FY2013_Q3_10Q_DOC


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
June 29, 2013
 
 
 
 
 
 
 
 
Incorporated in Delaware
 
I.R.S. Employer Identification
 
 
No. 95-4545390
500 South Buena Vista Street, Burbank, California 91521
(818) 560-1000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer (do not check if smaller reporting company)
 
¨

Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
There were 1,786,442,476 shares of common stock outstanding as of July 31, 2013.



PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per share data)
 
 
Quarter Ended
 
Nine Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Revenues
$
11,578

 
$
11,088

 
$
33,473

 
$
31,496

Costs and expenses
(8,574
)
 
(8,128
)
 
(26,182
)
 
(24,657
)
Restructuring and impairment charges
(60
)
 
(7
)
 
(121
)
 
(51
)
Other income/(expense), net
—

 
—

 
(92
)
 
184

Net interest expense
(83
)
 
(93
)
 
(209
)
 
(278
)
Equity in the income of investees
232

 
169

 
527

 
452

Income before income taxes
3,093

 
3,029

 
7,396

 
7,146

Income taxes
(1,059
)
 
(993
)
 
(2,303
)
 
(2,363
)
Net income
2,034

 
2,036

 
5,093

 
4,783

Less: Net income attributable to noncontrolling interests
(187
)
 
(205
)
 
(351
)
 
(345
)
Net income attributable to The Walt Disney Company (Disney)
$
1,847

 
$
1,831

 
$
4,742

 
$
4,438

 
 
 
 
 
 
 
 
Earnings per share attributable to Disney:
 
 
 
 
 
 
 
Diluted
$
1.01

 
$
1.01

 
$
2.61

 
$
2.44

Basic
$
1.02

 
$
1.02

 
$
2.64

 
$
2.47

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Diluted
1,821

 
1,812

 
1,816

 
1,818

Basic
1,802

 
1,791

 
1,794

 
1,794

See Notes to Condensed Consolidated Financial Statements

2


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
 
 
Quarter Ended
 
Nine Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Net income
$
2,034

 
$
2,036

 
$
5,093

 
$
4,783

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Market value adjustments for investments
43

 
(5
)
 
65

 
9

Market value adjustments for hedges
35

 
73

 
205

 
115

Pension and postretirement medical plan adjustments
75

 
57

 
215

 
145

Foreign currency translation and other
(58
)
 
(106
)
 
(77
)
 
(106
)
Other comprehensive income (loss)
95

 
19

 
408

 
163

Comprehensive income
2,129

 
2,055

 
5,501

 
4,946

Less: Net income attributable to noncontrolling interests
(187
)
 
(205
)
 
(351
)
 
(345
)
Less: Other comprehensive (income) loss attributable to noncontrolling interests
(11
)
 
19

 
(26
)
 
24

Comprehensive income attributable to Disney
$
1,931

 
$
1,869

 
$
5,124

 
$
4,625

See Notes to Condensed Consolidated Financial Statements





3

THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
June 29,
2013
 
September 29,
2012
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
3,932

 
$
3,387

Receivables
6,568

 
6,540

Inventories
1,465

 
1,537

Television costs and advances
655

 
676

Deferred income taxes
759

 
765

Other current assets
826

 
804

Total current assets
14,205

 
13,709

Film and television costs
4,786

 
4,541

Investments
2,683

 
2,723

Parks, resorts and other property
 
 
 
Attractions, buildings and equipment
39,960

 
38,582

Accumulated depreciation
(21,981
)
 
(20,687
)
 
17,979

 
17,895

Projects in progress
2,729

 
2,453

Land
1,167

 
1,164

 
21,875

 
21,512

Intangible assets, net
7,430

 
5,015

Goodwill
27,342

 
25,110

Other assets
2,244

 
2,288

Total assets
$
80,565

 
$
74,898

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
5,658

 
$
6,393

Current portion of borrowings
2,219

 
3,614

Unearned royalties and other advances
3,464

 
2,806

Total current liabilities
11,341

 
12,813

 
 
 
 
Borrowings
12,784

 
10,697

Deferred income taxes
3,485

 
2,251

Other long-term liabilities
7,048

 
7,179

Commitments and contingencies (Note 11)

 

