million, infrastructure costs, which increased $56 million from $407 million to $463 million, and cost of sales, which increased $42 million from $369 million to $411 million. The increase in operating labor was due to inflation, higher volumes and new guest offerings, partially offset by lower pension and postretirement medical costs. Higher infrastructure costs were driven by the dry-dock of the Disney Dream and inflation. The increase in cost of sales was primarily due to higher volumes. Other operating expenses, which include costs for such items as supplies, commissions and entertainment offerings, increased primarily due to new guest offerings, inflation and higher volumes. Operating labor, infrastructure costs and other operating expenses were also impacted by higher pre-opening expenses at Shanghai Disney Resort. Operating expense growth was partially offset by a 2% FX Impact, which had similar impacts on operating labor, infrastructure costs and cost of sales.
The increase in depreciation and amortization was associated with new attractions at Walt Disney World Resort, partially offset by a favorable FX Impact.
Segment Operating Income
Segment operating income increased 22%, or $176 million, to $981 million due to growth at our domestic operations, partially offset by a decrease at our international operations.


28

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


Studio Entertainment
Operating results for the Studio Entertainment segment are as follows: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues
 
 
 
 
 
Theatrical distribution
$
1,017

 
$
336

 
>100
 %
Home entertainment
722

 
678

 
6
 %
TV/SVOD distribution and other
982

 
844

 
16
 %
Total revenues
2,721

 
1,858

 
46
 %
Operating expenses
(1,064
)
 
(758
)
 
(40)
 %
Selling, general, administrative and other
(610
)
 
(521
)
 
(17)
 %
Depreciation and amortization
(33
)
 
(35
)
 
6
 %
Operating Income
$
1,014

 
$
544

 
86
 %
Revenues
The increase in theatrical distribution revenue was due to the strong performance of Star Wars: The Force Awakens in the current quarter, partially offset by an unfavorable FX Impact. Additionally, the current quarter included the release of The Good Dinosaur and the prior-year quarter included Big Hero 6.
The increase in home entertainment revenue was due to sales of Star Wars Classic titles, partially offset by an unfavorable FX Impact. Other significant titles in the current quarter include Inside Out, Marvel’s Ant-Man, Aladdin Diamond Release and Marvel’s Avengers: Age of Ultron, whereas significant titles in the prior-year quarter included Marvel’s Guardians of the Galaxy, Maleficent and Frozen.
The increase in TV/SVOD distribution and other revenue was due to increases of 14% from revenue share with the Consumer Products & Interactive Media segment driven by the success of merchandise based on Star Wars: The Force Awakens and 6% from TV/SVOD distribution, partially offset by a decrease of 3% from an unfavorable FX Impact. The increase in TV/SVOD distribution was due to growth internationally.
Costs and Expenses
Operating expenses include an increase of $283 million in film cost amortization, from $435 million to $718 million, primarily due to the impact of higher revenues. Operating expenses also include cost of goods sold and distribution costs, which increased $23 million, from $323 million to $346 million, due to higher theatrical distribution costs driven by Star Wars: The Force Awakens in the current quarter, partially offset by a favorable FX Impact.
Selling, general, administrative and other costs increased $89 million from $521 million to $610 million due to higher theatrical marketing expenses, partially offset by a favorable FX Impact. The increase in theatrical marketing expense was due to higher spending on Star Wars: The Force Awakens and The Good Dinosaur in the current quarter compared to Big Hero 6 in the prior-year quarter.
Segment Operating Income
Segment operating income increased $470 million to $1.0 billion due to growth from theatrical distribution, a higher revenue share with the Consumer Products & Interactive Media segment, growth in TV/SVOD distribution and increased home entertainment results, partially offset by an unfavorable FX Impact.


