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
~~July 1, 2017~~March 31, 2018




Incorporated in Delaware		I.R.S. Employer Identification
		No. 95-4545390

500 South Buena Vista Street, Burbank, California 91521

(818) 560-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer (Do not check if smaller reporting company)	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

There were ~~1,543,480,961~~1,490,523,320 shares of common stock outstanding as of ~~August~~May 2, ~~2017.~~2018.

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited; in millions, except per share data)


	Quarter Ended						Nine Months Ended						Quarter Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Revenues:
Services	$	12,097		$	12,113		$	35,990		$	35,906		$	12,520		$	11,487		$	25,504		$	23,893
Products	2,141			2,164			6,368			6,584			2,028			1,849			4,395			4,227
Total revenues	14,238			14,277			42,358			42,490			14,548			13,336			29,899			28,120
Costs and expenses:
Cost of services (exclusive of depreciation and amortization)	(6,469		)	(5,946		)	(19,328		)	(18,568		)	(6,304		)	(5,839		)	(13,638		)	(12,859		)
Cost of products (exclusive of depreciation and amortization)	(1,248		)	(1,255		)	(3,764		)	(4,120		)	(1,229		)	(1,130		)	(2,632		)	(2,516		)
Selling, general, administrative and other	(2,022		)	(2,305		)	(5,948		)	(6,467		)	(2,247		)	(1,941		)	(4,326		)	(3,926		)
Depreciation and amortization	(711		)	(626		)	(2,074		)	(1,838		)	(731		)	(676		)	(1,473		)	(1,363		)
Total costs and expenses	(10,450		)	(10,132		)	(31,114		)	(30,993		)	(10,511		)	(9,586		)	(22,069		)	(20,664		)
Restructuring and impairment charges	—			(44		)	—			(125		)	(13		)	—			(28		)	—
Other expense	(177		)	—			(177		)	—
Other income, net													41			—			94			—
Interest expense, net	(117		)	(70		)	(300		)	(161		)	(143		)	(84		)	(272		)	(183		)
Equity in the income of investees	124			152			327			776			6			85			49			203
Income before income taxes	3,618			4,183			11,094			11,987			3,928			3,751			7,673			7,476
Income taxes	(1,144		)	(1,471		)	(3,593		)	(4,089		)	(813		)	(1,212		)	(85		)	(2,449		)
Net income	2,474			2,712			7,501			7,898			3,115			2,539			7,588			5,027
Less: Net income attributable to noncontrolling interests	(108		)	(115		)	(268		)	(278		)	(178		)	(151		)	(228		)	(160		)
Net income attributable to The Walt Disney Company (Disney)	$	2,366		$	2,597		$	7,233		$	7,620		$	2,937		$	2,388		$	7,360		$	4,867

Earnings per share attributable to Disney:
Diluted	$	1.51		$	1.59		$	4.55		$	4.63		$	1.95		$	1.50		$	4.86		$	3.05

Basic	$	1.51		$	1.60		$	4.58		$	4.66		$	1.95		$	1.51		$	4.88		$	3.07

Weighted average number of common and common equivalent shares outstanding:
Diluted	1,572			1,631			1,588			1,647			1,510			1,591			1,515			1,597

Basic	1,562			1,621			1,578			1,636			1,503			1,580			1,507			1,586

Dividends declared per share	$	0.78		$	0.71		$	1.56		$	1.42		$	—		$	—		$	0.84		$	0.78

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited; in millions)


	Quarter Ended						Nine Months Ended						Quarter Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Net income	$	2,474		$	2,712		$	7,501		$	7,898		$	3,115		$	2,539		$	7,588		$	5,027
Other comprehensive income/(loss), net of tax:
Market value adjustments for investments	(5		)	(7		)	(15		)	(11		)	7			1			6			(10		)
Market value adjustments for hedges	(92		)	(84		)	24			(313		)	(112		)	(164		)	(94		)	116
Pension and postretirement medical plan adjustments	68			28			194			110			94			80			155			126
Foreign currency translation and other	70			(84		)	(153		)	(143		)	144			67			231			(223		)
Other comprehensive income/(loss)	41			(147		)	50			(357		)	133			(16		)	298			9
Comprehensive income	2,515			2,565			7,551			7,541			3,248			2,523			7,886			5,036
Less: Net income attributable to noncontrolling interests	(108		)	(115		)	(268		)	(278		)
Less: Other comprehensive (income)/loss attributable to noncontrolling interests	(25		)	47			65			79
Net income attributable to noncontrolling interests, including redeemable noncontrolling interests													(178		)	(151		)	(228		)	(160		)
Other comprehensive (income)/loss attributable to noncontrolling interests													(74		)	(9		)	(115		)	90
Comprehensive income attributable to Disney	$	2,382		$	2,497		$	7,348		$	7,342		$	2,996		$	2,363		$	7,543		$	4,966

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)


	July 1, 2017			October 1, 2016			March 31, 2018			September 30, 2017
ASSETS
Current assets
Cash and cash equivalents	$	4,336		$	4,610		$	4,179		$	4,017
Receivables	9,636			9,065			9,678			8,633
Inventories	1,300			1,390			1,301			1,373
Television costs and advances	1,214			1,208			1,114			1,278
Other current assets	665			693			536			588
Total current assets	17,151			16,966			16,808			15,889
Film and television costs	6,798			6,339			8,074			7,481
Investments	4,141			4,280			3,148			3,202
Parks, resorts and other property
Attractions, buildings and equipment	52,934			50,270			55,317			54,043
Accumulated depreciation	(28,335		)	(26,849		)	(30,435		)	(29,037		)
	24,599			23,421			24,882			25,006
Projects in progress	1,889			2,684			3,056			2,145
Land	1,245			1,244			1,262			1,255
	27,733			27,349			29,200			28,406
Intangible assets, net	6,797			6,949			6,962			6,995
Goodwill	27,835			27,810			31,350			31,426
Other assets	2,297			2,340			2,401			2,390
Total assets	$	92,752		$	92,033		$	97,943		$	95,789

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other accrued liabilities	$	9,374		$	9,130		$	9,022		$	8,855
Current portion of borrowings	3,338			3,687			5,918			6,172
Deferred revenue and other	4,382			4,025			4,788			4,568
Total current liabilities	17,094			16,842			19,728			19,595
Borrowings	18,849			16,483			18,766			19,119
Deferred income taxes	4,177			3,679			2,949			4,480
Other long-term liabilities	6,581			7,706			6,699			6,443
Commitments and contingencies (Note 10)
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests							1,150			1,148
Equity
Preferred stock, $.01 par value, Authorized – 100 million shares, Issued – none	—			—
Common stock, $.01 par value, Authorized – 4.6 billion shares, Issued – 2.9 billion shares	36,119			35,859
Preferred stock, $0.01 par value, Authorized – 100 million shares, Issued – none							—			—
Common stock, $0.01 par value, Authorized – 4.6 billion shares, Issued – 2.9 billion shares							36,411			36,248
Retained earnings	70,863			66,088			78,704			72,606
Accumulated other comprehensive loss	(3,864		)	(3,979		)	(3,345		)	(3,528		)
	103,118			97,968			111,770			105,326
Treasury stock, at cost, 1.3 billion shares	(60,587		)	(54,703		)
Treasury stock, at cost, 1.4 billion shares							(66,619		)	(64,011		)
Total Disney Shareholders’ equity	42,531			43,265			45,151			41,315
Noncontrolling interests	3,520			4,058			3,500			3,689
Total equity	46,051			47,323			48,651			45,004
Total liabilities and equity	$	92,752		$	92,033		$	97,943		$	95,789

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)


	Nine Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017
OPERATING ACTIVITIES
Net income	$	7,501		$	7,898		$	7,588		$	5,027
Depreciation and amortization	2,074			1,838			1,473			1,363
Deferred income taxes	294			885			(1,623		)	126
Equity in the income of investees	(327		)	(776		)	(49		)	(203		)
Cash distributions received from equity investees	584			594			389			397
Net change in film and television costs and advances	(745		)	(224		)	(490		)	(428		)
Equity-based compensation	278			305			194			189
Other	373			605			155			261
Changes in operating assets and liabilities:
Receivables	(786		)	(821		)	(1,004		)	(284		)
Inventories	93			214			64			90
Other assets	130			(87		)	(248		)	78
Accounts payable and other accrued liabilities	(781		)	(628		)	(92		)	(1,934		)
Income taxes	143			(188		)	406			(9		)
Cash provided by operations	8,831			9,615			6,763			4,673

INVESTING ACTIVITIES
Investments in parks, resorts and other property	(2,728		)	(3,691		)	(2,044		)	(1,923		)
Acquisitions	(557		)	(400		)	(1,581		)	(557		)
Other	(5		)	(135		)	(180		)	90
Cash used in investing activities	(3,290		)	(4,226		)	(3,805		)	(2,390		)

FINANCING ACTIVITIES
Commercial paper repayments, net	(112		)	(216		)
Commercial paper borrowings, net							1,372			914
Borrowings	4,053			4,046			1,048			2,053
Reduction of borrowings	(1,736		)	(672		)	(1,350		)	(1,233		)
Dividends	(1,237		)	(1,168		)	(1,266		)	(1,237		)
Repurchases of common stock	(5,944		)	(5,908		)	(2,608		)	(3,500		)
Proceeds from exercise of stock options	256			216			91			186
Other	(1,072		)	(618		)	(169		)	(232		)
Cash used in financing activities	(5,792		)	(4,320		)	(2,882		)	(3,049		)

Impact of exchange rates on cash and cash equivalents	(23		)	(111		)
Impact of exchange rates on cash, cash equivalents and restricted cash							55			(69		)

Change in cash and cash equivalents	(274		)	958
Cash and cash equivalents, beginning of period	4,610			4,269
Cash and cash equivalents, end of period	$	4,336		$	5,227
Change in cash, cash equivalents and restricted cash							131			(835		)
Cash, cash equivalents and restricted cash, beginning of period							4,064			4,760
Cash, cash equivalents and restricted cash, end of period							$	4,195		$	3,925

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)


	Quarter Ended																		Quarter Ended
	July 1, 2017									July 2, 2016									March 31, 2018									April 1, 2017
	Disney Shareholders			Non- controlling Interests			Total Equity			Disney Shareholders			Non- controlling Interests			Total Equity			Disney Shareholders			Non- controlling Interests ⁽¹⁾			Total Equity			Disney Shareholders			Non- controlling Interests ⁽¹⁾			Total Equity
Beginning balance	$	43,784		$	3,483		$	47,267		$	44,124		$	3,886		$	48,010		$	43,289		$	3,794		$	47,083		$	43,210		$	3,967		$	47,177
Comprehensive income	2,382			133			2,515			2,497			68			2,565			2,996			251			3,247			2,363			160			2,523
Equity compensation activity	174			—			174			235			—			235			157			—			157			182			—			182
Dividends	(1,208		)	—			(1,208		)	(1,145		)	—			(1,145		)
Common stock repurchases	(2,444		)	—			(2,444		)	(1,517		)	—			(1,517		)	(1,295		)	—			(1,295		)	(2,035		)	—			(2,035		)
Distributions and other	(157		)	(96		)	(253		)	(1		)	(1		)	(2		)	4			(545		)	(541		)	64			(644		)	(580		)
Ending balance	$	42,531		$	3,520		$	46,051		$	44,193		$	3,953		$	48,146		$	45,151		$	3,500		$	48,651		$	43,784		$	3,483		$	47,267


⁽¹⁾	Excludes redeemable noncontrolling interest

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)


	Nine Months Ended																		Six Months Ended
	July 1, 2017									July 2, 2016									March 31, 2018									April 1, 2017
	Disney Shareholders			Non- controlling Interests			Total Equity			Disney Shareholders			Non- controlling Interests			Total Equity			Disney Shareholders			Non- controlling Interests ⁽¹⁾			Total Equity			Disney Shareholders			Non- controlling Interests			Total Equity
Beginning balance	$	43,265		$	4,058		$	47,323		$	44,525		$	4,130		$	48,655		$	41,315		$	3,689		$	45,004		$	43,265		$	4,058		$	47,323
Comprehensive income	7,348			203			7,551			7,342			199			7,541			7,543			348			7,891			4,966			70			5,036
Equity compensation activity	404			—			404			557			—			557			163			—			163			230			—			230
Dividends	(2,445		)	—			(2,445		)	(2,313		)	—			(2,313		)	(1,266		)	—			(1,266		)	(1,237		)	—			(1,237		)
Common stock repurchases	(5,944		)	—			(5,944		)	(5,908		)	—			(5,908		)	(2,608		)	—			(2,608		)	(3,500		)	—			(3,500		)
Distributions and other	(97		)	(741		)	(838		)	(10		)	(376		)	(386		)	4			(537		)	(533		)	60			(645		)	(585		)
Ending balance	$	42,531		$	3,520		$	46,051		$	44,193		$	3,953		$	48,146		$	45,151		$	3,500		$	48,651		$	43,784		$	3,483		$	47,267


⁽¹⁾	Excludes redeemable noncontrolling interest

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


1.	Principles of Consolidation

These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending September ~~30, 2017.~~29, 2018. Certain reclassifications have been made in the prior-year financial statements to conform to the current-year presentation.

These financial statements should be read in conjunction with the Company’s ~~2016~~2017 Annual Report on Form 10-K.

The Company enters into relationships or investments with other entities that may be a variable interest ~~entity~~entities (VIE). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant (as defined by ASC 810-10-25-38) to the VIE. Hong Kong Disneyland Resort and Shanghai Disney Resort (collectively the Asia ~~International~~ Theme Parks) are ~~VIEs.~~VIEs in which the Company has less than 50% equity ownership. Company subsidiaries (the Management Companies) have management agreements with the Asia ~~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 Asia ~~International~~ Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the Asia ~~International~~ Theme Parks. Therefore, the Company has consolidated the Asia ~~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.	Cash and Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Balance Sheet to the total of the amounts reported in the Condensed Consolidated Statement of Cash Flows.



	March 31, 2018		September 30, 2017
Cash and cash equivalents	$	4,179	$	4,017
Restricted cash included in:
Other current assets	11		26
Other assets	5		21
Total cash, cash equivalents and restricted cash in the statement of cash flows	$	4,195	$	4,064


3.	Segment Information

The operating segments reported below are the segments of the Company for which separate financial information is available and for which results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance.

Segment operating results reflect earnings before corporate and unallocated shared expenses, restructuring and impairment charges, other income, interest expense, income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees. Corporate and unallocated shared expenses principally consist of corporate functions, executive management and certain unallocated administrative support functions.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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


	Quarter Ended						Nine Months Ended						Quarter Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Media Networks	$	127		$	154		$	334		$	447		$	13		$	88		$	63		$	207
Parks and Resorts	(3		)	—			(8		)	—			(7		)	(3		)	(14		)	(5		)
Consumer Products & Interactive Media	—			—			1			—			—			—			—			1
Equity in the income of investees included in segment operating income	124			154			327			447			$	6		$	85		$	49		$	203
Vice Gain	—			—			—			332
Other	—			(2		)	—			(3		)
Total equity in the income of investees	$	124		$	152		$	327		$	776

~~During the nine months ended July 2, 2016,~~Segment revenues and segment operating income are as follows:



	Quarter Ended				Six Months Ended
	March 31, 2018		April 1, 2017		March 31, 2018		April 1, 2017
Revenues ⁽¹⁾:
Media Networks	$	6,138	$	5,946	$	12,381	$	12,179
Parks and Resorts	4,879		4,299		10,033		8,854
Studio Entertainment	2,454		2,034		4,958		4,554
Consumer Products & Interactive Media	1,077		1,057		2,527		2,533
	$	14,548	$	13,336	$	29,899	$	28,120
Segment operating income ⁽¹⁾:
Media Networks	$	2,082	$	2,223	$	3,275	$	3,585
Parks and Resorts	954		750		2,301		1,860
Studio Entertainment	847		656		1,676		1,498
Consumer Products & Interactive Media	354		367		971		1,009
	$	4,237	$	3,996	$	8,223	$	7,952

⁽¹⁾

Studio Entertainment revenues and operating income include an allocation of Consumer Products & Interactive Media revenues, which is meant to reflect royalties on sales of merchandise based on film properties. The increase to Studio Entertainment revenues and operating income and corresponding decrease to Consumer Products & Interactive Media revenues and operating income was $136 million and $107 million for the quarters ended March 31, 2018 and April 1, 2017, respectively, and $307 million and $288 million for the six months ended March 31, 2018 and April 1, 2017, respectively.

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



	Quarter Ended						Six Months Ended
	March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Segment operating income	$	4,237		$	3,996		$	8,223		$	7,952
Corporate and unallocated shared expenses	(194		)	(161		)	(344		)	(293		)
Restructuring and impairment charges	(13		)	—			(28		)	—
Other income, net	41			—			94			—
Interest expense, net	(143		)	(84		)	(272		)	(183		)
Income before income taxes	$	3,928		$	3,751		$	7,673		$	7,476

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

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


4.	Acquisitions

BAMTech

On September 25, 2017, the Company acquired an additional 42% interest in BAMTech, a streaming technology and content delivery business, from an affiliate of Major League Baseball (MLB) for $1.6 billion (paid in January 2018). The acquisition increased our interest from 33% to 75%, and as a ~~net gain (Vice Gain) recorded by A+E Television Networks (A+E)~~result, we began consolidating BAMTech during the fourth quarter of fiscal 2017. The estimated acquisition date fair value of BAMTech is $3.9 billion.

BAMTech’s noncontrolling interest holders, MLB and the National Hockey League (NHL), ~~a joint venture owned 50% by~~have the right to sell their shares to the Company in ~~connection with A+E’s~~the future. MLB can generally sell their shares to the Company starting five years from and ending ten years after the September 25, 2017 acquisition date at the greater of fair value or a guaranteed floor value ($563 million accreting at 8% annually for eight years). The NHL can sell their shares to the Company in fiscal 2020 for $300 million or in fiscal 2021 for $350 million. Accordingly, these interests are recorded as “Redeemable noncontrolling interests” in the Company’s Condensed Consolidated Balance Sheet.

The Company has the right to purchase MLB’s interest in BAMTech starting five years from and ending ten years after the acquisition date at the greater of fair value or the guaranteed floor value. The Company has the right to acquire the NHL interest in fiscal years 2020 or 2021 for $500 million.

The acquisition date fair value of the noncontrolling interests was estimated at $1.1 billion, which was calculated using an option pricing model and generally reflects the net present value of the expected future redemption amount.

As a result of the MLB and NHL sale rights, the noncontrolling interests will generally not be allocated BAMTech losses. Prospectively, the Company will record the noncontrolling interests at the greater of (i) their acquisition date fair value adjusted for their share (if any) of earnings, losses, or dividends or (ii) an accreted value from the date of the acquisition to the earliest redemption date. The accretion of the MLB interest to the earliest redemption value in five years after the acquisition date will be recorded using an interest method. As of March 31, 2018, the redeemable noncontrolling interest subject to accretion would have had a redemption amount of $586 million if it were redeemed at that time. Adjustments to the carrying amount of redeemable noncontrolling interests increase or decrease income available to Company shareholders through an adjustment to “Net income attributable to noncontrolling interests” on the Condensed Consolidated Statement of Income.

The Company is negotiating to provide the noncontrolling interest holder in ~~Vice Group Holding, Inc. (Vice). The~~ESPN a portion of the Company’s ~~$332 million~~ share of the ~~Vice Gain~~BAMTech direct-to-consumer sports business at a price that is consistent with the amount the Company invested. If such transaction is finalized, the ESPN noncontrolling interest holder’s investment would be recorded ~~in “Equity~~as a noncontrolling interest transaction when consummated.

We have allocated $3.5 billion of the purchase price to goodwill (approximately half of which is deductible for tax purposes) with the remainder primarily allocated to identifiable intangible assets. We are in the ~~income~~process of finalizing the valuation of the acquired assets, assumed liabilities and noncontrolling interests.

The revenue and costs of BAMTech included in the Company’s Condensed Consolidated Statement of Income for the six months ended March 31, 2018 were approximately $0.2 billion and $0.3 billion, respectively.

Twenty-First Century Fox

8On December 14, 2017, the Company and Twenty-First Century Fox, Inc. (“21CF”) announced a definitive agreement (the “Merger Agreement”) for the Company to acquire 21CF. Prior to the acquisition, 21CF will transfer a portfolio of its news, sports and broadcast businesses, including the Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, FS1, FS2, Fox Deportes and Big Ten Network and certain other assets and liabilities into a newly formed subsidiary (“New Fox”) (the “New Fox Separation”) and distribute all of the issued and outstanding common stock of New Fox to shareholders of 21CF (other than holders that are subsidiaries of 21CF (shares held by such holders, the “Hook Stock”)) on a pro rata basis (the “New Fox Distribution”). Prior to the New Fox Distribution, New Fox will pay 21CF a dividend in the amount of $8.5 billion. As the New Fox Separation and the New Fox Distribution will be taxable to 21CF at the corporate level, the dividend is intended to fund the taxes resulting from the New Fox Separation and New Fox Distribution and certain other transactions contemplated by the Merger Agreement (the “Transaction Tax”). 21CF will retain all assets and liabilities not transferred to New Fox, which will include the 21CF film and television studios, certain cable networks (including FX and National Geographic) and 21CF’s international television businesses. Following the New Fox Separation and the New Fox Distribution, TWC Merger Enterprises 2 Corp., a wholly owned subsidiary of the Company (“Merger Sub”) will merge with and into 21CF (the “Initial Merger”), with 21CF surviving (the “Surviving Corporation”). Immediately after the effective time of the Initial Merger, the Surviving Corporation will merge with and into TWC Merger Enterprises 1, LLC, a wholly owned subsidiary of the Company (“Merger LLC”), with Merger LLC to be the surviving entity (the “Subsequent

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

~~investees” in~~Merger,” and together with the ~~Condensed Consolidated Statement of Income but is not included in segment operating income. See Note 3 for further discussion of~~Initial Merger, the ~~transaction.~~

~~Segment revenues and segment operating income are as follows:~~

Quarter Ended Nine Months Ended
July 1,
2017 July 2,
2016 July 1,
2017 July 2,
2016
Revenues ⁽¹⁾:

Media Networks $ 5,866

$ 5,906

$ 18,045

$ 18,031
Parks and Resorts 4,894

4,379

13,748

12,588
Studio Entertainment 2,393

2,847

6,947

7,630
Consumer Products & Interactive Media 1,085

1,145

3,618

4,241
$ 14,238
$ 14,277
$ 42,358
$ 42,490
Segment operating income ⁽¹⁾:

Media Networks $ 1,842
$ 2,372
$ 5,427
$ 6,083
Parks and Resorts 1,168
994
3,028
2,599
Studio Entertainment 639
766
2,137
2,322
Consumer Products & Interactive Media 362
324
1,371
1,541
$ 4,011
$ 4,456
$ 11,963
$ 12,545

⁽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 $103 million and $131 million for the quarters ended July 1, 2017 and July 2, 2016, respectively, and $391 million and $573 million for the nine months ended July 1, 2017 and July 2, 2016, respectively.