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

 
—

Common stock, $.01 par value
    Authorized – 4.6 billion shares, Issued – 2.8 billion shares
33,245

 
31,731

Retained earnings
46,364

 
42,965

Accumulated other comprehensive loss
(2,884
)
 
(3,266
)
 
76,725

 
71,430

Treasury stock, at cost, 1.0 billion shares
(33,189
)
 
(31,671
)
Total Disney Shareholders' equity
43,536

 
39,759

Noncontrolling interests
2,371

 
2,199

Total equity
45,907

 
41,958

Total liabilities and equity
$
80,565

 
$
74,898


See Notes to Condensed Consolidated Financial Statements

4


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
 
Nine Months Ended
 
June 29,
2013
 
June 30,
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
5,093

 
$
4,783

Depreciation and amortization
1,633

 
1,495

Gains on dispositions and acquisition
(229
)
 
(184
)
Deferred income taxes
163

 
153

Equity in the income of investees
(527
)
 
(452
)
Cash distributions received from equity investees
526

 
501

Net change in film and television costs and advances
(357
)
 
(185
)
Equity-based compensation
305

 
311

Other
233

 
200

Changes in operating assets and liabilities:
 
 
 
Receivables
(3
)
 
236

Inventories
78

 
76

Other assets
(3
)
 
(77
)
Accounts payable and other accrued liabilities
(328
)
 
(462
)
Income taxes
133

 
36

Cash provided by operations
6,717

 
6,431

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(1,809
)
 
(2,851
)
Proceeds from dispositions
345

 
15

Acquisitions
(2,310
)
 
(737
)
Other
112

 
103

Cash used in investing activities
(3,662
)
 
(3,470
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper repayments, net
(2,000
)
 
(558
)
Borrowings
3,900

 
3,251

Reduction of borrowings
(817
)
 
(1,672
)
Dividends
(1,324
)
 
(1,076
)
Repurchases of common stock
(2,694
)
 
(2,042
)
Proceeds from exercise of stock options
518

 
844

Other
(19
)
 
(427
)
Cash used in financing activities
(2,436
)
 
(1,680
)
 
 
 
 
Impact of exchange rates on cash and cash equivalents
(74
)
 
(92
)
 
 
 
 
Increase in cash and cash equivalents
545

 
1,189

Cash and cash equivalents, beginning of period
3,387

 
3,185

Cash and cash equivalents, end of period
$
3,932

 
$
4,374

See Notes to Condensed Consolidated Financial Statements

5


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
June 29, 2013
 
June 30, 2012
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
42,089

 
$
2,055

 
$
44,144

 
$
38,049

 
$
1,863

 
$
39,912

Comprehensive income
1,931

 
198

 
2,129

 
1,869

 
186

 
2,055

Equity compensation activity
316

 
—

 
316

 
463

 
—

 
463

Common stock repurchases
(800
)
 
—

 
(800
)
 
(373
)
 
—

 
(373
)
Distributions and other
—

 
118

 
118

 
(2
)
 
18

 
16

Ending balance
$
43,536

 
$
2,371

 
$
45,907

 
$
40,006

 
$
2,067

 
$
42,073

See Notes to Condensed Consolidated Financial Statements

6


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Nine Months Ended
 
June 29, 2013
 
June 30, 2012
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
39,759

 
$
2,199

 
$
41,958

 
$
37,385

 
$
2,068

 
$
39,453

Comprehensive income
5,124

 
377

 
5,501

 
4,625

 
321

 
4,946

Equity compensation activity
816

 
—

 
816

 
1,116

 
—

 
1,116

Dividends
(1,324
)
 
—

 
(1,324
)
 
(1,076
)
 
—

 
(1,076
)
Common stock repurchases
(2,694
)
 
—

 
(2,694
)
 
(2,042
)
 
—

 
(2,042
)
Acquisition of Lucasfilm
1,855

 
6

 
1,861

 
—

 
—

 
—

Distributions and other
—

 
(211
)
 
(211
)
 
(2
)
 
(322
)
 