29

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


Consumer Products & Interactive Media
Operating results for the Consumer Products & Interactive Media segment are as follows: 
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Revenues
 
 
 
 
 
Licensing, publishing and games
$
1,300

 
$
1,109

 
17
 %
Retail and other
610

 
654

 
(7)
 %
Total revenues
1,910

 
1,763

 
8
 %
Operating expenses
(729
)
 
(725
)
 
(1)
 %
Selling, general, administrative and other
(276
)
 
(291
)
 
5
 %
Depreciation and amortization
(45
)
 
(46
)
 
2
 %
Operating Income
$
860

 
$
701

 
23
 %
Revenues
The 17% increase in licensing, publishing and games revenue was due to a 17% increase from our Merchandise Licensing business and a 1% increase from publishing, partially offset by a 1% decrease from games. The increases at Merchandise Licensing and publishing were primarily due to higher licensing revenues from Star Wars merchandise and the timing of minimum guarantee shortfall recognition at Merchandise Licensing, partially offset by an unfavorable FX Impact. Lower games revenue was primarily due to a decrease in unit sales of Disney Infinity and catalog titles and lower minimum guarantee shortfall recognition, partially offset by licensing revenues from Star Wars: Battlefront.
The 7% decrease in retail and other revenue reflected a 7% decrease from our Retail business due to lower comparable store sales in Europe and North America, an unfavorable FX Impact and a decrease in online sales in North America. Lower sales were due to the strong performance of merchandise based on Frozen in the prior-year quarter, partially offset by current quarter sales of Star Wars merchandise.
Costs and Expenses
Operating expenses include a $10 million decrease in cost of goods sold and distribution costs, from $499 million to $489 million, a $6 million increase in labor and occupancy costs, from $135 million to $141 million and a $4 million increase in product development, from $75 million to $79 million. The decrease in cost of goods sold and distribution costs was driven by lower volumes at games and retail and a favorable FX Impact, partially offset by inventory reserves for Disney Infinity and higher average unit costs at retail. Labor and occupancy costs were essentially flat as the impact of higher rent and labor cost inflation at retail was largely offset by a favorable FX Impact. The increase in product development was due to higher costs for new content.             
Selling, general, administrative and other costs decreased $15 million from $291 million to $276 million due to a favorable FX Impact.
Segment Operating Income
Segment operating income increased 23% to $860 million due to an increase at Merchandise Licensing and, to a lesser extent, publishing and games, partially offset by a decrease at retail and an unfavorable FX Impact.

CORPORATE AND UNALLOCATED SHARED EXPENSES
 
Quarter Ended
 
% Change
(in millions)
January 2,
2016
 
December 27,
2014
 
Better/
(Worse)
Corporate and unallocated shared expenses
$
(136
)
 
$
(125
)
 
(9)
 %

The increase in Corporate and unallocated shared expenses in the current quarter was primarily due to higher compensation costs.


30

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


SIGNIFICANT DEVELOPMENTS
Impact of Foreign Currency Exchange Rates
The Company has a foreign exchange risk management program that is intended to reduce earnings fluctuations associated with foreign currency exchange rate changes. As part of this program, we enter into foreign currency derivative contracts designed to hedge projected foreign currency denominated operating income exposures for periods that generally do not exceed four years and to hedge foreign currency denominated net monetary assets to protect the U.S. dollar equivalent value of these assets from foreign currency fluctuations. The economic or political conditions in a country could reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country. Based on our hedge portfolio and our projections of foreign currency exposure, we project an adverse impact to growth in segment operating results from fiscal 2015 to fiscal 2016 of approximately $500 million due to the strengthening of the U.S. dollar against major foreign currencies in which we transact.
Seven TV Investment
In December 2015, the Company reduced its common share ownership interest in Seven TV from 49% to 20% to comply with Russian regulations that limit foreign ownership of media companies, while maintaining our economic interest in the business. Seven TV operates an advertising-supported, free-to-air Disney Channel in Russia and is accounted for under the equity method. We understand that the Russian government will review the new structure for compliance during calendar year 2016 and depending on the outcome of that review, we could have an impairment of some or all of our approximately $300 million investment related to the Disney Channel in Russia.