~~A reconciliation of segment operating income to income before income taxes is as follows:~~

Quarter Ended Nine Months Ended
July 1,
2017 July 2,
2016 July 1,
2017 July 2,
2016
Segment operating income $ 4,011
$ 4,456
$ 11,963
$ 12,545
Corporate and unallocated shared expenses (99 ) (159 ) (392 ) (457 )
Restructuring and impairment charges —
(44 ) —
(125 )
Other expense⁽¹⁾
(177 ) —
(177 ) —
Interest expense, net (117 ) (70 ) (300 ) (161 )
Vice Gain —
—
—
332
Infinity Charge⁽²⁾
—
—
—
(147 )
Income before income taxes $ 3,618
$ 4,183
$ 11,094
$ 11,987


⁽¹⁾	During the quarter the Company recorded a charge, net of committed insurance recoveries, in connection with the settlement of litigation. The Company is pursuing additional insurance coverage for this matter.

⁽²⁾

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


3.	~~Acquisitions~~

~~Vice/A+E~~

Vice is a media company targeting a millennial audience through news and pop culture content and creative brand integration. During the first quarter of fiscal 2016, A+E acquired an 8% interest in Vice in exchange for a 49.9% interest in one of A+E’s cable channels, H2, which has been rebranded as Viceland and programmed with Vice content.“Mergers”). As a result of ~~this~~the Mergers, 21CF will become a wholly owned subsidiary of the Company.

The Boards of Directors of the Company and 21CF have approved the transaction. In order to seek approval from 21CF and the Company’s shareholders, the Company filed a preliminary Form S-4 Registration Statement (“S-4”) with the U.S. Securities and Exchange Commission (“SEC”) on April 18, 2018, which S-4, once effective, will constitute a prospectus for the registration of Company common stock to be delivered to 21CF shareholders pursuant to the Merger Agreement as well as a joint proxy statement of the Company and 21CF. The consummation of the transaction is subject to various conditions, including, among others, (i) customary conditions relating to the adoption of the Merger Agreement by the requisite vote of shareholders of 21CF and the approval of the stock issuance by the requisite vote of the Company’s shareholders, (ii) the consummation of the New Fox Separation, (iii) the receipt of a tax ruling from the Australian Taxation Office and certain tax opinions with respect to the treatment of the transaction under U.S. and Australian tax laws, and (iv) the receipt of certain regulatory approvals and governmental consents.

Upon consummation of the transaction, each issued and outstanding share of 21CF common stock (other than Hook Stock) will be exchanged automatically for 0.2745 shares of Company common stock. The exchange ratio may be subject to an adjustment based on the final estimate of the Transaction Tax and other transactions contemplated by the Merger Agreement. The initial exchange ratio in the Merger Agreement of 0.2745 shares of Company common stock for each share of 21CF common stock (other than Hook Stock) was set based on an estimate of $8.5 billion for the Transaction Tax and will be adjusted immediately prior to consummation of the transaction if the final estimate of the Transaction Tax at closing is more than $8.5 billion or less than $6.5 billion. Such adjustment could increase or decrease the exchange ratio, depending on whether the final estimate is lower or higher, respectively, than $6.5 billion or $8.5 billion. Additionally, if the final estimate of the Transaction Tax is lower than $8.5 billion, the Company will make a cash payment to New Fox reflecting the difference between such amount and $8.5 billion, up to a maximum cash payment of $2.0 billion. As included in the S-4 filing, based on the number of shares of 21CF common stock outstanding as of April 11, 2018 and the closing price for the Company’s common stock on April 11, 2018 of $100.80, the Company would be required to issue approximately 512 million new shares of Company common stock, a value of approximately $51.6 billion. The value at which the Company will record the equity consideration will be based upon the Company’s stock price on the date the transaction closes. In addition, the Company will assume 21CF’s net debt, which was approximately $14.6 billion as of December 30, 2017 (approximately $19.8 billion of debt less approximately $5.2 billion in cash).

9Under the terms of the Merger Agreement, Disney will pay 21CF $2.5 billion if the merger is not consummated under certain circumstances relating to the failure to obtain approvals, or if there is a final, non-appealable order preventing the transaction, in each case, relating to antitrust laws, communications laws or foreign regulatory laws. If the Merger Agreement is terminated under certain other circumstances relating to changes in board recommendations and/or alternative transactions, the Company or 21CF may be required to pay the other party approximately $1.5 billion.

21CF currently has an approximately 39% interest in Sky. In December 2016, 21CF issued an announcement disclosing the terms of a firm offer to acquire the fully diluted share capital of Sky which 21CF and its affiliates do not already own at a price of £10.75 per share, payable in cash, subject to certain payments of dividends (the “Sky Acquisition”). The Sky Acquisition remains subject to certain customary closing conditions, including approval by the UK Secretary of State for Digital, Culture, Media and Sport and the requisite approval by Sky shareholders unaffiliated with 21CF. On April 12, 2018, the U.K. Takeover Panel ruled that, if the closing occurs under the Merger Agreement, and if 21CF has not previously completed its acquisition of the remaining interests in Sky and if no third party has acquired more than 50% of the ordinary shares in Sky prior to such time, then Disney will be obliged to make a mandatory offer for all the ordinary shares in Sky not already owned by 21CF in accordance with Note 8 of Rule 9.1 of the U.K. Takeover Code within 28 days of the closing under the Merger Agreement. The U.K. Takeover Panel further ruled that any such offer would be required to be made in cash and at a price of £10.75 for each ordinary share in Sky.

In connection with 21CF’s efforts to obtain U.K. regulatory approval for the Sky Acquisition, 21CF offered to sell, and Disney has advised 21CF that it is prepared to acquire, the Sky News business for a nominal amount if the Sky Acquisition is completed. Under the terms of the proposal, the Company would be committed to operate the Sky News business at its current cost structure for 10 years and 21CF has agreed to fund the anticipated costs of the Sky News business, based on the current cost structure (plus inflation), for 10 years.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

~~exchange, A+E recognized a net non-cash gain based on the estimated fair value of H2.~~ Goodwill

The ~~Company’s $332 million share of the Vice Gain was recorded in “Equity~~changes in the ~~income~~carrying amount of ~~investees” in~~goodwill for the ~~Condensed Consolidated Statement of Income in the first quarter of fiscal 2016. At July 1, 2017, A+E had a 20% interest in Vice.~~six months ended March 31, 2018 are as follows:

~~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.~~



	Media Networks		Parks and Resorts		Studio Entertainment		Consumer Products & Interactive Media		Unallocated ⁽¹⁾			Total
Balance at Sept. 30, 2017	$	16,325	$	291	$	6,817	$	4,393	$	3,600		$	31,426
Acquisitions	—		—		—		—		—			—
Dispositions	—		—		—		—		—			—
Other, net	3		—		2		1		(82		)	(76		)
Balance at Mar. 31, 2018	$	16,328	$	291	$	6,819	$	4,394	$	3,518		$	31,350

~~BAMTech~~

In August 2016, the Company paid $450 million for a 15% interest in BAMTech, an entity which holds Major League Baseball’s streaming technology and content delivery businesses. In January 2017, the Company acquired an additional 18% interest for $557 million. The Company has an option to increase its ownership to 66% by acquiring an additional interest at fair market value from Major League Baseball between August 2020 and August 2023. The Company accounts for its interest in BAMTech as an equity method investment.

In August 2017, the Company entered into an agreement to acquire an incremental 42% interest in BAMTech for $1.6 billion (bringing our aggregate ownership interest to 75%). The transaction, which is subject to regulatory approval, is expected to close prior to the end of the year. Upon closing, the Company will consolidate BAMTech.


⁽¹⁾	Unallocated amount will be allocated to the segments once the BAMTech purchase price allocation is finalized. Other, net represents the impact on goodwill of updates to our initial estimated fair value of intangible assets related to BAMTech.


4.5.	Borrowings

During the ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018, the Company’s borrowing activity was as follows:


	October 1, 2016		Borrowings		Payments			Other Activity			July 1, 2017		September 30, 2017		Borrowings		Payments			Other Activity			March 31, 2018
Commercial paper with original maturities less than three months⁽¹⁾	$	777	$	—	$	(577	)	$	—		$	200	$	1,151	$	—	$	(764	)	$	(2	)	$	385
Commercial paper with original maturities greater than three months	744		4,745		(4,280		)	2			1,211		1,621		4,467		(2,331		)	9			3,766
U.S. medium-term notes	16,827		3,995		(1,500		)	—			19,322
Asia International Theme Parks borrowings	1,087		13		—			16			1,116
Foreign currency denominated debt and other⁽²⁾	735		45		(236		)	(206		)	338
U.S. and European medium-term notes													19,721		—		(1,300		)	12			18,433
BAMTech acquisition payable													1,581		—		(1,581		)	—			—
Asia Theme Parks borrowings⁽²⁾													1,145		—		—			81			1,226
Foreign currency denominated debt and other⁽³⁾													72		1,048		(50		)	(196		)	874
Total	$	20,170	$	8,798	$	(6,593	)	$	(188	)	$	22,187	$	25,291	$	5,515	$	(6,026	)	$	(96	)	$	24,684


⁽¹⁾	Borrowings and payments are reported net.


⁽²⁾	The other activity is primarily the U.S. dollar weakening against the Chinese Renminbi.


⁽³⁾	The other activity is primarily market value adjustments for debt with qualifying hedges.

The Company has bank facilities with a syndicate of lenders to support commercial paper borrowings as follows:


	Committed Capacity		Capacity Used		Unused Capacity		Committed Capacity		Capacity Used		Unused Capacity
Facility expiring March 2018	$	2,500	$	—	$	2,500
Facility expiring March 2019	2,250		—		2,250		$	6,000	$	—	$	6,000
Facility expiring March 2021	2,250		—		2,250		2,250		—		2,250
Facility expiring March 2023							4,000		—		4,000
Total	$	7,000	$	—	$	7,000	$	12,250	$	—	$	12,250

The Company had bank facilities totaling $2.5 billion and $2.25 billion expiring in March 2018 and March 2019, respectively. These facilities were refinanced increasing the borrowing capacity to $6.0 billion and $4.0 billion and extending the maturity dates to March 2019 and March 2023, respectively. All of the above bank facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. The spread above LIBOR can range from ~~0.23%~~0.18% to 1.63%. The Company also has the ability to issue up to ~~$800~~$500 million of letters of credit under the facility expiring in March ~~2019,~~2023, which if utilized, reduces available borrowings under this facility. As of ~~July 1, 2017~~March 31, 2018, the Company has ~~$186~~$196 million of outstanding letters of credit, of which none were issued under this facility. The facilities specifically exclude certain entities, including the Asia ~~International~~ Theme Parks, ~~and Disneyland Paris,~~ from any representations, covenants, or ~~events of default and contain only one financial covenant relating to interest coverage, which the Company met on July 1, 2017 by a significant margin.~~

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

events of default and contain only one financial covenant relating to interest coverage, which the Company met on March 31, 2018 by a significant margin.

Cruise Ship Credit Facilities

In October 2016 and December 2017, the Company entered into credit facilities to finance three new cruise ships, which are expected to be delivered in 2021, 2022 and 2023. The financings may be used for up to 80% of the contract price of the cruise ships. Under the agreements, $1.0 billion in financing is available beginning in April 2021, $1.1 billion is available beginning in May 2022 and $1.1 billion is available beginning in April 2023. If utilized, the interest rates will be fixed at 3.48%, 3.72% and 3.74%, respectively, and the loan and interest will be payable semi-annually over a 12-year period from the borrowing date. Early repayment is permitted subject to cancellation fees.

Interest expense, net

Interest and investment income and interest expense are reported net in the Condensed Consolidated Statements of Income and consist of the following (net of capitalized interest):


	Quarter Ended						Nine Months Ended						Quarter Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Interest expense	$	(134	)	$	(88	)	$	(370	)	$	(235	)	$	(172	)	$	(115	)	$	(318	)	$	(236	)
Interest and investment income	17			18			70			74			29			31			46			53
Interest expense, net	$	(117	)	$	(70	)	$	(300	)	$	(161	)	$	(143	)	$	(84	)	$	(272	)	$	(183	)

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


5.6.	International Theme Parks

The Company has a 47% ownership interest in the operations of Hong Kong Disneyland Resort and a 43% ownership interest in the operations of Shanghai Disney Resort ~~(together, the~~(the Asia International Theme Parks), which are both VIEs consolidated in the Company’s financial statements. See Note 1 for the Company’s policy on consolidating VIEs. Disneyland Paris was also a consolidated VIE until the Company acquired 100% ownership of Disneyland Paris in June 2017. Given our 100% ownership, the Company will continue to consolidate Disneyland Paris’ financial results. The Asia International Theme Parks ~~and~~together with Disneyland Paris are collectively referred to as the International Theme ~~Parks.~~Parks).

The following table summarizes the carrying amounts of the International Theme Parks’ assets and liabilities included in the Company’s Condensed Consolidated Balance Sheets as of ~~July 1, 2017~~March 31, 2018 and ~~October 1, 2016:~~September 30, 2017:


	July 1, 2017		October 1, 2016		March 31, 2018		September 30, 2017
Cash and cash equivalents	$	598	$	1,008	$	780	$	843
Other current assets	417		331		450		376
Total current assets	1,015		1,339		1,230		1,219
Parks, resorts and other property	9,263		9,270		9,640		9,403
Other assets	89		88		94		111
Total assets ⁽¹⁾	$	10,367	$	10,697	$	10,964	$	10,733

Current liabilities	$	1,305	$	1,499	$	1,075	$	1,163
Borrowings - long-term	1,116		1,087		1,226		1,145
Other long-term liabilities	318		256		386		371
Total liabilities ⁽¹⁾	$	2,739	$	2,842	$	2,687	$	2,679

⁽¹⁾

~~The total~~Total assets of the Asia ~~International~~ Theme Parks were ~~$7.8~~$8 billion at March 31, 2018 and ~~$8.2 billion,~~September 30, 2017, which primarily consist of parks, resorts and other property of ~~$7.2~~$7 billion at March 31, 2018 and ~~$7.3 billion~~ ~~at July 1, 2017 and October 1, 2016, respectively. The total~~September 30, 2017. Total liabilities of the Asia ~~International~~ Theme Parks were ~~$2.0 billion and $2.2~~$2 billion at ~~July 1, 2017~~March 31, 2018 and ~~October 1, 2016, respectively.~~

September 30, 2017.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table summarizes the International Theme Parks’ revenues and costs and expenses included in the Company’s Condensed Consolidated Statement of Income for the ~~nine~~six months ended ~~July 1, 2017:~~March 31, 2018:


	July 1, 2017			March 31, 2018
Revenues	$	2,306		$	1,749
Costs and expenses	(2,373		)	(1,752		)
Equity in the loss of investees	(8		)	(14		)

~~For the nine months ended July 1, 2017, International~~Asia Theme Parks’ royalty and management fees of ~~$115~~$83 million for the six months ended March 31, 2018 are eliminated in consolidation but are considered in calculating earnings allocated to noncontrolling interests.

~~For the nine months ended July 1, 2017,~~ International Theme Parks’ cash flows for the six months ended March 31, 2018 included in the Company’s Condensed Consolidated Statement of Cash Flows were ~~$170~~$272 million generated from operating activities, ~~$758~~$319 million used in investing activities and ~~$13~~$8 million generated from financing activities. The majority of cash flows used in investing activities were for the Asia ~~International~~ Theme Parks.

~~Disneyland Paris~~

In February 2017, the Company increased its effective ownership percentage from 81% to 88% by exchanging 1.36 million of the Company’s common shares for 70.5 million outstanding shares of Euro Disney S.C.A. (EDSCA), a publicly-traded French entity, which has an 82% interest in the Disneyland Paris operating company. The transaction was valued at €141 million ($150 million) based on the purchase price of €2 per share.

In the third quarter of fiscal 2017, the Company acquired the remaining outstanding shares of EDSCA at €2 per share, a total cost of €224 million ($250 million), and EDSCA was delisted from Euronext Paris.

Hong Kong Disneyland Resort

The Government of the Hong Kong Special Administrative Region (HKSAR) and the Company have 53% and 47% equity interests in Hong Kong Disneyland Resort, respectively.

As part of financing the construction of a third hotel, which opened in April ~~30,~~ 2017, the Company and HKSAR have provided loans with outstanding balances of ~~$137~~$140 million and ~~$92~~$93 million, respectively, which bear interest at a rate of three month HIBOR plus 2% and mature in September 2025. The Company’s loan is eliminated upon consolidation.

The Company has provided Hong Kong Disneyland Resort with a revolving credit facility of HK $2.1 billion ($269 million), which bears interest at a rate of three month HIBOR plus 1.25% and matures in December 2023. There is no outstanding balance under the line of credit at March 31, 2018.

In August 2017, the Company and HKSAR entered into an agreement for a multi-year expansion of Hong Kong Disneyland that will add a number of new guest offerings, including two new themed areas, by 2023. Under the terms of the agreement, the HK $10.9 billion ($1.4 billion) expansion will be funded by equity contributions from the Company and HKSAR on an equal basis.

Shanghai Disney Resort

Shanghai Shendi (Group) Co., Ltd (Shendi) and the Company have 57% and 43% equity interests in Shanghai Disney Resort, respectively. A management company, in which the Company has a 70% interest and Shendi a 30% interest, is responsible for operating Shanghai Disney Resort.

The Company has provided Shanghai Disney Resort with ~~long-term~~ loans totaling ~~$775~~$788 million, bearing interest at rates up to 8%. and maturing in 2036, with early repayment permitted. In addition, the Company has an outstanding balance of ~~$281~~$320 million due from Shanghai Disney Resort related to development ~~and~~costs, pre-opening ~~costs of the resort~~expense and ~~outstanding~~ royalties and management fees. The Company has also provided Shanghai Disney Resort with a $157 million line of credit bearing interest at 8%. There is no outstanding balance under the line of credit at ~~July 1, 2017. The loan and line of credit~~March 31, 2018. These balances are eliminated upon consolidation.

Shendi has provided Shanghai Disney Resort with ~~term~~ loans totaling ~~6.6~~6.8 billion yuan (approximately ~~$1.0~~$1.1 billion), bearing interest at rates up to 8% and maturing in 2036, with early repayment permitted. Shendi has also provided Shanghai Disney Resort with a 1.4 billion yuan (approximately ~~$202~~$217 million) line of credit bearing interest at 8%. There is no outstanding balance under the line of credit at ~~July~~March 31, 2018.


7.	Income Taxes

On December 22, 2017, new federal income tax legislation, the “Tax Cuts and Jobs Act” (Tax Act), was signed into law. The most significant impacts on the Company are as follows:

Effective January 1, ~~2017.~~2018, the U.S. corporate federal statutory income tax rate was reduced from 35.0% to 21.0%. Because of our fiscal year end, the Company’s fiscal 2018 statutory federal tax rate is 24.5%, which is applicable to each quarter of the fiscal year, and will be 21.0% thereafter.

The Company remeasured its U.S. federal deferred tax assets and liabilities at the rate that the Company expects to be in effect when those deferred taxes will be realized (either 24.5% if in 2018 or 21.0% thereafter). The Company

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

recognized a benefit from the deferred tax remeasurement of approximately $2.0 billion in the six months ended March 31, 2018.

A one-time tax is due on certain accumulated foreign earnings (Deemed Repatriation Tax), which is payable over eight years. The effective tax rate is generally 15.5% on the portion of the earnings held in cash and cash equivalents and 8% on the remainder. The Company recognized a charge for the Deemed Repatriation Tax of approximately $350 million in the six months ended March 31, 2018. Generally there will no longer be a U.S. federal income tax cost arising from the repatriation of foreign earnings.

The Company will be eligible to claim an immediate deduction for investments in qualified fixed assets and film and television productions placed in service in fiscal 2018 through fiscal 2022. This provision phases out through fiscal 2027.

The domestic production activity deduction was eliminated effective for the Company’s fiscal 2019.

Certain foreign derived income will be taxed in the U.S. at an effective rate of approximately 13% (which increases to approximately 16% in 2025) rather than the general statutory rate of 21%. This will be effective for the Company in fiscal 2019.

Certain foreign earnings will be taxed at a minimum effective rate of approximately 13%. This will be effective for the Company in fiscal 2019.

The amounts that the Company has recorded are provisional estimates of the impact the Tax Act will have on the Company’s financial statements in fiscal 2018. Additional information and analysis is required to finalize the impact that the Tax Act will have on our full year financial results including the following:

Filing the fiscal 2017 U.S. federal income tax return, which could impact our estimated foreign earnings and deferred income tax assets and liabilities, and

Finalizing the determination of foreign cash and cash equivalents at the end of fiscal 2018, which is required to calculate the Deemed Repatriation Tax.

Although the Company does not anticipate material adjustments to the provisional amounts, final results could vary from these provisional amounts.

Additionally, potential further guidance may be forthcoming from the Financial Accounting Standards Board and the Securities and Exchange Commission, as well as regulations, interpretations and rulings from federal and state tax agencies, which could result in additional impacts.

During the six months ended March 31, 2018, the Company increased its gross unrecognized tax benefits by $0.1 billion to $0.9 billion. In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to resolutions of open tax matters. These resolutions would reduce our unrecognized tax benefits by approximately $296 million, of which $131 million would reduce our income tax expense and effective tax rate if recognized.