(324
)
Ending balance
$
43,536

 
$
2,371

 
$
45,907

 
$
40,006

 
$
2,067

 
$
42,073

See Notes to Condensed Consolidated Financial Statements


7


THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
 
1.
Principles of Consolidation
These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the quarter and nine months ended June 29, 2013 are not necessarily indicative of the results that may be expected for the year ending September 28, 2013. 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 2012 Annual Report on Form 10-K.
The Company enters into relationships or investments with other entities in which it does not have majority ownership or control. In certain instances, the entity in which the Company has a relationship or investment may be a variable interest entity (“VIE”). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Although the Company has less than a 50% direct ownership interest in Disneyland Paris, Hong Kong Disneyland Resort and Shanghai Disney Resort (collectively the "International Theme Parks"), they are VIEs, and given the nature of the Company’s relationships with these entities, which include management agreements, the Company has consolidated the International Theme Parks in its financial statements.
The terms “Company,” “we,” “us,” and “our” are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted.
 
2.
Segment Information
The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. The Company reports the performance of its operating segments including equity in the income of investees. Equity in the income of investees included in segment operating results is as follows:
 
 
Quarter Ended
 
Nine Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Media Networks
 
 
 
 
 
 
 
Cable Networks
$
237

 
$
177

 
$
609

 
$
476

Broadcasting
(5
)
 
(7
)
 
(28
)
 
(24
)
Equity in the income of investees included in segment operating income
$
232

 
$
170

 
$
581

 
$
452


During the nine months ended June 29, 2013, the Company recorded a $55 million charge for our share of expense related to an equity redemption at Hulu LLC (Hulu Equity Redemption). This charge is recorded in equity in the income of investees in the Condensed Consolidated Statements of Income but has been excluded from segment operating income. See Note 3 for further discussion of the transaction.

8
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


 
Quarter Ended
 
Nine Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Revenues (1):
 
 
 
 
 
 
 
Media Networks
$
5,352

 
$
5,084

 
$
15,410

 
$
14,555

Parks and Resorts
3,678

 
3,441

 
10,371

 
9,495

Studio Entertainment
1,590

 
1,625

 
4,473

 
4,423

Consumer Products
775

 
742

 
2,551

 
2,369

Interactive
183

 
196

 
668

 
654

 
$
11,578

 
$
11,088

 
$
33,473

 
$
31,496

Segment operating income (loss) (1):
 
 
 
 
 
 
 
Media Networks
$
2,300

 
$
2,126

 
$
5,376

 
$
5,048

Parks and Resorts
689

 
630

 
1,649

 
1,405

Studio Entertainment
201

 
313

 
553

 
642

Consumer Products
219

 
209

 
765

 
670

Interactive
(58
)
 
(42
)
 
(103
)
 
(140
)
 
$
3,351

 
$
3,236

 
$
8,240

 
$
7,625


(1) Studio Entertainment segment revenues and operating income include an allocation of Consumer Products and Interactive revenues, which is meant to reflect royalties on sales of merchandise based on certain film properties. The increases/(decreases) related to these allocations on segment revenues and operating income as reported in the above table are as follows:
 
Quarter Ended
 
Nine Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Studio Entertainment
$
62

 
$
64

 
$
166

 
$
194

Consumer Products
(62
)
 
(53
)
 
(165
)
 
(182
)
Interactive
—

 
(11
)
 
(1
)
 
(12
)
 
$
—

 
$
—

 
$
—

 
$
—

A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
Nine Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Segment operating income
$
3,351

 
$
3,236

 
$
8,240

 
$
7,625

Corporate and unallocated shared expenses
(115
)
 
(107
)
 
(367
)
 
(334
)
Restructuring and impairment charges
(60
)
 
(7
)
 
(121
)
 
(51
)
Other income/(expense), net
—

 
—

 
(92
)
 
184

Net interest expense
(83
)
 
(93
)
 
(209
)
 
(278
)
Hulu Equity Redemption charge
—

 
—

 
(55
)
 
—

Income before income taxes
$
3,093

 
$
3,029

 
$
7,396

 
$
7,146


 
3.
Acquisitions
Lucasfilm
On December 21, 2012, the Company acquired Lucasfilm Ltd. LLC (“Lucasfilm”), a privately held entertainment company. This acquisition will allow Disney to utilize Lucasfilm's content across our multiple platforms, businesses and markets, which we believe will generate growth as well as significant long-term value.
Under the terms of the merger agreement, Disney issued 37.1 million shares and made a cash payment of $2.2 billion.  Based on the $50.00 per share closing price of Disney shares on December 21, 2012, the transaction has a value of $4.1 billion.
The Company is required to allocate the purchase price to the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the purchase price over those fair values is recorded as goodwill. The Company is in the process of finalizing the valuation of the assets acquired and liabilities assumed.