FINANCIAL CONDITION
The change in cash and cash equivalents is as follows: 
 
Quarter Ended
 
% Change
Better/
(Worse)
(in millions)
January 2,
2016
 
December 27,
2014
 
Cash provided by operations
$
2,362

 
$
1,855

 
27
 %
Cash used in investing activities
(1,798
)
 
(991
)
 
(81)
 %
Cash (used in)/provided by financing activities
(468
)
 
897

 
nm

Impact of exchange rates on cash and cash equivalents
(64
)
 
(105
)
 
39
 %
Change in cash and cash equivalents
$
32

 
$
1,656

 
(98)
 %
Operating Activities
Cash provided by operating activities increased 27% to $2.4 billion for the current quarter compared to $1.9 billion in the prior-year quarter due to higher operating cash flow at our Studio Entertainment and Parks and Resorts segments. Higher operating cash flow at Studio Entertainment was primarily due to higher operating cash receipts due to increased revenue and lower operating cash disbursements driven by the timing of payments for marketing and participation costs. Higher operating cash flow at Parks and Resorts was due to higher operating cash receipts driven by increased revenue.
Film and Television Costs
The Company’s Studio Entertainment and Media Networks segments incur costs to acquire and produce feature film and television programming. Film and television production costs include all internally produced content such as live-action and animated feature films, animated direct-to-video programming, television series, television specials, theatrical stage plays or other similar product. Programming costs include film or television product licensed for a specific period from third parties for airing on the Company’s broadcast and cable networks and television stations. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities. Accordingly, we analyze our programming assets net of the related liability.
 

31

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


The Company’s film and television production and programming activity for the quarters ended January 2, 2016 and December 27, 2014 are as follows: 
 
Quarter Ended
(in millions)
January 2,
2016
 
December 27,
2014
Beginning balances:
 
 
 
Production and programming assets
$
7,353

 
$
6,386

Programming liabilities
(989
)
 
(875
)
 
6,364

 
5,511

Spending:
 
 
 
Television program licenses and rights
1,767

 
1,850

Film and television production
1,231

 
1,126

 
2,998

 
2,976

Amortization:
 
 
 
Television program licenses and rights
(2,558
)
 
(2,218
)
Film and television production
(1,145
)
 
(872
)
 
(3,703
)
 
(3,090
)
 
 
 
 
Change in film and television production and programming costs
(705
)
 
(114
)
Other non-cash activity
13

 
(42
)
Ending balances:
 
 
 
Production and programming assets
7,141

 
6,384

Programming liabilities
(1,469
)
 
(1,029
)
 
$
5,672

 
$
5,355

 
Investing Activities
Investing activities consist principally of investments in parks, resorts and other property and acquisition and divestiture activity. The Company’s investments in parks, resorts and other property for the quarters ended January 2, 2016 and December 27, 2014 are as follows: 
 
Quarter Ended
(in millions)
January 2,
2016
 
December 27,
2014
Media Networks
 
 
 
Cable Networks
$
27

 
$
15

Broadcasting
30

 
7

Total Media Networks
57

 
22

Parks and Resorts
 
 
 
Domestic
627

 
239

International
607

 
638

Total Parks and Resorts
1,234

 
877

Studio Entertainment
27

 
24

Consumer Products & Interactive Media
13

 
5

Corporate
75

 
70

 
$
1,406

 
$
998

Capital expenditures for the Parks and Resorts segment are principally for theme park and resort expansion, new attractions, cruise ships, recurring capital and capital improvements and systems infrastructure. The increase at our domestic parks and resorts was due to new attractions at Walt Disney World Resort and Disneyland Resort. The decrease at our international parks and resorts was due to lower construction spending for the Shanghai Disney Resort, partially offset by Hong Kong Disneyland Resort.

32

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


Capital expenditures at Media Networks primarily reflect investments in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities.
Capital expenditures at Consumer Products & Interactive Media primarily reflect investments in leasehold improvements at retail locations.
Capital expenditures at Corporate primarily reflect investments in corporate facilities, information technology and equipment.
The Company currently expects its fiscal 2016 capital expenditures will be approximately $0.8 billion higher than fiscal 2015 capital expenditures of $4.3 billion, due to increased investment at our domestic parks and resorts.
Other Investing Activities
During the current quarter, acquisitions totaled $400 million due to the acquisition of an 11% interest in Vice.