6.8.	Pension and Other Benefit Programs

The components of net periodic benefit cost are as follows:


	Pension Plans												Postretirement Medical Plans												Pension Plans												Postretirement Medical Plans
	Quarter Ended						Nine Months Ended						Quarter Ended						Nine Months Ended						Quarter Ended						Six Months Ended						Quarter Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Service costs	$	90		$	80		$	273		$	239		$	3		$	2		$	9		$	8		$	87		$	92		$	175		$	183		$	2		$	3		$	5		$	6
Interest costs	113			115			336			344			14			16			42			46			122			111			245			223			15			14			30			28
Expected return on plan assets	(219		)	(186		)	(656		)	(560		)	(13		)	(12		)	(37		)	(34		)	(227		)	(218		)	(452		)	(437		)	(13		)	(12		)	(26		)	(24		)
Amortization of prior-year service costs	3			3			8			10			—			(1		)	—			(1		)	5			2			8			5			—			—			—			—
Recognized net actuarial loss	101			61			303			182			4			2			12			6			88			101			175			202			4			4			7			8
Net periodic benefit cost	$	88		$	73		$	264		$	215		$	8		$	7		$	26		$	25		$	75		$	88		$	151		$	176		$	8		$	9		$	16		$	18

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

During the ~~nine~~six months ended ~~July 1, 2017~~,March 31, 2018, the Company ~~made $1.4 billion of~~did not make any material contributions to its pension and postretirement medical plans. The Company ~~currently does not expect to~~is assessing whether it will make any ~~additional~~ material contributions ~~to its pension and postretirement medical plans during~~in the remainder of fiscal ~~2017. However, final~~2018. Final funding amounts for fiscal ~~2017~~2018 will be assessed based on our January 1, ~~2017~~2018 funding actuarial valuation, which will be available by the end of the fourth quarter of fiscal ~~2017.~~2018.


7.9.	Earnings Per Share

Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period and are calculated using the treasury stock method for equity-based compensation awards (Awards). A reconciliation of the weighted average number of common and common equivalent shares outstanding and the number of Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, are as follows:


	Quarter Ended		Nine Months Ended		Quarter Ended		Six Months Ended
	July 1, 2017	July 2, 2016	July 1, 2017	July 2, 2016	March 31, 2018	April 1, 2017	March 31, 2018	April 1, 2017
Shares (in millions):
Weighted average number of common and common equivalent shares outstanding (basic)	1,562	1,621	1,578	1,636	1,503	1,580	1,507	1,586
Weighted average dilutive impact of Awards	10	10	10	11	7	11	8	11
Weighted average number of common and common equivalent shares outstanding (diluted)	1,572	1,631	1,588	1,647	1,510	1,591	1,515	1,597
Awards excluded from diluted earnings per share	8	4	11	6	12	8	13	12

~~THE WALT DISNEY COMPANY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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


8.10.	Equity

The Company paid the following dividends in fiscal ~~2017~~2018 and ~~2016:~~2017:



Per Share	Total Paid	Payment Timing	Related to Fiscal Period
$0.84	$1.3 billion	Second Quarter of Fiscal 2018	Second Half 2017
$0.78	$1.2 billion	Fourth Quarter of Fiscal 2017	First Half 2017
$0.78	$1.2 billion	Second Quarter of Fiscal 2017	Second Half 2016
~~$0.71~~	~~$1.1 billion~~	~~Fourth Quarter of Fiscal 2016~~	~~First Half 2016~~
~~$0.71~~	~~$1.2 billion~~	~~Second Quarter of Fiscal 2016~~	~~Second Half 2015~~

During the ~~nine~~six months ended ~~July 1, 2017,~~March 31, 2018, the Company repurchased 5625 million shares of its common stock for ~~$5.9~~$2.6 billion. As of ~~July 1, 2017,~~March 31, 2018, the Company had remaining authorization in place to repurchase approximately ~~226~~167 million additional shares. The repurchase program does not have an expiration date.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following ~~table summarizes~~tables summarize the changes in each component of accumulated other comprehensive income (loss) (AOCI) ~~(generally net of~~ ~~37%~~ ~~estimated tax)~~ including our proportional share of equity method investee amounts:


							Unrecognized Pension and Postretirement Medical Expense			Foreign Currency Translation and Other⁽¹⁾			AOCI									Unrecognized Pension and Postretirement Medical Expense			Foreign Currency Translation and Other			AOCI
	Market Value Adjustments															Market Value Adjustments
	Investments			Cash Flow Hedges
Balance at April 1, 2017	$	16		$	91		$	(3,525	)	$	(462	)	$	(3,880	)
Quarter Ended July 1, 2017:
AOCI, before tax																Investments			Cash Flow Hedges			Unrecognized Pension and Postretirement Medical Expense			Foreign Currency Translation and Other			AOCI
Balance at December 30, 2017																$	14		$	(69	)
Quarter Ended March 31, 2018:
Unrealized gains (losses) arising during the period	(5		)	(66		)	—			45			(26		)	10			(165		)	24			103			(28		)
Reclassifications of realized net (gains) losses to net income	—			(26		)	68			—			42			—			37			96			—			133
Balance at July 1, 2017	$	11		$	(1	)	$	(3,457	)	$	(417	)	$	(3,864	)
Balance at March 31, 2018																$	24		$	(197	)	$	(4,690	)	$	(358	)	$	(5,221	)

Balance at April 2, 2016	$	9		$	105		$	(2,415	)	$	(298	)	$	(2,599	)
Quarter Ended July 2, 2016:
Balance at December 31, 2016																$	26		$	398		$	(5,751	)	$	(662	)	$	(5,989	)
Quarter Ended April 1, 2017:
Unrealized gains (losses) arising during the period	(7		)	(49		)	(13		)	(37		)	(106		)	8			(206		)	5			63			(130		)
Reclassifications of realized net (gains) losses to net income	—			(35		)	41			—			6			(6		)	(51		)	108			—			51
Balance at July 2, 2016	$	2		$	21		$	(2,387	)	$	(335	)	$	(2,699	)
Balance at April 1, 2017																$	28		$	141		$	(5,638	)	$	(599	)	$	(6,068	)

Balance at September 30, 2017																$	15		$	(108	)	$	(4,906	)	$	(523	)	$	(5,522	)
Six Months Ended March 31, 2018:
Unrealized gains (losses) arising during the period																9			(146		)	24			165			52
Reclassifications of net (gains) losses to net income																—			57			192			—			249
Balance at March 31, 2018																$	24		$	(197	)	$	(4,690	)	$	(358	)	$	(5,221	)

Balance at October 1, 2016	$	26		$	(25	)	$	(3,651	)	$	(329	)	$	(3,979	)	$	44		$	(38	)	$	(5,859	)	$	(521	)	$	(6,374	)
Nine Months Ended July 1, 2017:
Six Months Ended April 1, 2017:
Unrealized gains (losses) arising during the period	(11		)	126			(10		)	(88		)	17			(10		)	300			5			(78		)	217
Reclassifications of net (gains) losses to net income	(4		)	(102		)	204			—			98			(6		)	(121		)	216			—			89
Balance at July 1, 2017	$	11		$	(1	)	$	(3,457	)	$	(417	)	$	(3,864	)

Balance at October 3, 2015	$	13		$	334		$	(2,497	)	$	(271	)	$	(2,421	)
Nine Months Ended July 2, 2016:
Unrealized gains (losses) arising during the period	(11		)	(170		)	(15		)	(64		)	(260		)
Reclassifications of net (gains) losses to net income	—			(143		)	125			—			(18		)
Balance at July 2, 2016	$	2		$	21		$	(2,387	)	$	(335	)	$	(2,699	)
Balance at April 1, 2017																$	28		$	141		$	(5,638	)	$	(599	)	$	(6,068	)


⁽¹⁾ THE WALT DISNEY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited; tabular dollars in millions, except for per share data)	~~Foreign Currency Translation and Other is net of an average 24% estimated tax at July 1, 2017 as the Company has not recognized deferred tax assets for some of our foreign entities.~~



							Unrecognized Pension and Postretirement Medical Expense			Foreign Currency Translation and Other			AOCI
	Market Value Adjustments
Tax on AOCI	Investments			Cash Flow Hedges
Balance at December 30, 2017	$	(7	)	$	25		$	1,804		$	100		$	1,922
Quarter Ended March 31, 2018:
Unrealized gains (losses) arising during the period	(3		)	25			(3		)	(33		)	(14		)
Reclassifications of realized net (gains) losses to net income	—			(9		)	(23		)	—			(32		)
Balance at March 31, 2018	$	(10	)	$	41		$	1,778		$	67		$	1,876

Balance at December 31, 2016	$	(11	)	$	(143	)	$	2,146		$	142		$	2,134
Quarter Ended April 1, 2017:
Unrealized gains (losses) arising during the period	(3		)	74			7			(5		)	73
Reclassifications of realized net (gains) losses to net income	2			19			(40		)	—			(19		)
Balance at April 1, 2017	$	(12	)	$	(50	)	$	2,113		$	137		$	2,188

Balance at September 30, 2017	$	(7	)	$	46		$	1,839		$	116		$	1,994
Six Months Ended March 31, 2018:
Unrealized gains (losses) arising during the period	(3		)	12			(3		)	(49		)	(43		)
Reclassifications of net (gains) losses to net income	—			(17		)	(58		)	—			(75		)
Balance at March 31, 2018	$	(10	)	$	41		$	1,778		$	67		$	1,876

Balance at October 1, 2016	$	(18	)	$	13		$	2,208		$	192		$	2,395
Six Months Ended April 1, 2017:
Unrealized gains (losses) arising during the period	4			(108		)	(15		)	(55		)	(174		)
Reclassifications of net (gains) losses to net income	2			45			(80		)	—			(33		)
Balance at April 1, 2017	$	(12	)	$	(50	)	$	2,113		$	137		$	2,188

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



							Unrecognized Pension and Postretirement Medical Expense			Foreign Currency Translation and Other			AOCI
	Market Value Adjustments
AOCI, after tax	Investments			Cash Flow Hedges
Balance at December 30, 2017	$	7		$	(44	)	$	(3,006	)	$	(361	)	$	(3,404	)
Quarter Ended March 31, 2018:
Unrealized gains (losses) arising during the period	7			(140		)	21			70			(42		)
Reclassifications of realized net (gains) losses to net income	—			28			73			—			101
Balance at March 31, 2018	$	14		$	(156	)	$	(2,912	)	$	(291	)	$	(3,345	)

Balance at December 31, 2016	$	15		$	255		$	(3,605	)	$	(520	)	$	(3,855	)
Quarter Ended April 1, 2017:
Unrealized gains (losses) arising during the period	5			(132		)	12			58			(57		)
Reclassifications of realized net (gains) losses to net income	(4		)	(32		)	68			—			32
Balance at April 1, 2017	$	16		$	91		$	(3,525	)	$	(462	)	$	(3,880	)

Balance at September 30, 2017	$	8		$	(62	)	$	(3,067	)	$	(407	)	$	(3,528	)
Six Months Ended March 31, 2018:
Unrealized gains (losses) arising during the period	6			(134		)	21			116			9
Reclassifications of net (gains) losses to net income	—			40			134			—			174
Balance at March 31, 2018	$	14		$	(156	)	$	(2,912	)	$	(291	)	$	(3,345	)

Balance at October 1, 2016	$	26		$	(25	)	$	(3,651	)	$	(329	)	$	(3,979	)
Six Months Ended April 1, 2017:
Unrealized gains (losses) arising during the period	(6		)	192			(10		)	(133		)	43
Reclassifications of net (gains) losses to net income	(4		)	(76		)	136			—			56
Balance at April 1, 2017	$	16		$	91		$	(3,525	)	$	(462	)	$	(3,880	)

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						Nine Months Ended						Affected line item in the Condensed Consolidated Statements of Income:	Quarter Ended						Six Months Ended
		July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016				March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Investments, net	Interest expense, net	$	—		$	—		$	6		$	—		Interest expense, net	$	—		$	6		$	—		$	6
Estimated tax	Income taxes	—			—			(2		)	—			Income taxes	—			(2		)	—			(2		)
		—			—			4			—				—			4			—			4

Cash flow hedges	Primarily revenue	41			56			162			228			Primarily revenue	(37		)	51			(57		)	121
Estimated tax	Income taxes	(15		)	(21		)	(60		)	(85		)	Income taxes	9			(19		)	17			(45		)
		26			35			102			143				(28		)	32			(40		)	76

Pension and postretirement medical expense	Costs and expenses	(108		)	(65		)	(324		)	(199		)	Costs and expenses	(96		)	(108		)	(192		)	(216		)
Estimated tax	Income taxes	40			24			120			74			Income taxes	23			40			58			80
		(68		)	(41		)	(204		)	(125		)		(73		)	(68		)	(134		)	(136		)

Total reclassifications for the period		$	(42	)	$	(6	)	$	(98	)	$	18			$	(101	)	$	(32	)	$	(174	)	$	(56	)

At ~~July 1,~~March 31, 2018 and September 30, 2017, unrealized gains and ~~October 1, 2016, the Company held~~losses on available-for-sale investments ~~in unrecognized gain positions totaling $23 million and $49 million, respectively, and no investments in significant unrecognized loss positions.~~were not material.


9.11.	Equity-Based Compensation

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


	Quarter Ended				Nine Months Ended				Quarter Ended				Six Months Ended
	July 1, 2017		July 2, 2016		July 1, 2017		July 2, 2016		March 31, 2018		April 1, 2017		March 31, 2018		April 1, 2017
Stock options	$	20	$	26	$	62	$	72	$	23	$	22	$	46	$	42
RSUs	69		74		216		233		77		70		148		147
Total equity-based compensation expense ⁽¹⁾	$	89	$	100	$	278	$	305	$	100	$	92	$	194	$	189
Equity-based compensation expense capitalized during the period	$	19	$	18	$	61	$	52	$	18	$	21	$	37	$	42


⁽¹⁾	Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs.

Unrecognized compensation cost related to unvested stock options and RSUs was $~~162~~178 million and $~~555~~618 million, respectively, as of ~~July 1, 2017~~March 31, 2018.

The weighted average grant date fair values of options granted during the ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 and ~~July 2, 2016~~April 1, 2017 were $~~25.66~~28.01 and $~~31.08~~25.79, respectively.

During the ~~nine~~six months ended ~~July 1, 2017~~,March 31, 2018, the Company made equity compensation grants consisting of ~~4.9~~4.0 million stock options and ~~3.7~~4.2 million RSUs.


~~10.~~12.	Commitments and Contingencies

Legal Matters

~~Beef Products, Inc. v. American Broadcasting Companies, Inc.~~ OnSeptember 13, 2012, plaintiffs filed an action in South Dakota state court against certain subsidiaries and employees of the Company and others, asserting claims for defamation arising from alleged false statements and implications, statutory and common law product disparagement, and tortious interference with existing and prospective business relationships. The claims arise out of ABC News reports published in March and April 2012 about a product, Lean Finely Textured Beef, that was included in ground beef and hamburger meat. Plaintiffs’ complaint sought actual and consequential damages in excess of $400 million (which in March 2016 they asserted could be as

~~THE WALT DISNEY COMPANY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

much as $1.9 billion), statutory damages (including treble damages) pursuant to South Dakota’s Agricultural Food Products Disparagement Act, and punitive damages. During the current quarter, the matter was settled during trial.

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~~businesses. Management does not believe that the Company has incurred a probable material loss by reason of any of those actions.

Contractual Guarantees

The Company has guaranteed bond issuances by the Anaheim Public Authority that were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the Disneyland Resort. Revenues from sales,

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of ~~July 1, 2017,~~March 31, 2018, the remaining debt service obligation guaranteed by the Company was ~~$311~~$301 million, of which ~~$50~~$47 million was principal. To the extent that tax revenues exceed the debt service payments in subsequent ~~periods,~~to the Company funding a shortfall, the Company would be reimbursed for any previously funded shortfalls. To date, tax revenues have exceeded the debt service payments for these bonds.

The Company has guaranteed $113 million of Hulu LLC’s $338 million term loan, which expires in ~~October 2017.~~August 2022. The Company is also committed to make a capital contribution of approximately $450 million to Hulu in calendar 2018. For the six months ended March 31, 2018, the Company made capital contributions of $114 million against this commitment. Hulu is a joint venture in which the Company has a 30% ownership interest.

Long-Term Receivables and the Allowance for Credit Losses

The Company has accounts receivable with original maturities greater than one year related to the sale of television program rights and vacation ownership units. Allowances for credit losses are established against these receivables as necessary.

The Company estimates the allowance for credit losses related to receivables from the sale of television programs based upon a number of factors, including historical experience and the financial condition of individual companies with which we do business. The balance of television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was ~~$0.9~~$0.8 billion as of ~~July 1, 2017.~~March 31, 2018. The activity in the current period related to the allowance for credit losses was not material.

The Company estimates the allowance for credit losses related to receivables from sales of its vacation ownership units based primarily on historical collection experience. Estimates of uncollectible amounts also consider the economic environment and the age of receivables. The balance of mortgage receivables recorded in other non-current assets, net of a related allowance for credit losses of approximately 4%, was approximately $0.7 billion as of ~~July 1, 2017.~~March 31, 2018. The activity in the current period related to the allowance for credit losses was not material.

~~Income Taxes~~

During the nine months ended July 1, 2017, the Company decreased its gross unrecognized tax benefits by an amount that was not material. As of July 1, 2017, gross unrecognized tax benefits totaled $818 million.

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 $170 million, of which $52 million would reduce our income tax expense and effective tax rate if recognized.

~~11.~~ ~~Fair Value Measurements~~


13.	Fair Value Measurements

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and is generally classified in one of the following ~~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 March 31, 2018
	Level 1		Level 2			Level 3		Total
Assets
Investments	$	42	$	—		$	—	$	42
Derivatives
Foreign exchange	—		458			—		458
Other	—		10			—		10
Liabilities
Derivatives
Interest rate	—		(296		)	—		(296		)
Foreign exchange	—		(688		)	—		(688		)
Total recorded at fair value	$	42	$	(516	)	$	—	$	(474	)
Fair value of borrowings	$	—	$	23,762		$	1,267	$	25,029

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Fair Value Measurement at July 1, 2017
Level 1 Level 2 Level 3 Total
Assets
Investments $ 40
$ —
$ —
$ 40
Derivatives
Interest rate —
10
—
10
Foreign exchange —
497
—
497
Other —
3
—
3
Liabilities
Derivatives
Interest rate —
(119 ) —
(119 )
Foreign exchange —
(414 ) —
(414 )
Other —
(2 ) —
(2 )
Total recorded at fair value $ 40
$ (25 ) $ —
$ 15
Fair value of borrowings $ —
$ 21,351
$ 1,421
$ 22,772


	Fair Value Measurement at October 1, 2016										Fair Value Measurement at September 30, 2017
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Assets
Investments	$	85	$	—		$	—	$	85		$	36	$	—		$	—	$	36
Derivatives
Interest rate	—		132			—		132			—		10			—		10
Foreign exchange	—		596			—		596			—		403			—		403
Other	—		6			—		6			—		8			—		8
Liabilities
Derivatives
Interest rate	—		(13		)	—		(13		)	—		(122		)	—		(122		)
Foreign exchange	—		(510		)	—		(510		)	—		(427		)	—		(427		)
Other	—		(4		)	—		(4		)
Total recorded at fair value	$	85	$	207		$	—	$	292		$	36	$	(128	)	$	—	$	(92	)
Fair value of borrowings	$	—	$	19,500		$	1,579	$	21,079		$	—	$	23,110		$	2,764	$	25,874

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

Level 2 borrowings, which include commercial paper, ~~and~~ U.S. medium-term notes and certain foreign currency denominated borrowings, are valued based on quoted prices for similar instruments in active markets.

Level 3 borrowings ~~which~~ include the Asia ~~International~~ Theme Park borrowings, ~~and other foreign currency denominated borrowings,~~which are ~~generally~~ valued based on ~~historical market transactions, prevailing market interest rates and~~ the ~~Company’s~~ current borrowing cost and credit ~~risk.~~risk of the Asia Theme Parks as well as historical market transactions and prevailing market interest rates.

The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.

~~THE WALT DISNEY COMPANY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~12.Derivative Instruments~~


14.	Derivative Instruments

The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.

The Company’s derivative positions measured at fair value are summarized in the following tables:


	As of July 1, 2017												As of March 31, 2018
	Current Assets			Other Assets			Other Current Liabilities			Other Long- Term Liabilities			Current Assets			Other Assets			Other Current Liabilities			Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	207		$	155		$	(120	)	$	(120	)	$	107		$	308		$	(281	)	$	(282	)
Interest rate	—			10			(100		)	—			—			—			(260		)	—
Other	2			1			(2		)	—			8			2			—			—
Derivatives not designated as hedges
Foreign exchange	135			—			(165		)	(9		)	25			18			(86		)	(39		)
Interest rate	—			—			—			(19		)	—			—			—			(36		)
Gross fair value of derivatives	344			166			(387		)	(148		)	140			328			(627		)	(357		)
Counterparty netting	(252		)	(112		)	252			112			(125		)	(324		)	206			243
Cash collateral (received)/paid	(45		)	(10		)	11			—			(10		)	—			261			—
Net derivative positions	$	47		$	44		$	(124	)	$	(36	)	$	5		$	4		$	(160	)	$	(114	)

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	As of October 1, 2016												As of September 30, 2017
	Current Assets			Other Assets			Other Current Liabilities			Other Long- Term Liabilities			Current Assets			Other Assets			Other Current Liabilities			Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	278		$	191		$	(209	)	$	(163	)	$	175		$	190		$	(192	)	$	(170	)
Interest rate	—			132			(13		)	—			—			10			(106		)	—
Other	3			3			(4		)	—			6			2			—			—
Derivatives not designated as hedges
Foreign exchange	125			2			(133		)	(5		)	38			—			(46		)	(19		)
Interest rate													—			—			—			(16		)
Gross fair value of derivatives	406			328			(359		)	(168		)	219			202			(344		)	(205		)
Counterparty netting	(241		)	(199		)	316			124			(142		)	(190		)	188			144
Cash collateral (received)/paid	(77		)	(44		)	7			—			(20		)	(7		)	19			—
Net derivative positions	$	88		$	85		$	(36	)	$	(44	)	$	57		$	5		$	(137	)	$	(61	)

Interest Rate Risk Management

The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and ~~to lower overall borrowing costs.~~on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company primarily uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate risk management activities.

~~THE WALT DISNEY COMPANY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of ~~July 1, 2017~~March 31, 2018 and ~~October 1, 2016~~September 30, 2017, the total notional amount of the Company’s pay-floating interest rate swaps was $7.8 billion and ~~$8.3~~$8.2 billion, respectively. The following table summarizes adjustments related to fair value hedges included in “Interest expense, net” in the Condensed Consolidated Statements of Income.