9
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The following table summarizes our allocation of the purchase price, which is subject to adjustment once the valuations are completed:
(in billions)
  Estimated 
Fair Value
Intangible assets
$
2.6

Goodwill
2.3

Deferred income taxes
(0.8
)
 
$
4.1

Intangible assets primarily consist of intellectual property based on the Star Wars franchise with an estimated useful life of approximately 40 years. The goodwill reflects the value to Disney from leveraging Lucasfilm intellectual property across our distribution channels, taking advantage of Disney's established global reach. The goodwill recorded as part of this acquisition is not deductible for tax purposes.

The amounts of revenue and net income of Lucasfilm included in the Company's Condensed Consolidated Statement of Income from the closing date through June 29, 2013 are not material.

Hulu
On October 5, 2012, Hulu LLC (Hulu) redeemed Providence Equity Partners' 10% equity interest in Hulu for $200 million, increasing the Company's ownership interest in Hulu from 29% to 32%.  In connection with the transaction, Hulu incurred a charge of approximately $174 million primarily related to employee equity-based compensation and borrowed $338 million under a five-year term loan, which was guaranteed by the Company and the other partners. The Company's share of the charge totaled $55 million and was recorded in equity in the income of investees in the first quarter of fiscal 2013.
 
In July 2013, Fox Entertainment Group, NBCUniversal and the Company agreed to provide Hulu with a total of $750 million in cash to fund Hulu's operations and investments for future growth. The Company contributed $134 million of its total commitment of $257 million, increasing its ownership to 33%, and the Company will continue to guarantee its share of Hulu's $338 million term loan.
  
The Company accounts for its interest in Hulu as an equity method investment.

UTV
Pursuant to a delisting offer process governed by Indian law, on February 2, 2012, the Company purchased publicly held shares and all of the shares held by the founder of UTV Software Communications Limited (UTV), a media and entertainment company headquartered and publicly traded in India, for $377 million. The Company also assumed approximately $300 million of UTV’s borrowings. The purchase increased the Company’s ownership interest to 93% from 50%. As a result, the Company changed its accounting for UTV from an equity method investment to a consolidated subsidiary. The acquisition of UTV supports the Company’s strategic priority of increasing its brand presence and reach in key international markets.

Upon consolidation, the Company recognized a non-cash gain of $184 million ($116 million after tax) as a result of adjusting the carrying value of the Company’s 50% equity investment to its estimated fair value of $405 million. The gain was recorded in “Other income/(expense), net” in the second quarter of fiscal 2012. The fair value was determined based on the Company’s internal valuation of the UTV business using an income approach (discounted cash flow model), which the Company believes provides the most appropriate indicator of fair value.

The Company allocated the purchase price to the estimated fair value of the tangible and intangible assets acquired and liabilities assumed. The majority of the purchase price was allocated to goodwill, which is not deductible for tax purposes. The goodwill reflects the synergies and increased Indian market penetration expected from combining the operations of UTV with the Company's existing operations in India.

To date, the Company has paid $73 million to acquire an incremental 6% interest bringing its ownership percentage to over 99%.


10
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


Goodwill
The changes in the carrying amount of goodwill for the nine months ended June 29, 2013, are as follows:
 
Media
Networks
 
Parks and
Resorts
 
Studio
Entertainment
 
Consumer
Products
 
Interactive
 
Total
Balance at September 29, 2012
$
16,131

 
$
172

 
$
5,680

 
$
1,794

 
$
1,333

 
$
25,110

Acquisitions
21

 
81

 
963

 
1,149

 
154

 
2,368

Dispositions
—

 
—

 
—

 
—

 
—

 
—

Other, net
(63
)
 
—

 
(54
)
 
—

 
(19
)
 
(136
)
Balance at June 29, 2013
$
16,089

 
$
253

 
$
6,589

 
$
2,943

 
$
1,468

 
$
27,342

The carrying amount of goodwill at June 29, 2013 and September 29, 2012 includes accumulated impairments of $29 million at Interactive.
During the nine months ended June 29, 2013, the Company completed the acquisition of Lucasfilm resulting in $2.3 billion of goodwill. See the discussion above on the Lucasfilm acquisition.