Financing Activities
Cash used in financing activities was $0.5 billion in the current quarter compared to cash provided by financing activities of $0.9 billion in the prior-year quarter.
Cash used in financing activities in the current quarter reflected repurchases of common stock of $2.4 billion, partially offset by net cash inflows from borrowings of $1.7 billion.
The decrease in cash provided by financing activities of $1.4 billion versus the prior-year quarter was due to an increase in repurchases of common stock of $1.0 billion and lower contributions from noncontrolling interest holders of $0.4 billion.
During the quarter ended January 2, 2016, the Company’s borrowing activity was as follows:
(in millions)
October 3,
2015
 
Borrowings
 
Payments
 
Other
Activity
 
January 2,
2016
Commercial paper with original maturities less than three months, net (1)
$
2,330

 
$
408

 
$

 
$
1

 
$
2,739

Commercial paper with original maturities greater than three months
100

 
1,599

 
(100
)
 
1

 
1,600

U.S. medium-term notes
13,873

 

 
(500
)
 
4

 
13,377

Foreign currency denominated debt and other obligations(2)
714

 
91

 
(64
)
 
(74
)
 
667

International Theme Parks borrowings(3)
319

 
291

 

 
(78
)
 
532

Total
$
17,336

 
$
2,389

 
$
(664
)
 
$
(146
)
 
$
18,915

(1) Borrowings and payments are reported net.
(2) 
The other activity is primarily market value adjustments for debt with qualifying hedges.
(3) 
The other activity is primarily the conversion of debt into HKDL equity. See Note 5 to the Condensed Consolidated Financial Statements for further discussion of the transaction.
The Company’s bank facilities as of January 2, 2016 were as follows: 
(in millions)
Committed
Capacity
 
Capacity
Used
 
Unused
Capacity
Bank facility expiring March 2016
$
1,500

 
$

 
$
1,500

Bank facility expiring June 2017
2,250

 

 
2,250

Bank facility expiring March 2019
2,250

 

 
2,250

Total
$
6,000

 
$

 
$
6,000

All of the above bank facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard & Poor’s. The spread above LIBOR can range from 0.23% to 1.63%. The Company also has the ability to issue up to $800 million of letters of credit under the facility expiring in March 2019, which if utilized,

33

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


reduces available borrowings under this facility. As of January 2, 2016, $187 million of letters of credit were outstanding, of which none were issued under this facility.
The Company may use commercial paper borrowings up to the amount of its unused bank facilities, in conjunction with term debt issuance and operating cash flow, to retire or refinance other borrowings before or as they come due.
On January 8, 2016, the Company issued $3.0 billion in debt under its U.S. medium-term note program. The proceeds will be used for general corporate purposes.
The Company paid the following dividends in fiscal 2016 and 2015:
Per Share
 
Total Paid
 
Payment Timing
 
Related to Fiscal Period
$0.71
$1.2 billion
 
Second Quarter of Fiscal 2016
Second Half 2015
$0.66
 
$1.1 billion
 
Fourth Quarter of Fiscal 2015
 
First Half 2015
$1.15
$1.9 billion
 
Second Quarter of Fiscal 2015
2014
During the quarter ended January 2, 2016, the Company repurchased 21 million shares of its common stock for $2.4 billion. As of January 2, 2016, the Company had remaining authorization in place to repurchase approximately 334 million additional shares. The repurchase program does not have an expiration date.
We believe that the Company’s financial condition is strong and that its cash balances, other liquid assets, operating cash flows, access to debt and equity capital markets and borrowing capacity, taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to the expansion of existing businesses and development of new projects. However, the Company’s operating cash flow and access to the capital markets can be impacted by macroeconomic factors outside of its control. In addition to macroeconomic factors, the Company’s borrowing costs can be impacted by short- and long-term debt ratings assigned by nationally recognized rating agencies, which are based, in significant part, on the Company’s performance as measured by certain credit metrics such as interest coverage and leverage ratios. As of January 2, 2016, Moody’s Investors Service’s long- and short-term debt ratings for the Company were A2 and P-1, respectively, with stable outlook; Standard & Poor’s long- and short-term debt ratings for the Company were A and A-1, respectively, with stable outlook; and Fitch’s long- and short-term debt ratings for the Company were A and F1, respectively, with stable outlook. The Company’s bank facilities contain only one financial covenant, relating to interest coverage, which the Company met on January 2, 2016 by a significant margin. The Company’s bank facilities also specifically exclude certain entities, including the International Theme Parks, from any representations, covenants or events of default.