	Quarter Ended						Nine Months Ended						Quarter Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Gain (loss) on interest rate swaps	$	39		$	30		$	(203	)	$	79		$	(102	)	$	(10	)	$	(166	)	$	(242	)
Gain (loss) on hedged borrowings	(39		)	(30		)	203			(79		)	102			10			166			242

In addition, during the quarter and ~~nine~~six months ended ~~July 1, 2017,~~March 31, 2018, the Company realized net benefits of ~~$7 million~~zero and ~~$29~~$7 million, respectively in “Interest expense, net” related to pay-floating interest rate swaps. During the quarter and ~~nine~~six months ended ~~July 2, 2016,~~April 1, 2017, the Company realized net benefits of ~~$24~~$10 million and ~~$73~~$22 million, respectively in “Interest expense, net” related to pay-floating interest rate swaps.

The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at ~~July 1, 2017~~March 31, 2018 or at ~~October 1, 2016~~September 30, 2017, and gains and losses related to pay-fixed swaps recognized in earnings for the quarter and ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 and ~~July 2, 2016~~April 1, 2017 were not material.

To facilitate its interest rate risk management activities, the Company sold ~~an option~~options in November 2016 and October 2017 to enter into a future pay-floating interest rate ~~swap~~swaps indexed to LIBOR for ~~$0.5~~$1.0 billion in future borrowings. The fair ~~value~~values of ~~this contract~~these contracts as of ~~July 1, 2017 was~~March 31, 2018 were not material. In April 2018, the Company sold additional options for $1.0 billion in future borrowings with similar terms. The ~~option is~~options are not designated as ~~a hedge~~hedges and ~~does~~do not qualify for hedge ~~accounting,~~accounting; accordingly, changes in their fair value are recorded in earnings.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 ~~July 1, 2017~~March 31, 2018 and ~~October 1, 2016~~September 30, 2017, the notional amounts of the Company’s net foreign exchange cash flow hedges were $~~5.6~~6.8 billion and ~~$5.6~~$6.3 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the ~~quarter and nine~~six months ended ~~July 1, 2017~~March 31, 2018 and ~~July 2, 2016~~April 1, 2017 were not material. Net deferred ~~gains~~losses recorded in AOCI for contracts that will mature in the next twelve months totaled ~~$65~~$199 million.

~~THE WALT DISNEY COMPANY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at ~~July 1,~~March 31, 2018 and September 30, 2017 ~~and October 1, 2016~~ were ~~$3.5~~$3.3 billion and ~~$3.3~~$3.6 billion, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the net foreign exchange gains or losses on the foreign exchange contracts we entered into to mitigate our exposure with respect to foreign currency denominated assets and liabilities for the ~~nine~~quarter and six months ended ~~July 1, 2017~~March 31, 2018 and ~~July 2, 2016~~April 1, 2017 by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of ~~Income.~~Income:


	Costs and Expenses						Interest expense, net						Income Tax expense					Costs and Expenses						Interest expense, net						Income Tax expense
Quarter Ended:	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			July 1, 2017		July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Net gains (losses) on foreign currency denominated assets and liabilities	$	148		$	(75	)	$	(7	)	$	(2	)	$	4	$	15		$	64		$	110		$	24		$	(3	)	$	(15	)	$	(11	)
Net gains (losses) on foreign exchange risk management contracts not designated as hedges	(144		)	52			6			1			21		(19		)	(77		)	(103		)	(27		)	3			17			14
Net gains (losses)	$	4		$	(23	)	$	(1	)	$	(1	)	$	25	$	(4	)	$	(13	)	$	7		$	(3	)	$	—		$	2		$	3

Nine Months Ended:
Six Months Ended:
Net gains (losses) on foreign currency denominated assets and liabilities	$	25		$	(29	)	$	(3	)	$	(7	)	$	16	$	42		$	81		$	(123	)	$	27		$	4		$	(12	)	$	12
Net gains (losses) on foreign exchange risk management contracts not designated as hedges	(26		)	(32		)	2			5			4		(19		)	(91		)	118			(28		)	(4		)	16			(17		)
Net gains (losses)	$	(1	)	$	(61	)	$	(1	)	$	(2	)	$	20	$	23		$	(10	)	$	(5	)	$	(1	)	$	—		$	4		$	(5	)

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 ~~July 1, 2017~~March 31, 2018 and ~~October 1, 2016~~September 30, 2017 and related gains or losses recognized in earnings for the quarter and ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 and ~~July 2, 2016~~April 1, 2017 were not material.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Risk Management – Other Derivatives Not Designated as Hedges

The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which include certain swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings. The notional amount and fair value of these contracts at ~~July 1, 2017~~March 31, 2018 and ~~October 1, 2016~~September 30, 2017 were not material. The related gains or losses recognized in earnings ~~were not material~~ for the quarter and ~~nine~~six months ended ~~July~~March 31, 2018 and April 1, 2017 ~~and~~ ~~July 2, 2016~~.were not material.

Contingent Features and Cash Collateral

The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or the counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were ~~$171~~$535 million and ~~$86~~$217 million on ~~July 1, 2017~~March 31, 2018 and ~~October 1, 2016~~September 30, 2017, respectively.

~~THE WALT DISNEY COMPANY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~13.~~ ~~Restructuring and Impairment Charges~~


15.	Restructuring and Impairment Charges and Other Income

The Company recorded ~~$44~~$13 million and $28 million of restructuring and impairment charges in the ~~prior-year~~current quarter and six-month period, respectively, primarily ~~consisting of asset impairments associated with shutting down certain international film production operations in the Studio Entertainment segment.~~ for severance costs.

The Company recorded ~~$125~~$94 million of ~~restructuring and impairment charges~~other income in the ~~prior-year nine-month~~six-month period, which included ~~an investment impairment and contract termination and severance costs at our Media Networks segment as well as~~a $53 million gain from the ~~$44 million~~sale of ~~restructuring and impairment charges~~property rights in the ~~prior-year~~first quarter and $41 million, primarily for insurance proceeds related to a legal matter, in the current quarter.


16.	New Accounting Pronouncements

~~14.~~ ~~New~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the Financial Accounting ~~Pronouncements~~Standards Board (FASB) issued guidance as a result of the Tax Act to permit the reclassification of certain tax effects in accumulated other comprehensive income (AOCI) to retained earnings. Current accounting guidance requires that adjustments to deferred tax assets and liabilities for changes in enacted tax rates be recorded through income from continuing operations even if the deferred taxes were originally established through comprehensive income. The new guidance allows companies to make a one-time election to reclassify the tax effects resulting from the Tax Act on items in AOCI to retained earnings. The new guidance is effective beginning with the first quarter of the Company’s 2020 fiscal year (with early adoption permitted) and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company is currently assessing the potential impact this guidance will have on its financial statements.

Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued guidance to improve certain aspects of the hedge accounting model including making more risk management strategies eligible for hedge accounting and simplifying the assessment of hedge effectiveness. We do not expect the adoption of the new standard will have a material impact on our consolidated financial statements as our historical hedging ineffectiveness has been immaterial. The new guidance is effective beginning with the Company’s 2020 fiscal year (with early adoption permitted) and requires prospective adoption with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption for existing hedging relationships.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the ~~Financial Accounting Standards Board (FASB)~~FASB issued guidance that ~~will require~~requires presentation of the ~~Company to present all~~ components of net periodic pension and postretirement benefit costs other than service costs in an income statement line item outside of a subtotal of income from operations. The service cost component will continue to be presented in the same line items as other employee compensation costs. In addition, under the guidance ~~allows~~ only service costs ~~to be~~are eligible for capitalization, for example, as part of a self-constructed fixed asset or a film production. The new guidance is effective beginning with the first quarter of the Company’s 2019 fiscal ~~year (with early adoption permitted as of the beginning of an annual period).~~year. The guidance is required to be adopted retrospectively with respect to ~~the~~ income statement presentation ~~requirement~~ and prospectively for the capitalization requirement. We do not expect the change in capitalization requirement to have a material impact on our financial statements. See Note 68 of this filing and Note 10 to the Consolidated Financial Statements in the ~~2016~~2017 Annual Report on Form 10-K for the amount of each component of net periodic pension and postretirement benefit costs we have reported

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

historically. ~~The~~These amounts of net periodic pension and postretirement benefit costs ~~in these filings~~ are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement.

~~Restricted Cash~~

In November 2016, the FASB issued guidance that requires restricted cash to be included in cash and cash equivalents in the statement of cash flows. The guidance is required to be adopted retrospectively, and is effective beginning in the first quarter of the Company’s 2019 fiscal year (with early adoption permitted). At July 1, 2017 and October 1, 2016, the Company held restricted cash of approximately $92 million and $150 million, respectively, primarily associated with collateral received from counterparties to its derivative contracts. Changes in restricted cash are currently classified as operating activities in the Condensed Consolidated Statements of Cash Flows as a component of changes in “Other assets”. Under the new guidance, changes in the Company’s restricted cash will generally be classified as either operating activities or investing activities in the Condensed Consolidated Statements of Cash Flows, depending on the nature of the activities that gave rise to the restricted cash balance.

Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued guidance that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs instead of when the asset is sold to an outside party. The new guidance is effective beginning with the first quarter of the Company’s 2019 fiscal ~~year (with early adoption permitted as of the beginning of an annual period).~~year. The guidance requires prospective adoption with a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. ~~The Company is assessing~~We do not expect the ~~potential~~adoption to have a material impact ~~this guidance~~on our financial statements. We currently estimate that we will ~~have on its financial statements.~~

~~Stock Compensation - Employee Share-based Payments~~

In March 2016, the FASB issued guidance to amend certain aspects of accounting for employee share-based awards, including accounting for income taxes related to those transactions. The guidance requires that excess tax benefits and tax deficiencies (that result fromrecord approximately $0.1 billion as an increase ~~or decrease in~~to retained earnings upon adoption. Our assessment may change if we enter into new transactions between now and the ~~value~~date of an award from grant date to the vesting date or exercise date) on share-based compensation arrangements are recognized in the tax provision, instead of in equity as under the current guidance. In addition, these amounts are to be classified as an operating activity in the statement of cash flows, instead of as a financing activity. The Company reported excess tax benefits of $0.2 billion and $0.3 billion in fiscal 2016 and 2015, respectively.

In addition, cash paid for shares withheld to satisfy employee taxes is to be classified as a financing activity, instead of as an operating activity. Cash paid for employee taxes was $0.2 billion and $0.3 billion in fiscal 2016 and 2015, respectively. The fiscal 2016 and 2015 amounts of excess tax benefits and cash paid for employee taxes are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement.

~~THE WALT DISNEY COMPANY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~The Company adopted the new guidance in the first quarter of fiscal 2017. As of July 1, 2017, the impact of the new guidance was as follows:~~

During the quarter and nine months ended July 1, 2017, excess tax benefits of $25 million and $116 million, respectively, were recognized as a benefit in “Income taxes” in the Condensed Consolidated Statement of Income and classified as a source in operating activities in the Condensed Consolidated Statement of Cash Flows. The guidance required prospective adoption for the statement of income and allowed for either prospective or retrospective adoption for the statement of cash flows. The Company elected to prospectively adopt the effect to the statement of cash flows and accordingly, did not restate the Condensed Consolidated Statements of Cash Flows for the quarter and nine months ended July 2, 2016.

During the quarter and nine months ended July 1, 2017, cash paid for shares withheld to satisfy employee taxes of $5 million and $192 million, respectively, were classified as a use in financing activities in the Condensed Consolidated Statement of Cash Flows. The guidance required retrospective adoption; accordingly, for the quarter and nine months ended July 2, 2016, uses of $6 million and $229 million, respectively, were reclassified from operating activities to financing activities in the Condensed Consolidated Statements of Cash Flows.adoption.

Leases

In February 2016, the FASB issued a new lease accounting standard, which requires the present value of committed operating lease payments to be recorded as right-of-use lease assets and lease liabilities on the balance sheet. As of ~~October 1, 2016,~~September 30, 2017, the Company had an estimated ~~$3.1~~$3.3 billion in undiscounted future minimum lease commitments. The Company is currently assessing the impact of the new guidance on its financial statements. The guidance is required to be adopted retrospectively and is effective ~~beginning in~~at the ~~first quarter~~beginning of the Company’s 2020 fiscal year (with early adoption permitted). The FASB has recently proposed guidance that would allow adoption of the standard as of the effective date without restating prior periods.

Revenue from Contracts with Customers

In May 2014, the FASB issued guidance that replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model, eliminating industry-specific accounting rules. The core principle is to recognize revenue upon the transfer of control of goods or services to customers at an amount that reflects the consideration expected to be received. Since its issuance, the FASB has amended several aspects of the new guidance, including provisions that address revenue recognition associated with the licensing of intellectual ~~property.~~property (IP). The new guidance, including the amendments, is effective ~~beginning with~~at the ~~first quarter~~beginning of the Company’s 2019 fiscal ~~year (with early adoption permitted~~year.

We have reviewed our significant revenue streams and identified required changes to our revenue recognition policies. Based on our existing customer contracts and relationships, we do not expect the implementation of the new guidance will have a material impact on our consolidated financial statements upon adoption. The Company’s evaluation of the impact could change if we enter into new revenue arrangements in the future or interpretations of the new guidance further evolve.

While not expected to be material, the more significant changes to the Company’s revenue recognition policies are in the following areas:

For television and film content licensing agreements with multiple availability windows with the same licensee, the Company will defer more revenues to future windows than is currently deferred.

For licenses of character images, brands and trademarks subject to minimum guaranteed license fees, we currently recognize the difference between the minimum guaranteed amount and actual royalties earned from licensee merchandise sales (“shortfalls”) at the ~~beginning~~end of ~~fiscal year 2018).~~ the contract period. Under the new guidance, projected guarantee shortfalls will be recognized straight-line over the remaining license period once an expected shortfall is identified.

For licenses that include multiple television and film titles subject to minimum guaranteed license fees that are recoupable against the licensee’s aggregate underlying sales from all titles, the Company will allocate the minimum guaranteed license fee to each title and recognize the allocated license fee as revenue when the title is made available to the customer. License fees in excess of the allocated by-title minimum guarantee are deferred until the aggregate contractual minimum guarantee has been exceeded and thereafter recognized as earned based on the licensee’s underlying sales. Under current guidance, an upfront allocation of the minimum guarantee is not required as license fees are recognized as earned based on the licensee’s underlying sales with any shortfalls recognized at the end of the contract period.

For renewals or extensions of license agreements for television and film content, we will recognize revenue when the licensed content becomes available under the renewal or extension, instead of when the agreement is renewed or extended.

We are continuing our assessment of the information that may be necessary for the expanded disclosures required under the new guidance, as well as identifying potential changes to our internal controls to support our new revenue recognition policies and disclosure requirements.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The guidance may be adopted either by restating ~~all years presented in~~fiscal 2017 and 2018 to reflect the ~~Company’s financial statements~~impact of the new guidance (full retrospective method) or by recording the impact of adoption as an adjustment to retained earnings at the beginning of fiscal 2019 (modified retrospective method). The Company currently expects to adopt the ~~year~~standard using the modified retrospective method.

The Company’s equity method investees are considered private companies for purposes of ~~adoption. We~~applying the new guidance and are ~~assessing~~not required to adopt the new standard until fiscal years beginning after December 15, 2018. Our significant equity method investees are reviewing their revenue streams to determine the potential impact of ~~this guidance, including~~ the ~~impact~~new standard on ~~those areas~~their financial statements. We currently ~~subject~~do not expect any material impacts to industry-specific guidance such as licensing of intellectual property. We have reviewed all of our significant revenue streams to determine which of our accounting policies require change. We are now in the ~~process of evaluating how best to apply~~Company’s consolidated financial statements upon the ~~necessary changes, quantifying whether any~~investees’ adoption of the changes have a significant impact on the timing of revenue recognition, and reviewing potential changes to our disclosure requirements. Our assessment is expected to be completed by the end of the year. Our method of adoption will in part be based on the degree of change identified in our assessment.new guidance.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

ORGANIZATION OF INFORMATION

Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:

Consolidated Results and Non-segment Items

Seasonality

Business Segment Results

~~Tax~~ Impact of ~~Employee Share-Based Awards~~U.S. tax reform

Financial Condition

Commitments and Contingencies

Other Matters

Market Risk

CONSOLIDATED RESULTS AND NON-SEGMENT ITEMS

Our summary consolidated results are presented below:


	Quarter Ended						% Change		Nine Months Ended						% Change		Quarter Ended						% Change		Six Months Ended						% Change
(in millions, except per share data)	July 1, 2017			July 2, 2016			Better/ (Worse)		July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues:
Services	$	12,097		$	12,113		—	%	$	35,990		$	35,906		—	%	$	12,520		$	11,487		9	%	$	25,504		$	23,893		7	%
Products	2,141			2,164			(1)	%	6,368			6,584			(3)	%	2,028			1,849			10	%	4,395			4,227			4	%
Total revenues	14,238			14,277			—	%	42,358			42,490			—	%	14,548			13,336			9	%	29,899			28,120			6	%
Costs and expenses:
Cost of services (exclusive of depreciation and amortization)	(6,469		)	(5,946		)	(9)	%	(19,328		)	(18,568		)	(4)	%	(6,304		)	(5,839		)	(8)	%	(13,638		)	(12,859		)	(6)	%
Cost of products (exclusive of depreciation and amortization)	(1,248		)	(1,255		)	1	%	(3,764		)	(4,120		)	9	%	(1,229		)	(1,130		)	(9)	%	(2,632		)	(2,516		)	(5)	%
Selling, general, administrative and other	(2,022		)	(2,305		)	12	%	(5,948		)	(6,467		)	8	%	(2,247		)	(1,941		)	(16)	%	(4,326		)	(3,926		)	(10)	%
Depreciation and amortization	(711		)	(626		)	(14)	%	(2,074		)	(1,838		)	(13)	%	(731		)	(676		)	(8)	%	(1,473		)	(1,363		)	(8)	%
Total costs and expenses	(10,450		)	(10,132		)	(3)	%	(31,114		)	(30,993		)	—	%	(10,511		)	(9,586		)	(10)	%	(22,069		)	(20,664		)	(7)	%
Restructuring and impairment charges	—			(44		)	nm		—			(125		)	nm		(13		)	—			nm		(28		)	—			nm
Other expense	(177		)	—			nm		(177		)	—			nm
Other income, net																	41			—			nm		94			—			nm
Interest expense, net	(117		)	(70		)	(67)	%	(300		)	(161		)	(86)	%	(143		)	(84		)	(70)	%	(272		)	(183		)	(49)	%
Equity in the income of investees	124			152			(18)	%	327			776			(58)	%	6			85			(93)	%	49			203			(76)	%
Income before income taxes	3,618			4,183			(14)	%	11,094			11,987			(7)	%	3,928			3,751			5	%	7,673			7,476			3	%
Income taxes	(1,144		)	(1,471		)	22	%	(3,593		)	(4,089		)	12	%	(813		)	(1,212		)	33	%	(85		)	(2,449		)	97	%
Net income	2,474			2,712			(9)	%	7,501			7,898			(5)	%	3,115			2,539			23	%	7,588			5,027			51	%
Less: Net income attributable to noncontrolling interests	(108		)	(115		)	6	%	(268		)	(278		)	4	%	(178		)	(151		)	(18)	%	(228		)	(160		)	(43)	%
Net income attributable to Disney	$	2,366		$	2,597		(9)	%	$	7,233		$	7,620		(5)	%	$	2,937		$	2,388		23	%	$	7,360		$	4,867		51	%

Diluted earnings per share attributable to Disney	$	1.51		$	1.59		(5)	%	$	4.55		$	4.63		(2)	%	$	1.95		$	1.50		30	%	$	4.86		$	3.05		59	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Quarter Results

Revenues for the quarter ~~were comparable~~increased 9%, or $1.2 billion, to ~~the prior-year quarter at $14.2~~$14.5 billion; net income attributable to Disney ~~decreased 9%~~increased 23%, or ~~$231 million,~~$0.5 billion, to ~~$2.4~~$2.9 billion; and diluted earnings per share attributable to Disney (EPS) ~~decreased 5%~~increased 30% from ~~$1.59~~$1.50 to ~~$1.51.~~$1.95. The net income and EPS ~~decrease~~increase for the quarter was due to ~~lower operating results~~the benefit of new federal income tax legislation, the “Tax Cuts and Jobs Act” (Tax Act) (See Note 7 to the Condensed Consolidated Financial Statements), a ~~charge in connection with the settlement of litigation, partially offset by decreases in the effective tax rate and~~decrease in weighted average shares outstanding as a result of our share repurchase ~~program.~~program and higher segment operating income, partially offset by higher interest expense. The increase in segment operating income was due to growth at our Parks and Resorts and Studio Entertainment segments, partially offset by lower results at our Media Networks segment.

Revenues

Service revenues for the quarter increased 9%, or $1,033 million, to $12.5 billion due to higher guest spending and attendance at our parks and resorts, higher theatrical distribution revenue driven by the success of Black Panther, an increase in affiliate fees, revenue from BAMTech, which is now consolidated, and an increase in sponsorship revenue. In addition, ~~net income attributable to Disney~~service revenues reflected an approximate 1 percentage point ~~decline~~increase due to the movement of the U.S. dollar against major currencies including the impact of our hedging program (FX Impact).

~~Revenues~~

Service revenues for the quarter were flat at $12.1 billion as lower theatrical distribution and advertising revenue were offset by increased guest spending and attendance at our parks and resorts, growth in TV/subscription video on demand (SVOD) distribution revenue and higher fees from Multi-channel Video Distributors (MVPDs) (Affiliate Fees). The increase at our parks and resorts included the benefit of a full quarter of operations at Shanghai Disney Resort, which opened late in the third quarter of the prior year. Service revenue reflected an approximate 1 percentage point decline due to an unfavorable FX Impact.

Product revenues for the quarter ~~decreased 1%~~increased 10%, or ~~$23~~$179 million to ~~$2.1~~$2.0 billion due to lower volumes at our home entertainment distribution and retail businesses and the discontinuation of the Infinity console game business (Infinity). These decreases were partially offset by increased volume andincreases in guest spending and volumes at our parks and resorts ~~including the benefit from a full quarter of operations at Shanghai Disney Resort.~~and higher home entertainment revenues. Product ~~revenue~~revenues reflected an approximate 12 percentage point ~~decline~~increase due to ~~an unfavorable~~a favorable FX Impact.