4.
Dispositions and Other Income/(Expense)
ESPN STAR Sports
On November 7, 2012, the Company sold its 50% equity interest in ESPN STAR Sports (ESS) to the joint venture partner of ESS for $335 million resulting in a gain of $219 million ($125 million after tax and allocation to noncontrolling interests).  ESPN had previously jointly guaranteed approximately $0.8 billion in programming rights obligations of ESS. As a result of the sale, ESPN no longer guarantees these obligations.

Other Income/(Expense)
 
Nine Months Ended
 
June 29, 2013
 
June 30, 2012
Celador litigation (see Note 11)
$
(321
)
 
$
—

Gain on sale of equity interest in ESS
219

 
—

UTV gain
—

 
184

Other
10

 
—

Other income/(expense), net
$
(92
)
 
$
184




11
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


5.
Borrowings
During the nine months ended June 29, 2013, the Company’s borrowing activity was as follows: 
 
September 29,
2012
 
Additions
 
Payments
 
Other
Activity
 
June 29,
2013
Commercial paper borrowings
$
2,050

 
$
—

 
$
(2,000
)
 
$
—

 
$
50

U.S. medium-term notes
10,117

 
3,778

 
(750
)
 
7

 
13,152

European medium-term notes and other foreign currency denominated borrowings (1)
1,315

 
122

 
(59
)
 
(217
)
 
1,161

Other (2)
562

 
—

 
(15
)
 
(180
)
 
367

Hong Kong Disneyland borrowings
267

 
—

 
—

 
6

 
273

Total
$
14,311

 
$
3,900

 
$
(2,824
)
 
$
(384
)
 
$
15,003


(1) The other activity is primarily the impact of foreign currency translation as a result of the strengthening of the U.S. dollar against the Japanese yen.

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

At September 29, 2012, the Company had two bank facilities, each for $2.25 billion. One of the facilities expires in 2015 and the other in 2017. On March 15, 2013, the Company entered into an additional $1.5 billion 364-day credit agreement with a syndicate of lenders.  These bank facilities are used to support commercial paper borrowings and 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 long-term debt ratings assigned by Moody's Investors Service and Standard & Poor's.  The spread above LIBOR can range from 0.23% to 1.93%.  The facilities contain only one financial covenant, relating to interest coverage, and specifically exclude certain entities, including the International Theme Parks, from any representations, covenants or events of default.


6.
International Theme Park Investments
The Company has a 51% effective ownership interest in the operations of Disneyland Paris, a 48% ownership interest in the operations of Hong Kong Disneyland Resort and a 43% ownership interest in the operations of Shanghai Disney Resort, all of which are VIEs consolidated in the Company’s financial statements. See Note 1 for the Company's policy on consolidating VIEs.

12
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The following tables present summarized balance sheet information for the Company as of June 29, 2013 and September 29, 2012, reflecting the impact of consolidating the International Theme Parks balance sheets.
 
As of June 29, 2013
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
3,419

 
$
513

 
$
3,932

Other current assets
9,995

 
278

 
10,273

Total current assets
13,414

 
791

 
14,205

Investments/Advances
6,085

 
(3,402
)
 
2,683

Parks, resorts and other property
16,953

 
4,922

 
21,875

Other assets
41,792

 
10

 
41,802

Total assets
$
78,244

 
$
2,321

 
$
80,565

 
 
 
 
 
 
Current portion of borrowings
$
2,219

 
$
—

 
$
2,219

Other current liabilities
8,602

 
520

 
9,122

Total current liabilities
10,821

 
520

 
11,341

Borrowings
12,511

 
273

 
12,784

Deferred income taxes and other long-term liabilities
10,397

 
136

 
10,533

Equity
44,515

 
1,392

 
45,907

Total liabilities and equity
$
78,244

 
$
2,321

 
$
80,565

 
 
As of September 29, 2012
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
2,839

 
$
548

 
$
3,387

Other current assets
10,066

 
256

 
10,322

Total current assets
12,905

 
804

 
13,709

Investments/Advances
6,065

 
(3,342
)
 