COMMITMENTS AND CONTINGENCIES
Legal Matters
As disclosed in Note 10 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters.
Guarantees
See Note 10 to the Condensed Consolidated Financial Statements for information regarding the Company’s guarantees.
Tax Matters
As disclosed in Note 9 to the Consolidated Financial Statements in the 2015 Annual Report on Form 10-K, the Company has exposure for certain tax matters.
Contractual Commitments
See Note 14 to the Consolidated Financial Statements in the 2015 Annual Report on Form 10-K for information regarding the Company’s contractual commitments.


34

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


OTHER MATTERS
Accounting Policies and Estimates
We believe that the application of the following accounting policies, which are important to our financial position and results of operations require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements in the 2015 Annual Report on Form 10-K.
Film and Television Revenues and Costs
We expense film and television production, participation and residual costs over the applicable product life cycle based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues) for each production. If our estimate of Ultimate Revenues decreases, amortization of film and television costs may be accelerated. Conversely, if our estimate of Ultimate Revenues increases, film and television cost amortization may be slowed. For film productions, Ultimate Revenues include revenues from all sources that will be earned within ten years from the date of the initial theatrical release. For 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.
With respect to films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues (and therefore affecting future film cost amortization and/or impairment) is theatrical performance. Revenues derived from other markets subsequent to the theatrical release (e.g., the home entertainment or television markets) have historically been highly correlated with the theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort. Upon a film’s release and determination of the theatrical performance, the Company’s estimates of revenues from succeeding windows and markets are revised based on historical relationships and an analysis of current market trends. The most sensitive factor affecting our estimate of Ultimate Revenues for released films is the level of expected home entertainment sales. Home entertainment sales vary based on the number and quality of competing home entertainment products, as well as the manner in which retailers market and price our products.
 
With respect to television series or other television productions intended for broadcast, the most sensitive factor affecting estimates of Ultimate Revenues is the program’s rating and the strength of the advertising market. Program ratings, which are an indication of market acceptance, directly affect the Company’s ability to generate advertising revenues during the airing of the program. In addition, television series with greater market acceptance are more likely to generate incremental revenues through the eventual sale of the program rights in the syndication, international and home entertainment markets. Alternatively, poor ratings may result in a television series cancellation, which would require an immediate write-down of any unamortized production costs. A significant decline in the advertising market would also negatively impact our estimates.
We expense the cost of television broadcast rights for acquired series, movies and other programs based on the number of times the program is expected to be aired or on a straight-line basis over the useful life, as appropriate. Amortization of those television programming assets being amortized on a number of airings basis may be accelerated if we reduce the estimated future airings and slowed if we increase the estimated future airings. The number of future airings of a particular program is impacted primarily by the program’s ratings in previous airings, expected advertising rates and availability and quality of alternative programming. Accordingly, planned usage is reviewed periodically and revised if necessary. We amortize rights costs for multi-year sports programming arrangements during the applicable seasons based on the estimated relative value of each year in the arrangement. The estimated value of each year is based on our projections of revenues over the contract period, which include advertising revenue and an allocation of affiliate revenue. If the annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season. If planned usage patterns or estimated relative values by year were to change significantly, amortization of our sports rights costs may be accelerated or slowed.
Costs of film and television productions are subject to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The net realizable values of television broadcast program licenses and rights are reviewed using a daypart methodology. A daypart is defined as an aggregation of programs broadcast during a particular time of day or programs of a similar type. The Company’s dayparts are: primetime, daytime, late night, news and sports (includes broadcast and cable networks). The net realizable values of other cable programming assets are reviewed on an aggregated basis for each cable network. Individual programs are written off when there are no plans to air or sublicense the program. Estimated values are based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than our projections, film, television and programming cost write-downs may be required.