Costs and expenses

Cost of services for the quarter increased 9%8%, or ~~$523~~$465 million, to ~~$6.5~~$6.3 billion ~~driven by increased sports programming costs and~~due to higher costs at our parks and resorts, ~~partially offset~~increased sports programming costs, costs from BAMTech, higher film cost amortization driven by ~~lower~~higher theatrical ~~distribution costs.~~revenue and higher film cost impairments. The increase at parks and resorts ~~reflected increased volume, including a full quarter of operations at Shanghai Disney Resort, costs associated with~~was driven by cost inflation, higher volumes and new guest ~~offerings and inflation.~~offerings. Cost of services reflected an approximate 1 percentage point increase due to an unfavorable FX Impact.

Cost of products for the quarter ~~decreased 1%~~increased 9%, or $7$99 million, to $1.2 billion ~~driven by lower retail~~due to higher volumes and ~~home entertainment volume and the discontinuation of Infinity. These decreases were partially offset by an increase~~cost inflation at our parks and resorts and higher film cost amortization due to ~~increased volume, including a full quarter~~an increase in home entertainment revenue. Cost of ~~operations at Shanghai Disney Resort, higher guest spending and cost inflation.~~products reflected an approximate 2 percentage point increase due to an unfavorable FX Impact.

Selling, general, administrative and other costs ~~decreased 12%~~increased 16%, or ~~$283~~$306 million, to ~~$2.0~~$2.2 billion driven by ~~lower~~higher theatrical marketing ~~costs.~~spend and costs from BAMTech. Selling, general, administrative and other costs reflected an approximate 21 percentage point ~~benefit from a favorable~~increase due to an unfavorable FX Impact.

Depreciation and amortization increased ~~14%~~8%, or ~~$85~~$55 million, to $0.7 billion, ~~primarily~~ due to ~~a full quarter~~depreciation of ~~operations~~new attractions at ~~Shanghai Disney Resort.~~our domestic parks and resorts.

Restructuring and impairment charges

The Company recorded ~~$44~~$13 million of restructuring and impairment charges in the ~~prior-year~~current quarter primarily ~~consisting of asset impairments associated with shutting down certain international film production operations in the Studio Entertainment segment.~~for severance costs.

Other income, net

Other ~~Expense~~

~~During~~income of $41 million for the current quarter ~~the Company recorded~~reflects insurance proceeds related to a ~~charge, net of committed insurance recoveries, in connection with the settlement of litigation. The Company is pursuing additional insurance coverage for this~~legal matter.

Interest expense, net

Interest expense, net is as follows:


	Quarter Ended								Quarter Ended
(in millions)	July 1, 2017			July 2, 2016			% Change Better/(Worse)		March 31, 2018			April 1, 2017			% Change Better/(Worse)
Interest expense	$	(134	)	$	(88	)	(52)	%	$	(172	)	$	(115	)	(50)	%
Interest and investment income	17			18			(6)	%	29			31			(6)	%
Interest expense, net	$	(117	)	$	(70	)	(67)	%	$	(143	)	$	(84	)	(70)	%

The increase in interest expense was primarily due to higher average debt balances and an increase in average interest rates.

Equity in the income of investees

24Equity in the income of investees decreased $79 million to $6 million for the quarter due to higher losses from Hulu, partially offset by higher operating results from A+E Television Networks (A+E). The decrease at Hulu was driven by higher

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

The increase in interest expense was due to higher average debt balances, lower capitalized interest and higher average interest rates. Capitalized interest was lower due to the completion of the majority of construction at Shanghai Disney Resort in the prior-year quarter.

~~Equity in the income of investees~~

Equity in the income of investees decreased $28 million to $124 million for the quarter due to a loss at BAMTech and an increased loss at Hulu, partially offset by higher income at A+E Television Networks (A+E). The Company acquired its 33% interest in BAMTech in August 2016 and January 2017. The decrease at Hulu was due to higherprogramming, marketing and labor costs, partially offset by higher subscription and advertising revenue. The increase at A+E was due to lower marketing and programming costs, a gain on an investment and higher affiliate revenue, partially offset by lower advertising revenue.

Effective Income Tax Rate

Quarter Ended
July 1,
2017 July 2,
2016
Change
Better/(Worse)
Effective income tax rate 31.6 % 35.2 % 3.6
ppt



	Quarter Ended
	March 31, 2018		April 1, 2017		Change Better/(Worse)
Effective income tax rate	20.7	%	32.3	%	11.6	ppt

The decrease in the effective income tax rate ~~for the quarter was primarily due to~~reflected a net favorable impact of the Tax Act, partially offset by lower tax benefits from ~~a change~~share-based awards. The net impact of the Tax Act reflects the following:

A reduction in ~~our estimated full year~~the Company’s fiscal 2018 U.S. statutory federal income tax rate to 24.5% from 35.0% in the prior year. Net of state tax and other related effects, the reduction in the statutory rate had an impact of approximately 10.2 percentage points on the effective income tax ~~rate, a decrease in foreign losses for which we are not recognizing a~~rate.

A net benefit of approximately $0.1 billion from updating our first quarter estimates of remeasuring our deferred tax ~~benefit and a benefit from the adoption of~~balances to the new ~~accounting pronouncement related to~~statutory rate and the ~~tax~~Deemed Repatriation Tax. This update includes the impact of ~~employee share-based awards (see~~legislation enacted in the second quarter that accelerated tax deductions into fiscal 2017 at the higher 2017 statutory rate. This net benefit had an impact of approximately 3.6 percentage points on the effective income tax rate.

Refer to Note ~~14 to~~7 of the Condensed Consolidated Financial Statements). The change in our estimated full year effective income tax rate was driven by an increase in our estimated benefit related to qualified domestic production activities. The estimated full year effective rate is used to determineStatements for further information on the ~~quarterly income tax provision and is adjusted each quarter based~~impact of the Tax Act on ~~information available at~~ the ~~end of that quarter.~~Company.

Noncontrolling Interests


	Quarter Ended						Quarter Ended
(in millions)	July 1, 2017		July 2, 2016		% Change Better/(Worse)		March 31, 2018		April 1, 2017		% Change Better/(Worse)
Net income attributable to noncontrolling interests	$	108	$	115	6	%	$	178	$	151	(18)	%

The ~~decrease~~increase in net income attributable to noncontrolling interests ~~for~~was due to lower tax expense at ESPN, largely due to the ~~quarter was driven by~~Tax Act, and the impact of ~~lower net income at ESPN,~~the Company’s acquisition of the noncontrolling interest in Disneyland Paris in the third quarter of the prior year, partially offset by ~~the impact of improvements~~lower operating results at Shanghai Disney ~~Resort and Disneyland Paris.~~Resort.

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

~~Nine-Month~~Six-Month Results

Revenues for the ~~nine-month~~six-month period ~~were comparable~~increased 6%, or $1.8 billion, to ~~the prior year at $42.4~~$29.9 billion; net income attributable to Disney ~~decreased 5%~~increased 51%, or ~~$387 million,~~$2.5 billion, to ~~$7.2~~$7.4 billion; and EPS ~~decreased 2%~~increased 59% from ~~$4.63~~$3.05 to ~~$4.55.~~$4.86. The EPS ~~decrease~~increase for the ~~nine-month~~six-month period was due to ~~lower operating results,~~ the ~~absence~~benefit of the Vice Gain (see Note 3 to the Condensed Consolidated Financial Statements), the third quarter charge in connection with the settlement of litigation and higher net interest expense. These decreases were partially offset by a benefit fromTax Act, a decrease in weighted average shares outstanding as a result of our share repurchase program aand higher segment operating income. These increases were partially offset by higher interest expense. The increase in segment operating income was due to growth at our Parks and Resorts and Studio Entertainment segments, partially offset by lower ~~effective income tax rate,~~results at our Media Networks segment.

Revenues

Service revenues for the ~~absence of~~six-month period increased 7%, or $1.6 billion, to $25.5 billion due to higher guest spending and volumes at our parks and resorts, higher theatrical distribution revenue, an increase in affiliate fees and revenue from BAMTech. These increases were partially offset by lower advertising revenue.

Product revenues for the ~~Infinity Charge (see Note 2 of the Condensed Consolidated Financial Statements)~~six-month period increased 4%, or $0.2 billion to $4.4 billion, due to increases in guest spending and ~~restructuring~~volumes at our parks and ~~impairment charges that were recorded in the prior year. In addition, net income attributable to Disney~~resorts, partially offset by lower home entertainment revenues. Product revenues reflected an approximate 1 percentage point ~~decline~~increase due to ~~an unfavorable~~a favorable FX Impact.

~~Revenues~~Costs and expenses

~~Service revenues~~Cost of services for the ~~nine-month~~six-month period ~~were essentially flat~~increased 6%, or $0.8 billion, to $13.6 billion, primarily due to higher costs at ~~$36.0 billion, as the benefit of the opening of Shanghai Disney Resort, an increase in guest spending and attendance at~~ our ~~other~~ parks and resorts, ~~growth in Affiliate Fees~~costs from BAMTech, increased sports programming costs and higher TV/SVOD distribution revenue were offset by lower theatrical and home entertainment distribution revenue, a decrease in merchandise licensing revenue and lower advertising revenue. Service revenue reflected an approximate 1 percentage point declinefilm cost amortization due to ~~an unfavorable FX Impact.~~

Product revenues for the nine-month period decreased 3%, or $0.2 billion, to $6.4 billion, due to lower volumes at our home entertainment distribution and retail businesses and the discontinuation of Infinity. These decreases were partially offset

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

~~by the benefit of the opening of Shanghai Disney Resort and~~ higher ~~guest spending~~theatrical revenue. The increase at ~~our other~~ parks and ~~resorts. Product revenue reflected an approximate 1 percentage point decline due to an unfavorable FX Impact.~~

~~Costs~~resorts was driven by cost inflation, higher volumes and ~~expenses~~new guest offerings.

Cost of ~~services~~products for the ~~nine-month~~six-month period increased 4%5%, or ~~$0.8~~$0.1 billion, to ~~$19.3~~$2.6 billion, due to ~~increased sports programming costs, the impact of the opening of Shanghai Disney Resort~~higher volumes and cost inflation at our ~~other~~ parks and ~~resorts. These increases were~~resorts, partially offset by lower film cost amortization ~~and theatrical distribution costs.~~

due to a decrease in home entertainment revenue. Cost of products ~~for the nine-month period decreased 9%, or $0.4 billion, to $3.8 billion,~~reflected an approximate 2 percentage point increase due to ~~the discontinuation of Infinity, the absence of the Infinity Charge and lower retail and home entertainment volumes, partially offset by~~ an ~~increase at our parks and resorts due to higher volumes, including a full quarter of operations at Shanghai Disney Resort, and inflation.~~unfavorable FX Impact.

Selling, general, administrative and other costs for the ~~nine-month~~six-month period ~~decreased 8%~~increased 10%, or ~~$0.5~~$0.4 billion, to ~~$5.9~~$4.3 billion, due to ~~lower~~higher marketing spend for theatrical ~~marketing~~distribution and parks and resorts, costs from BAMTech and ~~the discontinuation of Infinity.~~costs incurred in connection with our agreement to acquire Twenty-First Century Fox, Inc. Selling, general, administrative and other costs reflected an approximate 21 percentage point ~~benefit from a favorable~~increase due to an unfavorable FX Impact.

Depreciation and amortization for the ~~nine-month~~six-month period increased ~~13%~~8%, or ~~$236~~$110 million, to ~~$2.1~~$1.5 billion due to ~~a full quarter~~an increase in depreciation and amortization of ~~operations~~new attractions at ~~Shanghai Disney Resort.~~our domestic parks and resorts and Hong Kong Disneyland Resort, and the consolidation of BAMTech.

Restructuring and impairment charges

The Company recorded ~~$125~~$28 million of restructuring and impairment charges in the ~~prior-year nine-month~~current six-month period primarily for ~~investment and asset impairments and contract termination and~~ severance ~~costs in the Media Networks and Studio Entertainment segments.~~costs.

Other ~~Expense~~income, net

~~During~~Other income of $94 million for the ~~nine-month~~current six-month period reflects a gain from the ~~Company recorded~~sale of property rights and insurance proceeds related to a ~~charge, net of committed insurance recoveries, in connection with the settlement of litigation. The Company is pursuing additional insurance coverage for this~~legal matter.

Interest expense, net

Interest expense, net is as follows:


	Nine Months Ended								Six Months Ended
(in millions)	July 1, 2017			July 2, 2016			% Change Better/(Worse)		March 31, 2018			April 1, 2017			% Change Better/(Worse)
Interest expense	$	(370	)	$	(235	)	(57)	%	$	(318	)	$	(236	)	(35)	%
Interest and investment income	70			74			(5)	%	46			53			(13)	%
Interest expense, net	$	(300	)	$	(161	)	(86)	%	$	(272	)	$	(183	)	(49)	%

The increase in interest expense for the ~~nine-month~~six-month period was due to ~~lower capitalized interest, an increase in our~~higher average debt balances and ~~higher~~an increase in average interest rates. ~~Capitalized interest was lower due to the completion of the majority of construction at Shanghai Disney Resort in the prior-year third quarter.~~

Equity in the income of investees

Equity in the income of investees decreased ~~$449~~$154 million to ~~$327~~$49 million for the ~~nine-month~~six-month period ~~primarily~~ due to ~~the absence of the $332 million Vice Gain that was recognized in the prior-year nine-month period (See Note 3 to the Condensed Consolidated Financial Statements). The decrease also reflected~~ a higher loss at Hulu reflecting higher content, labor and ~~a loss at BAMTech. Results at Hulu reflected higher~~ marketing ~~content and labor~~ costs, partially offset by higher subscription and advertising revenue.

Effective Income Tax Rate

Nine Months Ended
July 1,
2017 July 2,
2016
Change
Better/(Worse)
Effective income tax rate 32.4 % 34.1 % 1.7
ppt



	Six Months Ended
	March 31, 2018		April 1, 2017		Change Better/(Worse)
Effective income tax rate	1.1	%	32.8	%	31.7	ppt

The decrease in the effective income tax rate ~~for the nine months was due to a favorable impact from the adoption~~reflected two significant impacts of the ~~new accounting pronouncement related~~Tax Act:

A net benefit of approximately $1.7 billion, which reflected an approximate $2.0 billion benefit from remeasuring our deferred tax balances to the ~~tax~~new statutory rate, partially offset by a charge of approximately $350 million from accruing the Deemed Repatriation Tax. This net benefit had an impact of ~~employee share-based awards ($116 million) (see Note 14~~approximately 22.2 percentage points on the effective income tax rate.

A reduction in the Company’s fiscal 2018 U.S. statutory federal income tax rate to 24.5% from 35.0% in the prior year. Net of state tax and other related effects, the reduction in the statutory rate had an impact of approximately 9.5 percentage points on the effective income tax rate.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Refer to Note 7 of the Condensed Consolidated Financial ~~Statements), a decrease in foreign losses~~Statements for ~~which we are not recognizing a tax benefit and an increase in our estimated benefit related to qualified domestic production activities.~~further information on the impact of the Tax Act on the Company.

Noncontrolling Interests


	Nine Months Ended						Six Months Ended
(in millions)	July 1, 2017		July 2, 2016		% Change Better/(Worse)		March 31, 2018		April 1, 2017		% Change Better/(Worse)
Net income attributable to noncontrolling interests	$	268	$	278	4	%	$	228	$	160	(43)	%

The ~~decrease~~increase in net income attributable to noncontrolling interests for the ~~nine-month~~six-month period was due to lower tax expense at ESPN, largely due to the Tax Act, and the impact of ~~lower net income at ESPN,~~the Company’s acquisition of the noncontrolling interest in Disneyland Paris in the third quarter of the prior year, partially offset by ~~the impact of improvements~~lower operating results at Shanghai Disney ~~Resort and Disneyland Paris.~~Resort.

SEASONALITY

The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.

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

Parks and Resorts revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods.

Studio Entertainment revenues fluctuate due to the timing and performance of releases in the theatrical, home entertainment and television markets. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods.

Consumer Products & Interactive Media revenues are influenced by seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first and fourth fiscal quarter, and the timing and performance of theatrical and game releases and cable programming broadcasts.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

BUSINESS SEGMENT RESULTS

The Company evaluates the performance of its operating segments based on segment operating income, which is shown below along with segment revenues:


	Quarter Ended				% Change		Nine Months Ended				% Change		Quarter Ended				% Change		Six Months Ended				% Change
(in millions)	July 1, 2017		July 2, 2016		Better/ (Worse)		July 1, 2017		July 2, 2016		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)
Revenues:
Media Networks	$	5,866	$	5,906	(1)	%	$	18,045	$	18,031	—	%	$	6,138	$	5,946	3	%	$	12,381	$	12,179	2	%
Parks and Resorts	4,894		4,379		12	%	13,748		12,588		9	%	4,879		4,299		13	%	10,033		8,854		13	%
Studio Entertainment	2,393		2,847		(16)	%	6,947		7,630		(9)	%	2,454		2,034		21	%	4,958		4,554		9	%
Consumer Products & Interactive Media	1,085		1,145		(5)	%	3,618		4,241		(15)	%	1,077		1,057		2	%	2,527		2,533		—	%
	$	14,238	$	14,277	—	%	$	42,358	$	42,490	—	%	$	14,548	$	13,336	9	%	$	29,899	$	28,120	6	%
Segment operating income:
Media Networks	$	1,842	$	2,372	(22)	%	$	5,427	$	6,083	(11)	%	$	2,082	$	2,223	(6)	%	$	3,275	$	3,585	(9)	%
Parks and Resorts	1,168		994		18	%	3,028		2,599		17	%	954		750		27	%	2,301		1,860		24	%
Studio Entertainment	639		766		(17)	%	2,137		2,322		(8)	%	847		656		29	%	1,676		1,498		12	%
Consumer Products & Interactive Media	362		324		12	%	1,371		1,541		(11)	%	354		367		(4)	%	971		1,009		(4)	%
	$	4,011	$	4,456	(10)	%	$	11,963	$	12,545	(5)	%	$	4,237	$	3,996	6	%	$	8,223	$	7,952	3	%

The following table reconciles ~~segment operating income to~~ income before income ~~taxes:~~taxes to segment operating income:


	Quarter Ended						% Change		Nine Months Ended						% Change		Quarter Ended					% Change		Six Months Ended					% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017		Better/ (Worse)		March 31, 2018			April 1, 2017		Better/ (Worse)
Segment operating income	$	4,011		$	4,456		(10)	%	$	11,963		$	12,545		(5)	%
Income before income taxes																	$	3,928		$	3,751	5	%	$	7,673		$	7,476	3	%
Add/(subtract):
Corporate and unallocated shared expenses	(99		)	(159		)	38	%	(392		)	(457		)	14	%	194			161		(20)	%	344			293		(17)	%
Restructuring and impairment charges	—			(44		)	nm		—			(125		)	nm		13			—		nm		28			—		nm
Other expense⁽¹⁾	(177		)	—			nm		(177		)	—			nm
Other income, net																	(41		)	—		nm		(94		)	—		nm
Interest expense, net	(117		)	(70		)	(67)	%	(300		)	(161		)	(86)	%	143			84		(70)	%	272			183		(49)	%
Vice Gain⁽²⁾	—			—			nm		—			332			nm
Infinity Charge⁽³⁾	—			—			nm		—			(147		)	nm
Income before income taxes	$	3,618		$	4,183		(14)	%	$	11,094		$	11,987		(7)	%
Segment Operating Income																	$	4,237		$	3,996	6	%	$	8,223		$	7,952	3	%


⁽¹⁾	During the quarter, the Company recorded a charge, net of committed insurance recoveries, in connection with the settlement of litigation. The Company is pursuing additional insurance coverage for this matter.


⁽²⁾	~~See Note 3 to the Condensed Consolidated Financial Statements for a discussion of the Vice Gain.~~


⁽³⁾	~~See Note 2 to the Condensed Consolidated Financial Statements for a discussion of the Infinity Charge.~~

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Depreciation expense is as follows:


	Quarter Ended				% Change		Nine Months Ended				% Change		Quarter Ended				% Change		Six Months Ended				% Change
(in millions)	July 1, 2017		July 2, 2016		Better/ (Worse)		July 1, 2017		July 2, 2016		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)
Media Networks
Cable Networks	$	34	$	37	8	%	$	105	$	111	5	%	$	45	$	35	(29)	%	$	84	$	71	(18)	%
Broadcasting	21		23		9	%	67		68		1	%	24		25		4	%	48		46		(4)	%
Total Media Networks	55		60		8	%	172		179		4	%	69		60		(15)	%	132		117		(13)	%
Parks and Resorts
Domestic	333		313		(6)	%	983		949		(4)	%	356		322		(11)	%	713		650		(10)	%
International	187		113		(65)	%	500		283		(77)	%	180		157		(15)	%	357		313		(14)	%
Total Parks and Resorts	520		426		(22)	%	1,483		1,232		(20)	%	536		479		(12)	%	1,070		963		(11)	%
Studio Entertainment	13		12		(8)	%	36		36		—	%	13		11		(18)	%	26		23		(13)	%
Consumer Products & Interactive Media	15		16		6	%	46		46		—	%	14		16		13	%	27		31		13	%
Corporate	60		61		2	%	189		185		(2)	%	55		61		10	%	109		129		16	%
Total depreciation expense	$	663	$	575	(15)	%	$	1,926	$	1,678	(15)	%	$	687	$	627	(10)	%	$	1,364	$	1,263	(8)	%

Amortization of intangible assets is as follows:


	Quarter Ended				% Change		Nine Months Ended				% Change		Quarter Ended				% Change		Six Months Ended				% Change
(in millions)	July 1, 2017		July 2, 2016		Better/ (Worse)		July 1, 2017		July 2, 2016		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)
Media Networks	$	3	$	4	25	%	$	9	$	14	36	%	$	—	$	4	—	%	$	20	$	6	>(100)	%
Parks and Resorts	1		1		—	%	3		3		—	%	1		1		—	%	1		2		50	%
Studio Entertainment	16		20		20	%	48		59		19	%	15		16		6	%	32		32		—	%
Consumer Products & Interactive Media	28		26		(8)	%	88		84		(5)	%	28		28		—	%	56		60		7	%
Total amortization of intangible assets	$	48	$	51	6	%	$	148	$	160	8	%	$	44	$	49	10	%	$	109	$	100	(9)	%

Media Networks

Operating results for the Media Networks segment are as follows:


	Quarter Ended						% Change		Quarter Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Affiliate fees	$	3,176		$	3,112		2	%	$	3,397		$	3,228		5	%
Advertising	2,006			2,140			(6)	%	1,917			1,931			(1)	%
TV/SVOD distribution and other	684			654			5	%	824			787			5	%
Total revenues	5,866			5,906			(1)	%	6,138			5,946			3	%
Operating expenses	(3,500		)	(3,002		)	(17)	%	(3,298		)	(3,101		)	(6)	%
Selling, general, administrative and other	(593		)	(622		)	5	%	(702		)	(646		)	(9)	%
Depreciation and amortization	(58		)	(64		)	9	%	(69		)	(64		)	(8)	%
Equity in the income of investees	127			154			(18)	%	13			88			(85)	%
Operating Income	$	1,842		$	2,372		(22)	%	$	2,082		$	2,223		(6)	%

Revenues

The increase in affiliate fees was due to growth of ~~approximately~~ 7% from higher contractual rates, partially offset by an ~~approximate 3 and one-half percent~~approximately 3% decrease from fewer subscribers.