2,723

Parks, resorts and other property
17,005

 
4,507

 
21,512

Other assets
36,949

 
5

 
36,954

Total assets
$
72,924

 
$
1,974

 
$
74,898

 
 
 
 
 
 
Current portion of borrowings
$
3,614

 
$
—

 
$
3,614

Other current liabilities
8,742

 
457

 
9,199

Total current liabilities
12,356

 
457

 
12,813

Borrowings
10,430

 
267

 
10,697

Deferred income taxes and other long-term liabilities
9,325

 
105

 
9,430

Equity
40,813

 
1,145

 
41,958

Total liabilities and equity
$
72,924

 
$
1,974

 
$
74,898



13
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The following table presents summarized income statement information of the Company for the nine months ended June 29, 2013, reflecting the impact of consolidating the International Theme Parks income statements.
 
Before 
International
Theme Parks
Consolidation(1)
 
International
Theme Parks
and Adjustments
 
Total
Revenues
$
31,942

 
$
1,531

 
$
33,473

Cost and expenses
(24,548
)
 
(1,634
)
 
(26,182
)
Restructuring and impairment charges
(121
)
 
—

 
(121
)
Other income/(expense), net
(92
)
 
—

 
(92
)
Net interest expense
(161
)
 
(48
)
 
(209
)
Equity in the income of investees
457

 
70

 
527

Income before income taxes
7,477

 
(81
)
 
7,396

Income taxes
(2,302
)
 
(1
)
 
(2,303
)
Net income
$
5,175

 
$
(82
)
 
$
5,093

 
(1) 
These amounts include the International Theme Parks under the equity method of accounting. As such, royalty and management fee income from these operations is included in Revenues and our share of their net income/(loss) is included in Equity in the income of investees. There were $111 million of royalties and management fees recognized for the nine months ended June 29, 2013.
 
The following table presents summarized cash flow statement information of the Company for the nine months ended June 29, 2013, reflecting the impact of consolidating the International Theme Parks cash flow statements. 
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash provided by operations
$
6,677

 
$
40

 
$
6,717

Investments in parks, resorts and other property
(1,203
)
 
(606
)
 
(1,809
)
Cash (used in)/provided by other investing activities
(2,076
)
 
223

 
(1,853
)
Cash (used in)/provided by financing activities
(2,737
)
 
301

 
(2,436
)
Impact of exchange rates on cash and cash equivalents
(81
)
 
7

 
(74
)
Increase/(decrease) in cash and cash equivalents
580

 
(35
)
 
545

Cash and cash equivalents, beginning of period
2,839

 
548

 
3,387

Cash and cash equivalents, end of period
$
3,419

 
$
513

 
$
3,932

 
7.
Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows: 
 
Pension Plans
 
Postretirement Medical Plans
 
Quarter Ended
 
Nine Months Ended
 
Quarter Ended
 
Nine Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Service costs
$
86

 
$
69

 
$
258

 
$
208

 
$
4

 
$
5

 
$
13

 
$
16

Interest costs
109

 
111

 
326

 
330

 
17

 
19

 
50

 
56

Expected return on plan assets
(151
)
 
(128
)
 
(452
)
 
(385
)
 
(8
)
 
(5
)
 
(23
)
 
(17
)
Amortization of prior-year service costs
2

 
3

 
7

 
10

 
(1
)
 
—

 
(2
)
 
(1
)
Recognized net actuarial loss
105

 
77

 
313

 
232

 
10

 
7

 
30

 
23

Net periodic benefit cost
$
151

 
$
132

 
$
452

 
$
395

 
$
22

 
$
26

 
$
68

 
$
77


14
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


During the nine months ended June 29, 2013, the Company made contributions to its pension and postretirement medical plans totaling $382 million. The Company expects total pension and postretirement medical plan contributions in fiscal 2013 of approximately $425 million to $475 million. Final minimum pension plan funding requirements for fiscal 2013 will be determined based on our January 1, 2013 funding actuarial valuation, which will be available by the end of the fourth quarter of fiscal 2013.