35

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


Revenue Recognition
The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. See Note 2 to the Consolidated Financial Statements in the 2015 Annual Report on Form 10-K for a summary of these revenue recognition policies.
We reduce home entertainment and game revenues for estimated future returns of merchandise and for customer programs and sales incentives. These estimates are based upon historical return experience, current economic trends and projections of customer demand for and acceptance of our products. If we underestimate the level of returns or concessions in a particular period, we may record less revenue in later periods when returns or concessions exceed the estimated amount. Conversely, if we overestimate the level of returns or concessions for a period, we may have additional revenue in later periods when returns or concessions are less than estimated.
We recognize revenues from advance theme park ticket sales when the tickets are used. We recognize revenues from expiring multi-use tickets ratably over the estimated usage period. For non-expiring, multi-day tickets, we recognize revenue over a five-year time period based on estimated usage. The estimated usage periods are derived from historical usage patterns. If actual usage is different than our estimated usage, revenues may not be recognized in the periods the related services are rendered. In addition, a change in usage patterns would impact the timing of revenue recognition.
Pension and Postretirement Medical Plan Actuarial Assumptions
The Company’s pension and postretirement medical benefit obligations and related costs are calculated using a number of actuarial assumptions. Two significant assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement, which we evaluate annually. Refer to the 2015 Annual Report on Form 10-K for estimated impacts of changes in these assumptions. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase.
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. The Company’s discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans’ liability cash flows to the yield curves.
To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation as well as historical and expected returns on each plan asset class. A lower expected rate of return on pension plan assets will increase pension expense.
Goodwill, Intangible Assets, Long-Lived Assets and Investments
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. The Company compares the fair value of each reporting unit to its carrying amount to determine if there is potential goodwill impairment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of the goodwill.
To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flow) corroborated by market multiples when available and as appropriate. We apply what we believe to be the most appropriate valuation methodology for each of our reporting units. The discounted cash flow analyses are sensitive to our estimates of future revenue growth and margins for these businesses. We include in the projected cash flows an estimate of the revenue we believe the reporting unit would receive if the intellectual property developed by the reporting unit that is being used by other reporting units was licensed to an unrelated third party at its fair market value. These amounts are not necessarily the same as those included in segment operating results. We believe our estimates of fair value are consistent with how a marketplace participant would value our reporting units.
In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.

36

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


The Company is required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized for the difference. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
 
The Company tests long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use 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. An asset group is established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses or segments. If the carrying value of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be 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. The impairment is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts, but only to the extent the carrying value of each asset is above its fair value. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of the asset groups, estimates of future cash flows and the discount rate used to determine fair values. If we had established different asset groups or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.
The Company has cost and equity investments. The fair value of these investments is dependent on the performance of the investee companies as well as volatility inherent in the external markets for these investments. In assessing potential impairment of these investments, we consider these factors, as well as the forecasted financial performance of the investees and market values, where available. If these forecasts are not met or market values indicate an other-than-temporary decline in value, impairment charges may be required.
Allowance for Doubtful Accounts
We evaluate our allowance for doubtful accounts 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, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, costs and expenses may increase in future periods, and if it is too high, costs and expenses may decrease in future periods.
Contingencies and Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for the resolution of these claims. These estimates have been developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. See Note 10 to the Condensed Consolidated Financial Statements for more detailed information on litigation exposure.
Income Tax Audits
As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in proposed assessments. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized by the Company may differ from those recognized in our future financial statements based on a number of factors, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and the Company’s success in supporting its filing positions with taxing authorities.