The decrease in advertising revenues was due to a decrease of ~~$81~~$20 million at Broadcasting, from $1,000 million to $980 million, partially offset by an increase of $6 million at Cable Networks, from ~~$1,122~~$931 million to ~~$1,041 million and a decrease of $53 million at Broadcasting, from $1,018 million to $965~~$937 million. The decrease at ~~Cable Networks~~Broadcasting was due to a 7% decrease of 6% from lower network impressions, partially offset by ~~a 2%~~an increase of 3% from higher ~~rates. The decrease~~

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

network rates. Broadcast advertising revenue also benefited from the timing of New Year’s Rockin’ Eve (NYRE) relative to our fiscal periods. NYRE aired in the current quarter, whereas it aired in the first quarter of the prior year. The decrease in network impressions was ~~primarily~~ due to lower average viewership, ~~and a decrease~~partially offset by an increase in units ~~delivered including the impact~~delivered. Cable Networks advertising revenue reflected an increase of ~~two fewer NBA finals games. Broadcasting advertising revenues reflected decreases of 9%~~6% from ~~lower network impressions and 1% from the owned television stations, which were both due to lower average viewership. These decreases were~~higher rates, partially offset by a ~~6% increase~~decrease of 4% from ~~higher network rates.~~lower impressions due to decreases in average viewership and units delivered. Rates and average viewership benefited from the shift of College Football Playoff (CFP) bowl games between the first and second fiscal quarters. The current quarter included the CFP championship game, two semi-final games and one host bowl game, whereas the prior-year quarter included the championship game and three host games. Semi-final games generally generate more advertising revenue than host games.

TV/SVOD distribution and other revenue increased ~~$30~~$37 million ~~primarily~~ due to ~~higher program sales,~~the consolidation of BAMTech, partially offset by ~~an unfavorable FX Impact. The increase~~a decrease in program sales, ~~was primarily due to~~ ~~The Defenders, Quantico~~ ~~and~~ ~~Black-ish~~ ~~in the current quarter compared to~~which reflected higher sales of How to Get Away with Murder~~and~~ ~~Devious Maids~~ in the prior-year quarter. ~~This increase~~On September 25, 2017, the Company increased its ownership in BAMTech and began consolidating its results. The Company’s share of BAMTech’s results was ~~partially offset by a decrease~~previously reported in equity in the ~~number~~income of ~~cable titles sold in the current quarter.~~investees.

Costs and Expenses

Operating expenses include programming and production costs, which increased ~~$524~~$145 million, from ~~$2,679~~$2,839 million to ~~$3,203~~$2,984 million. At Cable Networks, programming and production costs increased ~~$388~~$148 million due to ahigher sports programming costs and the consolidation of BAMTech. Higher sports programming costs reflected the shift of CFP games, as semi-final games generally have higher costs than host games, and contractual rate ~~increase~~increases for college sports and NBA ~~programming and, to a lesser extent, severance and contract termination costs.~~programming. At Broadcasting, programming and production costs ~~increased $136~~decreased $3 million ~~primarily~~ due to ~~higher~~lower production cost write-downs and a decrease in program ~~sales and~~sales. These decreases were largely offset by a higher cost mix of network ~~programming.~~programming, including the impact of more hours of higher cost acquired programming, contractual increases, and the timing of NYRE. Other operating costs, which include distribution and technology costs, increased primarily due to the consolidation of BAMTech.

Selling, general, administrative and other costs ~~decreased $29~~increased $56 million, from ~~$622~~$646 million to ~~$593~~$702 million ~~driven by lower~~due to the consolidation of BAMTech and higher marketing costs atfor CFP bowl games and ABC Network mid-season premieres.

Depreciation and amortization increased $5 million, from $64 million to $69 million due to the ~~international Disney Channels and Freeform.~~consolidation of BAMTech.

Equity in the Income of Investees

Income from equity investees decreased ~~$27~~$75 million, from ~~$154~~$88 million to ~~$127~~$13 million due to ~~a loss at BAMTech and a~~ higher ~~loss at~~losses from Hulu, partially offset by higher ~~income at A+E.~~operating results from A +E. The decrease at Hulu was driven by higher programming, marketing and labor costs, partially offset by higher subscription and advertising revenue. The increase at A+E was due to lower marketing and programming costs, a gain from an investment and higher affiliate revenue, partially offset by lower advertising revenue.

Segment Operating Income

Segment operating income decreased ~~$530~~6%, or $141 million, to ~~$1,842~~$2,082 million due to ~~decreases at ESPN and the ABC Television Network and~~ lower income from equity ~~investees.~~investees, the consolidation of BAMTech, lower income from program sales and decreases at Freeform and ESPN. These decreases were partially offset by an increase at the owned television stations.

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


	Quarter Ended				% Change		Quarter Ended				% Change
(in millions)	July 1, 2017		July 2, 2016		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)
Revenues
Cable Networks	$	4,086	$	4,200	(3)	%
Cable Networks⁽¹⁾							$	4,252	$	4,062	5	%
Broadcasting	1,780		1,706		4	%	1,886		1,884		—	%
	$	5,866	$	5,906	(1)	%	$	6,138	$	5,946	3	%
Segment operating income
Cable Networks	$	1,462	$	1,893	(23)	%
Cable Networks⁽¹⁾							$	1,726	$	1,791	(4)	%
Broadcasting	253		325		(22)	%	343		344		—	%
Equity in the income of investees(1)	127		154		(18)	%	13		88		(85)	%
	$	1,842	$	2,372	(22)	%	$	2,082	$	2,223	(6)	%


⁽¹⁾	Cable Networks results in the current quarter include the consolidated results of BAMTech, whereas in the prior-year quarter the Company’s share of BAMTech’s results was reported in equity in the income of investees.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Parks and Resorts

Operating results for the Parks and Resorts segment are as follows:


	Quarter Ended						% Change		Quarter Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Domestic	$	3,935		$	3,697		6	%	$	3,965		$	3,556		12	%
International	959			682			41	%	914			743			23	%
Total revenues	4,894			4,379			12	%	4,879			4,299			13	%
Operating expenses	(2,687		)	(2,439		)	(10)	%	(2,843		)	(2,583		)	(10)	%
Selling, general, administrative and other	(515		)	(519		)	1	%	(538		)	(483		)	(11)	%
Depreciation and amortization	(521		)	(427		)	(22)	%	(537		)	(480		)	(12)	%
Equity in the loss of investees	(3		)	—			nm		(7		)	(3		)	>(100)	%
Operating Income	$	1,168		$	994		18	%	$	954		$	750		27	%

Revenues

Parks and Resorts revenues increased ~~12%~~13%, or ~~$515~~$580 million, to $4.9 billion due to increases of ~~$277~~$409 million at our domestic operations and $171 million at our international ~~operations and $238 million at our domestic~~ operations. ~~Results were favorably impacted by~~Revenue growth included a benefit from a shift in the timing of the Easter holiday ~~which~~relative to our fiscal periods. The current quarter included one week of the Easter holiday, whereas the entire Easter holiday fell in the third ~~quarter of the current year compared to the second~~ quarter of the prior year.

Revenue growth at our ~~international~~domestic operations reflected increases of ~~34% from higher volumes and~~ 7% from higher average guest spending, ~~partially offset by a decrease of 2%~~3% from ~~an unfavorable FX Impact. The increase in~~higher volumes ~~reflected a full quarter of operations at Shanghai Disney Resort in the current year~~ and ~~to a lesser extent,~~1% from higher ~~attendance at Disneyland Paris.~~sponsorship revenue. Guest spending growth ~~reflected an increase at Disneyland Paris~~was driven by higher average ticket prices for theme park admissions and ~~increased~~for cruise line sailings, an increase in average daily hotel room rates and higher food, beverage and ~~beverage~~merchandise spending. The increase in volume was due to attendance growth at Walt Disney World Resort.

Revenue growth at our ~~domestic~~international operations reflected increases of 4%12% from a favorable FX Impact, 8% from higher average guest spending and 2%4% from volume growth. Higher guest spending was driven by an increase in food, beverage and merchandise spending and higher ~~volumes. Guest spending growth~~average ticket prices at Disneyland Paris driven by less discounting. The increase in volumes was due to higher ~~average ticket prices for cruise line sailings~~attendance and ~~theme park admissions, increased average daily rates~~occupied room nights at ~~our hotels~~Hong Kong Disneyland Resort and ~~higher food and beverage spending. Higher volumes were due to attendance growth,~~Disneyland Paris, partially offset by lower occupied hotel room nights and a decrease in passenger cruise ship days. The decrease in occupied room nights was driven by reduced room inventory due to refurbishments and conversions to vacation club units. Lower passenger cruise ship days reflected the impact of the decreased attendance at Shanghai Disney ~~Fantasy~~ ~~dry-dock in the current quarter.~~Resort.

The following table presents supplemental park and hotel statistics:


	Domestic						International ⁽²⁾						Total						Domestic						International ⁽²⁾						Total
	Quarter Ended						Quarter Ended						Quarter Ended						Quarter Ended						Quarter Ended						Quarter Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			Mar. 31, 2018			Apr. 1, 2017			Mar. 31, 2018			Apr. 1, 2017			Mar. 31, 2018			Apr. 1, 2017
Parks
Increase/(decrease)
Attendance	8		%	(4)		%	72		%	1		%	22		%	(3)		%	5		%	4		%	1		%	70		%	4		%	17		%
Per Capita Guest Spending	2		%	8		%	(1)		%	4		%	(2)		%	7		%	6		%	—		%	10		%	—		%	7		%	(3)		%
Hotels ⁽¹⁾
Occupancy	88		%	90		%	84		%	81		%	87		%	88		%	90		%	88		%	84		%	82		%	88		%	87		%
Available Room Nights (in thousands)	2,533			2,597			772			635			3,305			3,232			2,509			2,561			787			719			3,296			3,280
Per Room Guest Spending		$330			$306			$311			$286			$326			$303			$347			$310			$252			$226			$326			$292


⁽¹⁾	Per room guest spending consists of the average daily hotel room rate, as well as food, beverage and merchandise sales 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 ~~2016 third~~2017 second quarter average foreign exchange rate.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Costs and Expenses

Operating expenses include operating labor, which increased ~~$98~~$147 million, from ~~$1,177~~$1,215 million to ~~$1,275~~$1,362 million, infrastructure costs, which increased ~~$89~~$58 million, from ~~$431~~$491 million to ~~$520~~$549 million, and cost of sales, which increased ~~$39~~$41 million, from ~~$383~~$385 million to ~~$422~~$426 million. The increase in operating labor was ~~due to new guest offerings, higher operations support costs,~~driven by inflation, ~~a full quarter of operations at Shanghai Disney Resort in the current year and~~ higher volumes, ~~at our other parks~~an unfavorable FX Impact and ~~resorts.~~a special fiscal 2018 domestic employee bonus. Higher infrastructure costs were ~~driven by~~primarily due to increased ~~operations support costs, the dry-dock of the~~ ~~Disney Fantasy~~technology spending and ~~a full quarter of operations at Shanghai Disney Resort.~~new guest offerings. The increase in cost of sales was ~~due to~~driven by higher volumes ~~including a full quarter of operations at Shanghai Disney Resort.~~and inflation. Other operating expenses, which include costs for such items as supplies, commissions, and entertainment offerings, increased $14 million, from $492 million to $506 million due to ~~new guest offerings, higher volumes and a full quarter of operations at Shanghai Disney Resort.~~an unfavorable FX Impact.

Selling, general, administrative and other costs ~~decreased~~increased $55 million, from $483 million to $538 million driven by inflation and an unfavorable FX Impact.

Depreciation and amortization increased $57 million, from $480 million to $537 million primarily due to new attractions at our domestic parks and resorts.

Equity in the Loss of Investees

Loss from equity investees increased $4 million ~~from $519 million~~ to ~~$515~~$7 million due to a higher ~~marketing spend~~operating loss from Villages Nature, in ~~the prior-year quarter in connection with the opening of Shanghai Disney Resort, largely offset by an increase in domestic marketing spend in the current quarter driven by new guest offerings.~~

~~The increase in depreciation and amortization was primarily due to~~which Disneyland Paris has a ~~full quarter of operations at Shanghai Disney Resort.~~50% interest.

Segment Operating Income

Segment operating income increased ~~18%~~27%, or ~~$174~~$204 million, to $~~1,168~~954 million due to growth at our domestic and international operations.

Studio Entertainment

Operating results for the Studio Entertainment segment are as follows:


	Quarter Ended						% Change		Quarter Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Theatrical distribution	$	1,044		$	1,510		(31)	%	$	956		$	710		35	%
Home entertainment	488			610			(20)	%	494			419			18	%
TV/SVOD distribution and other	861			727			18	%	1,004			905			11	%
Total revenues	2,393			2,847			(16)	%	2,454			2,034			21	%
Operating expenses	(1,099		)	(1,259		)	13	%	(956		)	(864		)	(11)	%
Selling, general, administrative and other	(626		)	(790		)	21	%	(623		)	(487		)	(28)	%
Depreciation and amortization	(29		)	(32		)	9	%	(28		)	(27		)	(4)	%
Operating Income	$	639		$	766		(17)	%	$	847		$	656		29	%

Revenues

The ~~decrease~~increase in theatrical distribution revenue was due to the ~~timing~~success of ~~Disney live action releases~~Black Panther in the current quarter with no comparable Marvel title in the prior-year quarter. This increase was partially offset by the performance of A Wrinkle in Time in the current quarter compared to Beauty and the Beast ~~and~~ ~~The Jungle Book.Beauty and the Beast~~ ~~was released in the second quarter of the current year, while~~ ~~The Jungle Book~~ ~~was released in the prior-year third quarter. The decrease also reflected the performance of other significant releases, which included~~ ~~Guardians of the Galaxy Vol. 2,Pirates of the Caribbean: Dead Men Tell No Tales~~ ~~and~~ ~~Cars 3~~ ~~in the current quartercompared to~~ ~~Captain America: Civil War~~, ~~Finding Dory~~ ~~and~~ ~~Alice Through the Looking Glass~~ in the prior-year quarter. ~~Additionally, the prior-year quarter included the continued performance of~~ ~~Zootopia, whereas there was no Disney feature animation title in release in the current quarter.~~

~~Lower~~The increase in home entertainment revenue was due to ~~decreases~~increases of ~~13%~~10% from ~~lower unit sales and 6% from lower~~higher average net effective ~~pricing. The decrease in~~pricing and 9% from higher unit sales, ~~was driven by~~both of which reflected the ~~performance~~successful release of Star Wars: The ~~Force Awakens~~Last Jedi. The increase in unit sales was due to the DVD/Blu-ray release of Star Wars: The Last Jedi in the ~~prior-year~~current quarter ~~compared to~~whereas the DVD/Blu-ray release of Rogue One: A Star Wars Story occurred in the ~~current~~prior-year third quarter. Other significant titles in the current quarter included ~~Beauty and the Beast~~ Thor: Ragnarokand ~~Moana~~Coco, whereas the prior-year quarter included ~~Zootopia~~Moana~~. The decrease in average net effective pricing was due to lower rates~~ and ~~a lower sales mix of new release titles. New release titles have a higher sales price than catalog titles.~~Doctor Strange. Net effective pricing is the wholesale selling price adjusted for discounts, sales incentives and returns.

~~Higher~~The increase in TV/SVOD distribution and other revenue was primarily due to ~~an increase~~increases of ~~16%~~4% from TV/SVOD distribution ~~primarily due to higher domestic rates,~~and 4% from stage plays. The increase from TV/SVOD distribution was driven by international growth and the ~~timing~~domestic free television sale of Star Wars: The Force Awakens in the current quarter, partially offset by fewer domestic pay television title availabilities. Higher stage play revenues were due to additional productions in the current quarter.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Costs and Expenses

Operating expenses include ~~a decrease~~an increase of ~~$103~~$66 million in film cost amortization, from ~~$868~~$590 million to ~~$765 million,~~$656 million. The increase in film cost amortization was due to ~~the impact of lower~~higher theatrical and home entertainment revenues and ~~lower~~an increase in film cost impairments, partially offset by a ~~higher~~lower average film cost amortization ratein the current quarter. Operating expenses also include cost of goods sold and distribution costs, which ~~decreased $57~~increased $26 million, from ~~$391~~$274 million to ~~$334~~$300 million due to ~~lower theatrical distribution costs and lower home entertainment unit sales.~~the increase in stage play productions.

Selling, general, administrative and other costs ~~decreased $164~~increased $136 million from ~~$790~~$487 million to ~~$626~~$623 million ~~primarily due to lower~~driven by higher theatrical and stage play marketing costs. The increase in theatrical marketing costs ~~driven by~~was due to spending on ~~the DreamWorks title,~~ ~~The BFG~~ Black Panther, and A Wrinkle in Time in the ~~prior-year~~current quarter compared to no DreamWorks titles released in the current quarter. The Company stopped distributing new DreamWorks releases after the fourth quarter of fiscal 2016. The current quarter also benefited from the timing of release for Beauty and the Beast~~, which released in the second quarter of the current year compared to~~ ~~The Jungle Book, which released~~ in the prior-year ~~third~~quarter, while higher stage play marketing costs reflected spending for additional productions in the current quarter.

Segment Operating Income

Segment operating income ~~decreased 17%~~increased 29%, or ~~$127~~$191 million, to ~~$639~~$847 million due to ~~lower~~increases in theatrical, ~~and~~ home entertainment and TV/SVOD distribution results, partially offset by ~~growth in TV/SVOD distribution and lower~~higher film cost impairments.

Consumer Products & Interactive Media

Operating results for the Consumer Products & Interactive Media segment are as follows:


	Quarter Ended						% Change		Quarter Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Licensing, publishing and games	$	746		$	776		(4)	%	$	732		$	727		1	%
Retail and other	339			369			(8)	%	345			330			5	%
Total revenues	1,085			1,145			(5)	%	1,077			1,057			2	%
Operating expenses	(431		)	(501		)	14	%	(436		)	(421		)	(4)	%
Selling, general, administrative and other	(249		)	(278		)	10	%	(245		)	(225		)	(9)	%
Depreciation and amortization	(43		)	(42		)	(2)	%	(42		)	(44		)	5	%
Operating Income	$	362		$	324		12	%	$	354		$	367		(4)	%

Revenues

~~Lower~~The increase in licensing, publishing and games revenue was due to decreases of 3% from our games business and 1% from our publishing business. The decrease in games revenue was due to the discontinuation of Infinity in the prior year and lower licensed game revenue, partially offset by higher minimum guarantee shortfall ~~recognition. The~~recognition, partially offset by a decrease ~~at our publishing business was driven by~~in settlements and lower ~~unit~~licensing revenues from sales of ~~comics.~~merchandise and games. Higher minimum guarantee shortfall recognition was due to a favorable timing impact. Shortfalls are generally recognized at the end of the contract period. For contracts that ended on December 31, shortfalls were recognized in the second quarter of the current year whereas they were recognized in the first quarter of the prior year.

~~Lower~~The increase in retail and other revenue was driven by higher sponsorship revenue and a ~~decrease of 10% from our retail business primarily due to lower comparable store sales. The~~favorable foreign currency impact, partially offset by a decrease in comparable store sales. Lower comparable store sales reflected ~~higher sales of~~ ~~Frozen, Star Wars and Finding Dory/Nemo merchandise~~a decrease in ~~the prior-year quarter, partially offset by~~ sales of Moana and Star Wars merchandise in the current ~~quarter.~~period, partially offset by higher sales of Mickey and Minnie merchandise.

Costs and Expenses

Operating expenses include a ~~$47~~$5 million decrease in cost of goods sold and distribution costs, from ~~$281~~$232 million to ~~$234 million, a $1 million decrease in labor and occupancy costs, from $132 million to $131~~$227 million and a ~~$24~~$20 million ~~decrease~~increase in other operating expenses, from $139 million to $159 million. Operating expenses also include product development expense, ~~from $73 million to $49~~which was flat at $50 million. The ~~decrease~~increase in ~~cost of goods sold~~other operating expenses, which include occupancy costs, labor at our retail stores and ~~distribution~~other direct costs, ~~was due to lower retail sales, the discontinuation of Infinity and the decrease in sales of comics. Lower product development expense~~ was driven by ~~fewer mobile games in development, the discontinuation of Infinity and lower spending on video content.~~an unfavorable FX Impact.

Selling, general, administrative and other costs ~~decreased $29~~increased $20 million from ~~$278~~$225 million to ~~$249~~$245 million ~~driven by lower costs at our merchandise licensing and games businesses. The decrease at our merchandise licensing business was driven by lower labor costs, while~~as the ~~decrease at our games business was due to~~prior year included the ~~discontinuation of Infinity.~~benefit from a settlement.

Segment Operating Income

Segment operating income ~~increased~~ ~~12%~~decreased 4%, or ~~$38~~$13 million, to $~~362~~354 million~~, due to increases at our merchandise~~ as higher income from licensing activities was more than offset by a decrease in comparable retail store sales and ~~games businesses.~~an unfavorable FX impact.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

BUSINESS SEGMENT RESULTS - ~~Nine~~Six Month Results

Media Networks

Operating results for the Media Networks segment are as follows:


	Nine Months Ended						% Change		Six Months Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Affiliate Fees	$	9,479		$	9,187		3	%	$	6,602		$	6,303		5	%
Advertising	6,466			6,706			(4)	%	4,237			4,460			(5)	%
TV/SVOD distribution and other	2,100			2,138			(2)	%	1,542			1,416			9	%
Total revenues	18,045			18,031			—	%	12,381			12,179			2	%
Operating expenses	(10,899		)	(10,261		)	(6)	%	(7,668		)	(7,399		)	(4)	%
Selling, general, administrative and other	(1,872		)	(1,941		)	4	%	(1,349		)	(1,279		)	(5)	%
Depreciation and amortization	(181		)	(193		)	6	%	(152		)	(123		)	(24)	%
Equity in the income of investees	334			447			(25)	%	63			207			(70)	%
Operating Income	$	5,427		$	6,083		(11)	%	$	3,275		$	3,585		(9)	%

Revenues

The increase in affiliate fees was due to an increase of 7% from higher contractual rates, partially offset by aan approximately 3% decrease ~~of 3%~~ from fewer subscribers.

The decrease in advertising revenues was due to decreases of ~~$144~~$118 million at Cable Networks, from ~~$3,523~~$2,338 million to ~~$3,379~~$2,220 million, and ~~$96~~$105 million at Broadcasting, from ~~$3,183~~$2,122 million to ~~$3,087~~$2,017 million. The decrease at Cable Networks was due to a 6% decrease from lower impressions, partially offset by a 3%2% increase from higher rates. The decrease at Broadcasting was due to ~~an 8%~~a 7% decrease from lower network impressions and a 2%3% decrease ~~from other~~at the owned television stations due to lower political advertising, partially offset by a 7%4% increase infrom network ~~rates and a 1% increase at the owned television stations driven by higher political advertising.~~rates. The decrease in impressions at both Broadcasting and Cable Networks ~~and Broadcasting~~ was due to lower average viewership.

TV/SVOD distribution and other revenue ~~decreased $38~~increased $126 million due to ~~an unfavorable FX impact, partially offset by higher program sales. The increase in program sales was due to higher sales~~the consolidation of ~~ABC titles,~~BAMTech, partially offset by lower sales of ~~cable programs.~~ABC titles reflecting higher sales of How to Get Away with Murder in the prior-year period.

Costs and Expenses

Operating expenses include programming and production costs, which increased ~~$701~~$192 million from ~~$9,352~~$6,850 million to ~~$10,053~~$7,042 million. At Cable Networks, programming and production costs increased ~~$618~~$159 million due to contractual rate increases for ~~NBA, NFL and~~ college sports ~~programming. These increases were partially offset by a lower cost mix of~~and NFL programming ~~at the Disney Channels and Freeform~~ and the ~~timing~~consolidation of ~~airing new seasons at the Disney Channels.~~BAMTech. At Broadcasting, programming and production costs increased ~~$83~~$33 million due to a higher cost mix of network programming, including the impact of more hours of higher cost acquired programming and contractual rate ~~increases~~increases. Other operating costs, which include distribution and ~~higher program sales. These increases were partially offset~~technology costs, increased driven by ~~lower cost write-downs for network programming.~~the consolidation of BAMTech.

Selling, general, administrative and other costs ~~decreased $69~~increased $70 million ~~primarily~~ due to ~~lower marketing costs~~the consolidation of BAMTech.

Depreciation and ~~a favorable FX Impact.~~amortization increased $29 million, from $123 million to $152 million due to the consolidation of BAMTech.

Equity in the Income of Investees

Income from equity investees decreased ~~$113~~$144 million from ~~$447~~$207 million to ~~$334~~$63 million due to a higher ~~loss~~losses at Hulu reflecting higher content, labor and ~~a loss at BAMTech. Results at Hulu reflected higher~~ marketing ~~content and labor~~ costs, partially offset by higher subscription and advertising revenue.

Segment Operating Income

Segment operating income decreased ~~11%~~9%, or ~~$656~~$310 million, to ~~$5,427~~$3,275 million due to ~~a decrease at ESPN and~~ lower income from equity investees, ~~partially offset by higher income from program sales and increases~~the consolidation of BAMTech, decreases at ~~the Disney Channels, Freeform~~ESPN and the owned television ~~stations.~~stations and lower income from program sales.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

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


	Nine Months Ended				% Change		Six Months Ended				% Change
(in millions)	July 1, 2017		July 2, 2016		Better/ (Worse)		March 31, 2018		April 1, 2017		Better/ (Worse)
Revenues
Cable Networks	$	12,576	$	12,676	(1)	%
Cable Networks⁽¹⁾							$	8,745	$	8,490	3	%
Broadcasting	5,469		5,355		2	%	3,636		3,689		(1)	%
	$	18,045	$	18,031	—	%	$	12,381	$	12,179	2	%
Segment operating income
Cable Networks	$	4,117	$	4,714	(13)	%
Cable Networks⁽¹⁾							$	2,584	$	2,655	(3)	%
Broadcasting	976		922		6	%	628		723		(13)	%
Equity in the income of investees(1)	334		447		(25)	%	63		207		(70)	%
	$	5,427	$	6,083	(11)	%	$	3,275	$	3,585	(9)	%

~~Restructuring and Impairment Charges~~

The Company recorded restructuring and impairment charges of $87 million related to Media Networks in the prior-year nine-month period due to an investment impairment and contract termination and severance costs.


⁽¹⁾	Cable Networks results in the current period include the consolidated results of BAMTech, whereas in the prior-year period the Company’s share of BAMTech’s results was reported in equity in the income of investees.

Parks and Resorts

Operating results for the Parks and Resorts segment are as follows:


	Nine Months Ended						% Change		Six Months Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Domestic	$	11,231		$	10,792		4	%	$	8,134		$	7,296		11	%
International	2,517			1,796			40	%	1,899			1,558			22	%
Total revenues	13,748			12,588			9	%	10,033			8,854			13	%
Operating expenses	(7,817		)	(7,341		)	(6)	%	(5,654		)	(5,130		)	(10)	%
Selling, general, administrative and other	(1,409		)	(1,413		)	—	%	(993		)	(894		)	(11)	%
Depreciation and amortization	(1,486		)	(1,235		)	(20)	%	(1,071		)	(965		)	(11)	%
Equity in the loss of investees	(8		)	—			nm		(14		)	(5		)	>(100)	%
Operating Income	$	3,028		$	2,599		17	%	$	2,301		$	1,860		24	%

Revenues

Parks and Resorts revenues increased 9%13%, or ~~$1,160~~$1,179 million, to ~~$13.7~~$10.0 billion due to increases of ~~$721~~$838 million at our domestic operations and $341 million at our international ~~operations and $439 million at our domestic~~ operations.

Revenue growth ~~at our international operations reflected increases of 34%~~included a benefit from ~~higher volumes and 5% from an increase in guest spending, partially offset by~~ a ~~decrease of 2% from an unfavorable FX Impact. Higher volumes were due to a full period of operations at Shanghai Disney Resort~~shift in the timing of the Easter holiday relative to our fiscal periods. The current period and, to a lesser extent, higher attendance and occupied room nights at Disneyland Paris. Guest spending growth reflected an increase at Disneyland Paris driven by higher food and beverage spending and average daily hotel room rates.included one week of the Easter holiday, whereas the entire Easter holiday fell in the third quarter of the prior year.

Revenue growth at our domestic operations reflected ~~an increase~~increases of 3%7% from higher average guest spending, 3% from volume growth and 1% from higher sponsorship revenue. Guest spending growth was primarily due to higher average ticket prices for theme park admissions and for cruise line sailings, ~~as well as~~ increased food, beverage and ~~beverage spending. Domestic~~merchandise spending and higher average daily hotel room rates. The increase in volumes ~~were comparable~~was due to ~~the prior year as increased~~higher attendance.

Revenue growth at our international operations reflected increases of 9% from a favorable FX Impact, 7% from an increase in volumes and 6% from higher average guest spending at Disneyland Paris. The increase in volumes was due to higher attendance ~~at Walt Disney World Resort was largely offset by lower~~and occupied room nights at ~~Walt Disney World Resort~~Disneyland Paris and Hong Kong Disneyland Resort. ~~The decrease in occupied room nights~~Guest spending growth at Disneyland Paris was driven by ~~reduced~~higher average ticket prices, driven by less discounting, and increases in food, beverage and merchandise spending and average daily hotel room ~~inventory due to refurbishments and conversions to vacation club units.~~rates.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

The following table presents supplemental park and hotel statistics:


	Domestic						International ⁽²⁾						Total						Domestic						International ⁽²⁾						Total
	Nine Months Ended						Nine Months Ended						Nine Months Ended						Six Months Ended						Six Months Ended						Six Months Ended
	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017			March 31, 2018			April 1, 2017
Parks
Increase/(decrease)
Attendance	2		%	2		%	64		%	(4)		%	15		%	1		%	5		%	(1)		%	6		%	59		%	5		%	11		%
Per Capita Guest Spending	3		%	7		%	(1)		%	4		%	(1)		%	7		%	6		%	4		%	9		%	(2)		%	7		%	(1)		%
Hotels ⁽¹⁾
Occupancy	89		%	90		%	82		%	79		%	87		%	88		%	90		%	90		%	84		%	80		%	89		%	88		%
Available Room Nights (in thousands)	7,663			7,788			2,222			1,869			9,885			9,657			5,024			5,129			1,587			1,450			6,611			6,579
Per Room Guest Spending		$321			$309			$279			$263			$312			$301			$345			$317			$272			$255			$329			$304


⁽¹⁾	Per room guest spending consists of the average daily hotel room rate, as well as food, beverage and merchandise sales 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 ~~2016 nine-month~~2017 six-month average foreign exchange rate.

Costs and Expenses

Operating expenses include operating labor, which increased ~~$198~~$259 million from ~~$3,494~~$2,417 million to ~~$3,692~~$2,676 million, infrastructure costs, which increased ~~$105~~$108 million from ~~$1,368~~$953 million to ~~$1,473~~$1,061 million, and cost of sales, which increased ~~$85~~$81 million from ~~$1,141~~$804 million to ~~$1,226~~$885 million. The increase in operating labor was primarily due to ~~a full period of operations at Shanghai Disney Resort in the current year,~~ inflation, higher volumes and ~~new guest offerings, partially offset by the benefit of efficiency initiatives.~~an unfavorable FX Impact. Higher infrastructure costs were ~~primarily due to a full period of operations at Shanghai Disney Resort, inflation and~~driven by increased technology spending, new guest ~~offerings.~~offerings, and higher maintenance costs. The increase in cost of sales was primarily due to ~~a full period of operations at Shanghai Disney Resort, inflation and~~ higher ~~volumes at our other parks and resorts.~~volumes. Other operating expenses, which include costs for such items as supplies, commissions and entertainment offerings, increased $76 million, from $956 million to $1,032 million primarily due to ~~a full period of operations at Shanghai Disney Resort and~~ new guest ~~offerings. The increases in operating expenses due to a full period of operations at Shanghai Disney Resort were partially offset by the absence of pre-opening costs.~~offerings and an unfavorable FX Impact.

Selling, general, administrative and other costs ~~decreased $4~~increased $99 million, from ~~$1,413~~$894 million to ~~$1,409~~$993 million primarily due to higher marketing spend.

Depreciation and amortization increased $106 million, from $965 million to $1,071 million driven by new attractions at our domestic parks and resorts and Hong Kong Disneyland Resort.

Equity in the Loss of Investees

Loss from equity investees increased $9 million to $14 million due to ~~lower marketing spend as well as the absence of pre-opening costs at Shanghai Disney Resort. These decreases were largely offset by an increase~~a higher operating loss from Villages Nature, in ~~domestic marketing spend driven by new guest offerings.~~

~~The increase in depreciation and amortization was due to~~which Disneyland Paris has a ~~full period of operations at Shanghai Disney Resort.~~50% interest.

Segment Operating Income

Segment operating income increased ~~17%~~24%, or ~~$429~~$441 million, to ~~$3,028~~$2,301 million due to growth at our ~~international~~domestic and ~~domestic~~international operations.

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:


	Nine Months Ended						% Change		Six Months Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Theatrical distribution	$	2,715		$	3,259		(17)	%	$	2,125		$	1,671		27	%
Home entertainment	1,454			1,728			(16)	%	884			966			(8)	%
TV/SVOD distribution and other	2,778			2,643			5	%	1,949			1,917			2	%
Total revenues	6,947			7,630			(9)	%	4,958			4,554			9	%
Operating expenses	(2,970		)	(3,200		)	7	%	(1,952		)	(1,871		)	(4)	%
Selling, general, administrative and other	(1,756		)	(2,013		)	13	%	(1,272		)	(1,130		)	(13)	%
Depreciation and amortization	(84		)	(95		)	12	%	(58		)	(55		)	(5)	%
Operating Income	$	2,137		$	2,322		(8)	%	$	1,676		$	1,498		12	%

Revenues

The ~~decrease~~increase in theatrical distribution revenue was due to two Marvel titles in the current year compared to one in the prior year and the comparison of Star Wars: The ~~Force Awakens~~Last Jedi in the ~~prior-year period~~current year to Rogue One: A Star Wars Story in the ~~current period, two Pixar~~prior year. The Marvel titles ~~in prior-year period compared to one~~ in the current ~~period and the performance of~~year were ~~Zootopia~~ ~~in the prior-year period compared to~~ ~~Moana~~ ~~in the current period. The Pixar titles in the prior-year period included~~ ~~Finding Dory~~Black Panther and ~~The Good Dinosaur~~Thor: Ragnarok, whereas the ~~current period~~prior year included ~~Cars 3~~Doctor Strange. These ~~decreases~~increases were partially offset by the ~~stronger~~ performance of ~~Disney live action titles and two Marvel titles,~~ ~~Guardians of the Galaxy Vol. 2~~ ~~and~~ ~~Doctor Strange~~A Wrinkle in Time in the current ~~period~~year compared to ~~one Marvel title,~~ ~~Captain America: Civil War~~Beauty and the Beast, in the ~~prior-year period. The Disney live action titles~~prior year. Other significant releases in the current ~~period~~year included ~~Beauty and the Beast~~ ~~and~~ ~~Pirates of the Caribbean: Dead Men Tell No Tales~~Coco, while the ~~prior-year period~~prior year included~~The Jungle Book~~ ~~and~~ ~~AliceThrough the Looking Glass.~~ Moana.

Lower home entertainment revenue was due to a decrease of ~~18%~~10% from lower unit sales, ~~driven~~partially offset by ~~lower~~an increase of 3% from higher average net effective pricing. Lower unit sales were due to one less feature animation release in the current year compared to the prior year. This decrease was partially offset by the DVD/Blu-ray release of Star ~~Wars Classic titles and lower performance~~Wars: The Last Jedi in the second quarter of the current year whereas the DVD/Blu-ray release of Rogue One: A Star Wars Story occurred in the prior-year third quarter. Feature animation releases in the current ~~period compared to~~year were ~~Star Wars: The Force Awakens~~Cars 3 inand Coco while the ~~prior-year period. Other significant titles in release~~prior year included Finding Dory, Moana, and Zootopia. Other significant titles in the current year included Thor: Ragnarok, whereas the prior year included Doctor Strange~~and~~ ~~Beauty and the Beast~~ ~~in the current period compared to~~ ~~Inside Out~~, ~~Zootopia~~, ~~Ant-Man~~ and Captain America: Civil War. The ~~Good Dinosaur~~increase in average net effective pricing was primarily due to higher rates and a higher sales mix of Blu-ray discs, partially offset by a lower mix of new release titles. Net effective pricing is the ~~prior-year period.~~wholesale selling price adjusted for discounts, sales incentives and returns.

Higher TV/SVOD distribution and other revenue was ~~driven by~~due to an increase of ~~10%~~3% from ~~TV/SVOD distribution,~~stage plays, partially offset by a 1% decrease ~~of 7%~~ from ~~lower revenue share with the Consumer Products & Interactive Media segment~~TV/SVOD distribution. Higher stage play revenues were due to ~~the stronger performance of merchandise based on Star Wars and~~ ~~Frozen~~additional productions in the ~~prior-year period.~~current year. The ~~increase~~decrease in TV/SVOD distribution was ~~primarily due to~~driven by fewer domestic pay television title availabilities, partially offset by international ~~growth and higher domestic rates.~~growth.

Costs and Expenses

Operating expenses include ~~a decrease~~an increase of ~~$112~~$76 million in film cost amortization, from ~~$2,133~~$1,256 million to ~~$2,021~~$1,332 million due to the impact of ~~lower~~higher theatrical distribution revenues and ~~a reduction~~an increase in film cost impairments, partially offset by a ~~higher~~lower average film cost amortization rate~~in the current period.~~ for theatrical releases. Operating expenses also include cost of goods sold and distribution costs, which ~~decreased $118~~increased $5 million, from ~~$1,067~~$615 million to ~~$949 million primarily due to a decrease in home entertainment unit sales and lower theatrical distribution costs.~~$620 million.

Selling, general, administrative and other costs ~~decreased $257~~increased $142 million from ~~$2,013~~$1,130 million to ~~$1,756~~$1,272 million ~~due to lower~~driven by higher theatrical and stage play marketing ~~costs and a favorable FX Impact.~~costs. The ~~decrease~~increase in theatrical marketing costs ~~reflected two DreamWorks~~was driven by more significant titles~~The BFG~~ ~~and~~ ~~Bridge of Spies,~~ ~~in the prior-year period compared to no DreamWorks releases~~ in the current ~~period. The Company stopped distributing new DreamWorks titles after~~year, while higher stage play marketing costs reflected spending for additional productions in the ~~fourth quarter of fiscal 2016.~~

~~The decrease in depreciation and amortization was driven by lower amortization of intangible assets.~~current year.

Segment Operating Income

Segment operating income ~~decreased 8%~~increased 12%, or ~~$185~~$178 million, to ~~$2,137~~$1,676 million due to ~~a decrease~~an increase in theatrical ~~and home entertainment~~ distribution results, partially offset by ~~growth in TV/SVOD distribution and lower~~higher film cost ~~impairments.~~impairments and a decrease in home entertainment distribution results.

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:


	Nine Months Ended						% Change		Six Months Ended						% Change
(in millions)	July 1, 2017			July 2, 2016			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Revenues
Licensing, publishing and games	$	2,409		$	2,905		(17)	%	$	1,636		$	1,663		(2)	%
Retail and other	1,209			1,336			(10)	%	891			870			2	%
Total revenues	3,618			4,241			(15)	%	2,527			2,533			—	%
Operating expenses	(1,406		)	(1,739		)	19	%	(996		)	(975		)	(2)	%
Selling, general, administrative and other	(708		)	(831		)	15	%	(477		)	(459		)	(4)	%
Depreciation and amortization	(134		)	(130		)	(3)	%	(83		)	(91		)	9	%
Equity in the income of investees	1			—			nm		—			1			—	%
Operating Income	$	1,371		$	1,541		(11)	%	$	971		$	1,009		(4)	%

Revenues

Lower licensing, publishing and games revenue was primarily due to ~~decreases of 9% from our games business, 6% from our merchandise licensing business and 2% from our publishing business. Lower games revenue was due to the discontinuation of Infinity~~a decrease in ~~the prior-year period and decreased licensing revenue from~~ ~~Star Wars: Battlefront.~~ ~~The decrease at our merchandise licensing business was due to lower revenue in the current period from merchandise based on Star Wars and~~ ~~Frozen~~ ~~and an unfavorable FX Impact,~~settlements, partially offset by higher ~~revenue~~licensing revenues from sales of merchandise ~~based on Cars. The decrease at our publishing business was~~and games driven by ~~lower sales of books based on~~ Star ~~Wars and various Disney properties and a decrease in comic book sales.~~Wars.

~~Lower~~The increase in retail and other revenue was driven by ~~a decrease of 10% from our~~higher online retail ~~business due to~~sales and increased sponsorship revenue, partially offset by lower comparable store ~~and online~~sales. The decrease in comparable store sales ~~in our key markets, reflecting higher~~reflected lower sales of Star Wars, ~~Frozen~~Moana and ~~Star Wars~~Finding Nemo/Dory merchandise in the ~~prior-year~~current period, partially offset by increased sales of ~~Moana~~ ~~merchandise in the current period.~~Cars merchandise.

Costs and Expenses

Operating expenses included a ~~$238~~$1 million ~~decrease~~increase in cost of goods sold and distribution costs, from ~~$1,046~~$574 million to ~~$808~~$575 million, ~~an $8~~a $29 million ~~decrease~~increase in ~~labor and occupancy costs,~~other operating expenses, from ~~$404~~$290 million to ~~$396~~$319 million, and ~~an $83~~a $9 million decrease in product development expense, from ~~$243~~$111 million to ~~$160~~$102 million. The ~~decrease~~increase in ~~cost of goods sold~~other operating expenses, which include occupancy costs, labor at our retail stores and ~~distribution~~other direct costs, was ~~due to the discontinuation of Infinity, lower~~driven by an unfavorable FX Impact at our retail ~~sales and the~~business. The decrease in ~~sales of books and comics. Lower~~ product development expense was primarily due to ~~the discontinuation of Infinity and~~ fewer ~~mobile~~ games in development.

Selling, general, administrative and other costs ~~decreased $123~~increased $18 million from ~~$831~~$459 million to ~~$708~~$477 million ~~primarily~~ due to the ~~discontinuation of Infinity~~benefit from a settlement in the prior year and ~~a favorable~~an unfavorable FX ~~Impact. The discontinuation of Infinity resulted in lower marketing costs.~~Impact at our retail business.

Segment Operating Income

Segment operating income decreased ~~11%~~4%, or ~~$170~~$38 million, to ~~$1,371~~$971 million due to ~~lower results~~decreases at our merchandise licensing ~~retail~~ and ~~publishing~~retail businesses, partially offset by ~~an improvement~~higher results at our games business.

Restructuring and Impairment Charges

~~In the prior-year period, the~~The Company recorded restructuring and impairment charges of $14 million related to Consumer Products and Interactive Media in the ~~Infinity Charge, which totaled $147 million and has been excluded from segment operating income (See Note 2 to the Condensed Consolidated Financial Statements).~~current-year period primarily for severance costs.

CORPORATE AND UNALLOCATED SHARED EXPENSES



	Quarter Ended						% Change		Six Months Ended						% Change
(in millions)	March 31, 2018			April 1, 2017			Better/ (Worse)		March 31, 2018			April 1, 2017			Better/ (Worse)
Corporate and unallocated shared expenses	$	(194	)	$	(161	)	(20)	%	$	(344	)	$	(293	)	(17)	%

Corporate and unallocated shared expenses increased $33 million to $194 million in the current quarter and increased $51 million to $344 million for the six-month period, due to costs incurred in connection with our agreement to acquire Twenty-First Century Fox, Inc. and higher compensation costs.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

~~CORPORATE AND UNALLOCATED SHARED EXPENSES~~

Quarter Ended % Change Nine Months Ended % Change
(in millions) July 1,
2017 July 2,
2016 Better/
(Worse) July 1,
2017 July 2,
2016 Better/
(Worse)
Corporate and unallocated shared expenses $ (99 ) $ (159 ) 38 % $ (392 ) $ (457 ) 14 %

~~The decrease in corporate and unallocated shared expense for the quarter and nine-month period was due to lower incentive compensation costs.~~

~~TAX~~ IMPACT OF ~~EMPLOYEE SHARE-BASED AWARDS~~U.S. FEDERAL INCOME TAX REFORM

As ~~disclosed~~discussed in Note 147 to the Condensed Consolidated Financial Statements, the ~~Company adopted new accounting guidance~~Tax Act resulted in the ~~first quarter of the current year with respect~~following impacts to the Company (the amounts recorded in the six-month period are provisional and will be refined during the remainder of fiscal 2018):

The Company’s federal statutory income tax ~~impacts (i.e. excess tax benefits or tax deficiencies) associated with employee share-based awards.~~ rate was reduced from 35.0% to 24.5% for fiscal 2018 and to 21.0% for following years.