37

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


New Accounting Pronouncements
See Note 14 to the Condensed Consolidated Financial Statements for information regarding new accounting pronouncements.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, commodity fluctuations and changes in the market values of its investments.
Policies and Procedures
In the normal course of business, we employ established policies and procedures to manage the Company’s exposure to changes in interest rates, foreign currencies and commodities using a variety of financial instruments.
Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to the Company’s portfolio of borrowings. By policy, the Company targets fixed-rate debt as a percentage of its net debt between minimum and maximum percentages.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flows in order to allow management to focus on core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the U.S. dollar equivalent value of its existing foreign currency assets, liabilities, commitments and forecasted foreign currency revenues and expenses. The Company utilizes option strategies and forward contracts that provide for the purchase or sale of foreign currencies to hedge probable, but not firmly committed, transactions. The Company also uses forward and option contracts to hedge foreign currency assets and liabilities. The principal foreign currencies hedged are the euro, British pound, Japanese yen and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings to U.S. dollar denominated borrowings. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its forecasted foreign exchange exposures generally for periods not to exceed four years. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related exposures. The economic or political conditions in a country could reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country.
Our objectives in managing exposure to commodity fluctuations are to use commodity derivatives to reduce volatility of earnings and cash flows arising from commodity price changes. The amounts hedged using commodity swap contracts are based on forecasted levels of consumption of certain commodities, such as fuel oil and gasoline.
It is the Company’s policy to enter into foreign currency and interest rate derivative transactions and other financial instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes.

38


Item 3. Quantitative and Qualitative Disclosures about Market Risk.
See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures – We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of January 2, 2016, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
There have been no changes in our internal controls over financial reporting during the first quarter of fiscal 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


39


PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As disclosed in Note 10 to the Condensed Consolidated Financial Statements, the Company is engaged in certain legal matters, and the disclosure set forth in Note 10 relating to certain legal matters is incorporated herein by reference.


ITEM 1A. Risk Factors
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for “forward-looking statements” made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our shareholders. All forward-looking statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made and the Company does not undertake any obligation to update its disclosure relating to forward-looking matters. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company’s control, including: changes in domestic and global economic conditions, competitive conditions and consumer preferences; adverse weather conditions or natural disasters; health concerns; international, political or military developments; and technological developments. Such developments may affect travel and leisure businesses generally and may, among other things, affect the performance of the Company’s theatrical and home entertainment releases, the advertising market for broadcast and cable television programming, expenses of providing medical and pension benefits, demand for our products and performance of some or all company businesses either directly or through their impact on those who distribute our products. Additional factors are discussed in the 2015 Annual Report on Form 10-K under the Item 1A, “Risk Factors.”

40


ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about Company purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the quarter ended January 2, 2016: 
Period
 
Total
Number of
Shares
Purchased (1)
 
Weighted
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (2)
October 4, 2015 – October 31, 2015
 
5,216,879

 
$
106.33

 
5,191,200

 
350 million
November 1, 2015 – November 30, 2015
 
5,394,949

 
116.44

 
5,367,500

 
345 million
December 1, 2015 – January 2, 2016
 
10,588,558

 
111.31

 
10,557,500

 
334 million
Total
 
21,200,386

 
111.39

 
21,116,200

 
334 million
 
(1) 
84,186 shares were purchased on the open market to provide shares to participants in the Walt Disney Investment Plan (WDIP). These purchases were not made pursuant to a publicly announced repurchase plan or program.

(2) 
Under a share repurchase program implemented effective June 10, 1998, the Company is authorized to repurchase shares of its common stock. On January 30, 2015, the Company’s Board of Directors increased the share repurchase authorization to a total of 400 million shares as of that date. The repurchase program does not have an expiration date.



41


ITEM 6. Exhibits
See Index of Exhibits.

42


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
THE WALT DISNEY COMPANY
 
 
(Registrant)
 
 
By:
 
/s/ CHRISTINE M. MCCARTHY
 
 
Christine M. McCarthy,
Senior Executive Vice President and Chief Financial Officer
February 9, 2016
Burbank, California

43



INDEX OF EXHIBITS
 
 
 
 
 
Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K)
 
Document Incorporated by Reference from a Previous Filing or Filed Herewith, as Indicated below
 
 
 
12.1
 
Ratio of Earnings to Fixed Charges
 
Filed herewith
 
 
 
31(a)
 
Rule 13a-14(a) Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
31(b)
 
Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
 
 
32(a)
 
Section 1350 Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002*
 
Furnished
 
 
 
32(b)
 
Section 1350 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002*
 
Furnished
 
 
 
101
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended January 2, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Equity and (vi) related notes
 
Filed

*
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

44