For the ~~current quarter and nine-month~~six-month period ended March 31, 2018, the Company recognized ~~$25~~a net benefit of approximately $1.7 billion, which reflected an approximate $2.0 billion benefit from remeasuring our deferred tax balances to the new statutory rate, partially offset by a charge of approximately $350 million from accruing a Deemed Repatriation Tax.

Generally, there will no longer be a U.S. federal income tax cost on the repatriation of foreign earnings.

The Company will be eligible to claim an immediate deduction for investments in qualified fixed assets and ~~$116 million, respectively,~~film and television productions placed in service during fiscal 2018 through fiscal 2022. This provision phases out through fiscal 2027.

Certain provisions of ~~excess tax benefits in “Income Taxes”~~the Act are not effective for the Company until fiscal 2019 including:

The elimination of the domestic production activities deduction.

The taxation of certain foreign derived income in the ~~Condensed Consolidated Statements~~U.S. at an effective rate of ~~Income. Based~~approximately 13% (which increases to approximately 16% in 2025) rather than the general statutory rate of 21%.

A minimum effective tax on ~~expected vesting/forfeiture/exercise~~certain foreign earnings of ~~employee awards over~~approximately 13%.

We are continuing to assess the ~~remainder~~impacts of these provisions, but do not currently anticipate that the ~~year, we estimate that for the full year~~net impact will be material to our fiscal ~~2017 we will recognize approximately $120 million of excess~~2019 effective income tax benefits in “Income Taxes”. The market price of Company common stock and actual exercise decisions of employee option holders will determine the actual excess tax benefits or tax deficiencies and, accordingly, the excessrate.

We expect a cash tax benefit ~~that we recognize may be different than this estimate.~~

similar to the reduction in the statutory rate, as well as a benefit from the immediate deduction for investments in qualified fixed assets and film and television productions.

FINANCIAL CONDITION

The change in cash and cash equivalents is as follows:


	Nine Months Ended						% Change Better/ (Worse)		Six Months Ended						% Change Better/ (Worse)
(in millions)	July 1, 2017			July 2, 2016			% Change Better/ (Worse)		March 31, 2018			April 1, 2017			% Change Better/ (Worse)
Cash provided by operations	$	8,831		$	9,615		(8)	%	$	6,763		$	4,673		45	%
Cash used in investing activities	(3,290		)	(4,226		)	22	%	(3,805		)	(2,390		)	(59)	%
Cash used in financing activities	(5,792		)	(4,320		)	(34)	%	(2,882		)	(3,049		)	5	%
Impact of exchange rates on cash and cash equivalents	(23		)	(111		)	79	%
Change in cash and cash equivalents	$	(274	)	$	958		nm
Impact of exchange rates on cash, cash equivalents and restricted cash									55			(69		)	nm
Change in cash, cash equivalents and restricted cash									$	131		$	(835	)	nm

Operating Activities

Cash provided by operating activities ~~decreased 8%~~increased 45% to ~~$8.8~~$6.8 billion for the current ~~nine-month period~~six months compared to ~~$9.6~~$4.7 billion in the prior-year ~~nine-month period~~six months due to a decrease in ~~operating cash flow at Studio Entertainment and an increase~~pension plan contributions, a decrease in ~~contributions~~tax payments due to the ~~Company’s pension plans, partially offset by~~Tax Act and higher operating cash flow at Parks and ~~Resorts. The decrease in~~Resorts, partially offset by lower operating cash flow at ~~Studio Entertainment was due to lower operating cash receipts driven by a decrease in revenue and higher film and television spending.~~Media Networks. Parks and Resorts cash flow reflected higher operating cash receipts due to increased revenues, partially offset by higher ~~payments for~~spending on labor and other ~~costs,~~costs. Lower operating cash flow at Media Networks was driven by ~~volume and inflation growth.~~higher television production spending.

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.

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 ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 and ~~July 2, 2016~~April 1, 2017 are as follows:


	Nine Months Ended						Six Months Ended
(in millions)	July 1, 2017			July 2, 2016			March 31, 2018			April 1, 2017
Beginning balances:
Production and programming assets	$	7,547		$	7,353		$	8,759		$	7,547
Programming liabilities	(1,063		)	(989		)	(1,108		)	(1,063		)
	6,484			6,364			7,651			6,484
Spending:
Television program licenses and rights	6,025			5,225			4,092			3,980
Film and television production	3,863			3,578			3,011			2,632
	9,888			8,803			7,103			6,612
Amortization:
Television program licenses and rights	(5,986		)	(5,055		)	(4,411		)	(4,205		)
Film and television production	(3,157		)	(3,524		)	(2,202		)	(1,979		)
	(9,143		)	(8,579		)	(6,613		)	(6,184		)

Change in film and television production and programming costs	745			224			490			428
Other non-cash activity	19			20			(146		)	30
Ending balances:
Production and programming assets	8,012			7,322			9,188			8,107
Programming liabilities	(764		)	(714		)	(1,193		)	(1,165		)
	$	7,248		$	6,608		$	7,995		$	6,942

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 ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 and ~~July 2, 2016~~April 1, 2017 are as follows:


	Nine Months Ended				Six Months Ended
(in millions)	July 1, 2017		July 2, 2016		March 31, 2018		April 1, 2017
Media Networks
Cable Networks	$	70	$	55	$	135	$	60
Broadcasting	44		55		45		33
Total Media Networks	114		110		180		93
Parks and Resorts
Domestic	1,682		1,619		1,413		1,093
International	721		1,689		307		579
Total Parks and Resorts	2,403		3,308		1,720		1,672
Studio Entertainment	64		67		52		47
Consumer Products & Interactive Media	17		33		10		8
Corporate	130		173		82		103
	$	2,728	$	3,691	$	2,044	$	1,923

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

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. The increase at Cable Networks was due to technology spending at BAMTech.

Capital expenditures at Corporate primarily reflect investments in corporate facilities, information technology infrastructure and equipment.

The Company currently expects its fiscal ~~2017~~2018 capital expenditures will be approximately ~~$0.8~~$1 billion ~~lower~~higher than fiscal ~~2016~~2017 capital expenditures of ~~$4.8~~$3.6 billion primarily due to ~~decreased investments at our international parks and resorts, partially offset by~~ increased investments at our domestic parks and resorts.

Other Investing Activities

During the current ~~nine-month~~six-month period, the Company made a $1.6 billion payment for its incremental 42% interest in BAMTech. During the prior-year six-month period, the Company acquired an incremental 18% interest in BAMTech for $557 ~~million. During the prior-year nine-month period, the Company acquired an 11% interest in Vice for $400~~ million.

Financing Activities

Cash used in financing activities was $~~5.8~~2.9 billion in the current ~~nine-month~~six-month period, which reflected repurchases of common stock of ~~$5.9~~$2.6 billion and dividends of ~~$1.2~~$1.3 billion, partially offset by net cash inflows from borrowings of ~~$2.2~~$1.1 billion.

Cash used in financing activities of ~~$5.8~~$2.9 billion was ~~$1.5 billion more than the $4.3 billion used in~~essentially flat compared to the prior-year ~~nine-month period. The increase from the prior-year nine-month~~six-month period ~~was primarily due to lower borrowings~~as a decrease in repurchases of common stock in the current ~~nine-month~~six-month period compared to the prior-year ~~nine-month~~six-month period ($~~2.2~~2.6 billion ~~vs. $3.2~~vs $3.5 billion respectively) was largely offset by lower net borrowings in the current six-month period compared to the prior-year six-month period ($1.1 billion vs $1.7 billion respectively).

See Note 45 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the ~~nine~~six months ended ~~July 1, 2017~~March 31, 2018 and information regarding the Company’s bank facilities. 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.

See Note 810 to the Condensed Consolidated Financial Statements for a summary of the Company’s dividends in fiscal ~~2017~~2018 and ~~2016~~2017 and share repurchases during the ~~nine~~six months ended ~~July 1, 2017.~~March 31, 2018.

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 ~~July 1, 2017~~March 31, 2018, 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;~~outlook and Fitch’s long- and short-term debt ratings for the Company were A and F1, respectively, with stable outlook. On December 14, 2017, Standard & Poor’s placed the Company’s long-term and short-term debt ratings of A+ and A-1+, respectively, on Creditwatch with negative implications. The Company’s bank facilities contain only one financial covenant, relating to interest coverage, which the Company met on ~~July 1, 2017~~March 31, 2018 by a significant margin. The Company’s bank facilities also specifically exclude certain entities, including the ~~International~~Asia Theme Parks, from any representations, covenants or events of default.

COMMITMENTS AND CONTINGENCIES

Legal Matters

As disclosed in Note 1012 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters.

Guarantees

See Note 1012 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 2016 Annual Report on Form 10-K, the Company has exposure for certain tax matters.~~

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Tax Matters

As disclosed in Note 9 to the Consolidated Financial Statements in the 2017 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 ~~2016~~2017 Annual Report on Form 10-K for information regarding the Company’s contractual commitments.

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 ~~2016~~2017 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 factors affecting estimates of Ultimate Revenues are program ratings 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 licensing of program rights worldwide to television distributors, SVOD services and in home entertainment formats. Alternatively, poor ratings may result in cancellation of the program, 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

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

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)~~

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.

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 2016 Annual Report on Form 10-K for a summary of these revenue recognition policies.

We reduce home entertainment 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 sales incentives in a particular period, we may record less revenue in later periods when returns or sales incentives exceed the estimated amount. Conversely, if we overestimate the level of returns or sales incentives for a period, we may have additional revenue in later periods when returns or sales incentives are less than estimated.

We recognize revenues from advance theme park ticket sales when the tickets are used. ~~We recognize revenues~~Revenues from ~~expiring multi-use tickets~~annual pass sales are recognized ratably over the ~~estimated usage period. The estimated usage periods are derived from historical usage patterns. If actual usage~~period for which the pass 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.available for use.

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 critical 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 ~~2016~~2017 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, Other 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, and to ~~determine if there is a potential goodwill impairment. If~~the extent the carrying amount exceeds the fair value, ~~of a reporting unit is less than its carrying value,~~ an impairment ~~loss~~of goodwill is ~~recorded~~recognized for the excess up to the ~~extent that the fair value of the~~ goodwill ~~within~~allocated to the reporting ~~unit is less than the carrying value of the goodwill.~~unit.

To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flows) 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

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)~~

valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.

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 excess. 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 the 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 proceedings. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies, and have been developed in consultation with outside counsel as appropriate. From time to time, we may also be involved in other contingent matters for which we have accrued estimates for a probable and estimable loss. 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 legal proceedings or our assumptions regarding other contingent matters. See Note 1012 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

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)~~

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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

New Accounting Pronouncements

See Note 1416 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 flow 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.

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 ~~July 1, 2017~~March 31, 2018, 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 ~~third~~second quarter of fiscal ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

As disclosed in Note 1012 to the Condensed Consolidated Financial Statements, the Company is engaged in certain legal matters, and the disclosure set forth in Note 1012 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 entertainment, 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, demand for our products and services, expenses of providing medical and pension benefits, ~~and~~ performance of some or all company businesses either directly or through their impact on those who distribute our ~~products.~~products and the proposed transaction with 21CF. Additional factors are discussed in the ~~2016~~2017 Annual Report on Form 10-K and in the Quarterly Report on 10-Q for the period ended December 30, 2017, in each case under the Item 1A, “Risk Factors.”

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)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 ~~July 1, 2017~~March 31, 2018:

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⁾
April 2, 2017 - April 30, 2017 5,600,055
$ 113.49
5,577,399
242 million
May 1, 2017 - May 31, 2017 9,372,819
109.65
9,345,000
233 million
June 1, 2017 - July 1, 2017 7,423,354
106.15
7,398,800
226 million
Total 22,396,228
109.45
22,321,199
226 million



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⁾
December 31, 2017 - January 31, 2018	4,083,370	$	110.69	3,850,092	175 million
February 1, 2018 - February 28, 2018	3,817,590	106.09		3,793,500	171 million
March 1, 2018 - March 31, 2018	4,562,314	102.89		4,534,524	167 million
Total	12,463,274	106.43		12,178,116	167 million


⁽¹⁾	~~75,029~~285,158 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.

ITEM 5. Other Items

Mayer DTC-WDI Agreement

On May 3, 2018, Walt Disney International (“WDI”) entered into an employment agreement with Kevin A. Mayer (the “Executive”), whose contract with the Company as Senior Executive Vice President and Chief Strategy Officer ended when his new contract (the “Mayer DTC-WDI Agreement”) became effective. The Mayer DTC-WDI Agreement has a stated term commencing as of March 14, 2018 and ending on December 31, 2022.

Under the Mayer DTC-WDI Agreement, Mr. Mayer will serve as Chairman, Direct-to-Consumer and International. The Mayer DTC-WDI Agreement provides that Mr. Mayer will receive an annual salary of $1,800,000, commencing as of March 14, 2018, and that for each year thereafter the annual salary for Mr. Mayer will be determined by WDI in its sole discretion but shall not be less than $1,800,000. The Mayer DTC-WDI Agreement provides that Mr. Mayer is also eligible for an annual, performance-based bonus under the Company’s applicable annual incentive plan (currently, the Company’s Management Incentive Bonus Program) and that the Compensation Committee will set a target bonus each fiscal year of not less than 200% of the annual base salary for Mr. Mayer in effect at the end of such fiscal year. The actual amount payable to Mr. Mayer as an annual bonus will be dependent upon the achievement of performance objectives, which will be substantially the same as the objectives established under the plan for comparable executives of the Company’s subsidiaries. Depending on performance, the actual amount payable as an annual bonus to Mr. Mayer may be less than, greater than or equal to the stated target bonus (and could be zero).

The Mayer DTC-WDI Agreement also provides that Mr. Mayer is entitled to participate in the Company’s equity-based long-term incentive plans and programs generally made available to comparable executives of the Company’s subsidiaries and that for each fiscal year during the term of the Agreement, Mr. Mayer will be granted a long-term incentive award having a target value of not less than three times his annual base salary as expected to be in effect at the end of such fiscal year. These awards will be subject to substantially the same terms and conditions (including vesting and performance conditions) as will be established for comparable executives of the Company’s subsidiaries in accordance with the Board’s policies for the grant of equity-based awards, as in effect at the time of the award, and do not guarantee Mr. Mayer any minimum amount of compensation. The actual amounts payable to Mr. Mayer in respect of such opportunities will be determined based on the extent to which any performance conditions and/or service conditions applicable to such awards are satisfied and on the value of the Company’s stock. Accordingly, Mr. Mayer may receive compensation in respect of any such award that is greater or less than the stated target value, depending on whether, and to what extent, the applicable performance and other conditions are satisfied, and on the value of the Company’s stock.

Under the Mayer DTC-WDI Agreement, Mr. Mayer is entitled to participate in employee benefits and perquisites generally made available to comparable executives of the Company’s subsidiaries.

Mr. Mayer’s employment may be terminated by WDI for “cause,” which is defined to include gross negligence, gross misconduct, willful nonfeasance or a willful material breach of the Agreement.

Mr. Mayer has the right to terminate his employment for “good reason,” which is defined as (i) a reduction in any of his base salary, annual target bonus opportunity or annual target long-term incentive award opportunity; (ii) removal from the position of Chairman, Direct-to-Consumer and International; (iii) a material reduction in his duties and responsibilities; (iv) the assignment to him of duties that are materially inconsistent with his position or duties or that materially impair his ability to function in his current position or any other position in which he is then serving; (vi) relocation of his principal office to a location that is more than 50 miles outside of the greater Los Angeles area; or (vii) a material breach of any material provision of the Agreement by WDI. Following a change in control of the Company, as defined in the Company’s stock plans, good reason also includes any event that is a triggering event as defined in the plans. A triggering event is defined to include a termination of employment by WDI other than for “cause” or a termination of employment by the participant following a reduction in position, pay or other “constructive termination.”

In the event that Mr. Mayer’s employment is terminated by WDI without “cause” or by Mr. Mayer for “good reason,” he will be entitled to termination benefits, which include the following: (i) a lump sum payment of the base salary that would have been payable over the remaining term of the Agreement, (ii) a pro-rated bonus for the year of termination (any prior-year bonus not yet paid at time of termination is also paid), and (iii) the outstanding unvested stock options and outstanding unvested restricted stock unit awards that could vest in accordance with their scheduled vesting provisions if Mr. Mayer’s employment had continued through the remaining term of the Agreement will be eligible to vest at the same time and subject to the same performance conditions as though he continued in WDI’s employ, and all stock options, whether vested on date of termination or vesting thereafter as described above, shall vest and remain exercisable to the same extent as if his employment had continued through the term of the Agreement. However, the Agreement provides that, unless necessary to preserve the tax

deductibility of the compensation payable in respect of restricted stock units, the Company will waive any performance conditions related to performance in future fiscal years that were imposed primarily to permit the Company to claim a tax deduction for the compensation payable in respect of such units.

To qualify for the foregoing cash severance benefit, pro-rated bonus (and prior-year bonus, if not already paid), opportunity to vest in unvested equity awards and extended exercisability of stock options following an involuntary termination by WDI without cause, or a termination by Mr. Mayer for good reason, he must execute a release in favor of WDI and the Company and agree to provide WDI with certain consulting services for a period of six months after his termination (or, if less, for the remaining term of the Agreement). Additionally, during the period of these consulting services, Mr. Mayer must also agree not to provide any services to entities that compete with any of the Company’s business segments.

Merger Agreement Amendment

As previously disclosed, on December 13, 2017, The Walt Disney Company (“Disney”), TWC Merger Enterprises 2 Corp., a Delaware corporation and wholly owned subsidiary of Disney (“Merger Sub”), TWC Merger Enterprises 1, LLC, a Delaware limited liability company and wholly owned subsidiary of Disney (“Merger LLC”), and Twenty-First Century Fox (“21CF”) entered into an Agreement and Plan of Merger (the “Merger Agreement”).

The Merger Agreement contemplates that at the effective time of the Initial Merger (as defined in the Merger Agreement), each issued and outstanding share of common stock of 21CF, except as otherwise set forth in the Merger Agreement, will be exchanged automatically for 0.2745 shares of Disney common stock, subject to adjustment as provided in the Merger Agreement (as so adjusted, the “Exchange Ratio”), together with cash in lieu of fractional shares of Disney common stock (such consideration, the “Common Stock Merger Consideration”).

On May 7, 2018, Disney, Merger Sub, Merger LLC and 21CF entered into an Amendment to the Merger Agreement (the “Merger Agreement Amendment”) pursuant to which, among other things, in lieu of receiving the Common Stock Merger Consideration at the effective time of the Initial Merger, each issued and outstanding share of 21CF common stock owned by a subsidiary of 21CF will be exchanged automatically for a number of shares of series B preferred stock, par value $0.01, of Disney equal to the Exchange Ratio multiplied by 1/10,000. Each share of series B preferred stock is convertible into 10,000 shares of Disney common stock upon transfer to any person who is not Disney or a subsidiary of Disney. The terms of the series B preferred stock are described in more detail in Disney’s current report on Form 8-K filed with the Securities and Exchange

Commission on March 9, 2018. The Merger Agreement Amendment permits Disney’s board of directors to elect, in its sole discretion at any time prior to the Closing Date (as defined in the Merger Agreement), for each issued and outstanding share of 21CF common stock owned by a subsidiary of 21CF to be exchanged, at the effective time of the Initial Merger, automatically for the Common Stock Merger Consideration.

The foregoing description of the Merger Agreement Amendment and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement Amendment, which is attached as Exhibit 2.1 and incorporated herein by reference.

Other than as expressly modified pursuant to the Merger Agreement Amendment, the Merger Agreement, which was previously filed as Exhibit 2.1 to the Current Report on Form 8-K/A filed with the Securities Exchange Commission on December 14, 2017, remains in full force and effect as originally executed on December 13, 2017.

ITEM 6. Exhibits

See Index of Exhibits.

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

~~August~~May 8, ~~2017~~2018

Burbank, California

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

2.1	Amendment to Agreement and Plan of Merger, dated as of May 7, 2018, among Twenty-First Century Fox Inc., The Walt Disney Company, TWC Merger Enterprises 2 Corp. and TWC Merger Enterprises 1, LLC*	Filed herewith

3.1	Certificate of Designation of Series B Convertible Preferred Stock of The Walt Disney Company, as filed with the Secretary of State of the State of Delaware on March 8, 2018	Exhibit 3.1 to the Current Report on Form 8-K of the Company filed March 9, 2018

10.1	364 Day Credit Agreement dated as of March 9, 2018	Exhibit 10.1 to the Current Report on Form 8-K of the Company filed March 9, 2018

10.2	Five-Year Credit Agreement dated as of March 9, 2018	Exhibit 10.2 to the Current Report on Form 8-K of the Company filed March 9, 2018

10.3	Employment Agreement dated as of March 14, 2018 between the Company and Kevin A. Mayer	Filed herewith

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 ~~July 1, 2017~~March 31, 2018 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



*	Certain schedules and exhibits have been omitted pursuant to 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request.
**	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.

5158



	Fair Value Measurement at July 1, 2017
	Level 1		Level 2			Level 3		Total
Assets
Investments	$	40	$	—		$	—	$	40
Derivatives
Interest rate	—		10			—		10
Foreign exchange	—		497			—		497
Other	—		3			—		3
Liabilities
Derivatives
Interest rate	—		(119		)	—		(119		)
Foreign exchange	—		(414		)	—		(414		)
Other	—		(2		)	—		(2		)
Total recorded at fair value	$	40	$	(25	)	$	—	$	15
Fair value of borrowings	$	—	$	21,351		$	1,421	$	22,772