8.
Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period and are calculated using the treasury stock method for equity-based compensation awards (Awards). A reconciliation of the weighted average number of common and common equivalent shares outstanding and Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, are as follows: 
 
Quarter Ended
 
Nine Months Ended
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Shares (in millions):
 
 
 
 
 
 
 
Weighted average number of common shares outstanding (basic)
1,802

 
1,791

 
1,794

 
1,794

Weighted average dilutive impact of Awards
19

 
21

 
22

 
24

Weighted average number of common and common equivalent shares outstanding (diluted)
1,821

 
1,812

 
1,816

 
1,818

Awards excluded from diluted earnings per share
—

 
10

 
3

 
13

 
9.
Equity
On November 28, 2012, the Company declared a $0.75 per share dividend ($1.3 billion) related to fiscal 2012 for shareholders of record on December 10, 2012, which was paid on December 28, 2012. The Company paid a $0.60 per share dividend ($1.1 billion) during the second quarter of fiscal 2012 related to fiscal 2011.
During the nine months ended June 29, 2013, the Company repurchased 49 million shares of its common stock for $2.7 billion. As of June 29, 2013, the Company had remaining authorization in place to repurchase 183 million additional shares. The repurchase program does not have an expiration date.


15
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 changes in each component of accumulated other comprehensive income (loss) (AOCI) including our proportional share of equity method investee amounts, net of 37% estimated tax:
 
 
 
 
 
Unrecognized
Pension and 
Post-retirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
 
Investments
 
Cash Flow
Hedges(1)
 
 
 
 
 
 
 
 
 
 
 
Balance at Mar. 30, 2013
$
25

 
$
118

 
$
(3,094
)
 
$
(17
)
 
$
(2,968
)
Quarter Ended June 29, 2013:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
43

 
60

 
—

 
(69
)
 
34

Reclassifications of net (gains) losses to net income
—

 
(25
)
 
75

 
—

 
50

Balance at June 29, 2013
$
68

 
$
153

 
$
(3,019
)
 
$
(86
)
 
$
(2,884
)
 
 
 
 
 
 
 
 
 
 
Balance at Mar. 31, 2012
$
20

 
$
(12
)
 
$
(2,537
)
 
$
48

 
$
(2,481
)
Quarter Ended June 30, 2012:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(4
)
 
91

 
2

 
(87
)
 
2

Reclassifications of net (gains) losses to net income
(1
)
 
(18
)
 
55

 
—

 
36

Balance at June 30, 2012
$
15

 
$
61

 
$
(2,480
)
 
$
(39
)
 
$
(2,443
)
 
 
 
 
 
 
 
 
 
 
Balance at Sept. 29, 2012
$
3

 
$
(52
)
 
$
(3,234
)
 
$
17

 
$
(3,266
)
Nine Months Ended June 29, 2013:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
72

 
245

 
(6
)
 
(109
)
 
202

Reclassifications of net (gains) losses to net income
(7
)
 
(40
)
 
221

 
6

 
180

Balance at June 29, 2013
$
68

 
$
153

 
$
(3,019
)
 
$
(86
)
 
$
(2,884
)
 
 
 
 
 
 
 
 
 
 
Balance at Oct. 1, 2011
$
6

 
$
(54
)
 
$
(2,625
)
 
$
43

 
$
(2,630
)
Nine Months Ended June 30, 2012:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
16

 
130

 
(20
)
 
(116
)
 
10

Reclassifications of net (gains) losses to net income
(7
)
 
(15
)
 
165

 
34

 
177

Balance at June 30, 2012
$
15

 
$
61

 
$
(2,480
)
 
$
(39
)
 
$
(2,443
)
 
(1) 
Reclassifications of gains on cash flow hedges are primarily recorded in revenue.


16
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


10.
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
 
June 29, 2013
 
June 30, 2012
 
June 29, 2013
 
June 30, 2012
Stock options/rights (1)
$
25

 
$
29

 
$
78

 
$
89

RSUs
76

 
77

 
236

 
234

Total equity-based compensation expense (2)
$
101

 
$
106

 
$
314

 
$
323

Equity-based compensation expense capitalized during the period
$
14

 
$
15

 
$
43

 
$
42

 
(1) 
Includes stock appreciation rights.

(2) 
Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. During the quarter and nine months ended June 29, 2013, amortization of previously capitalized equity-based compensation totaled $14 million and $51 million, respectively. During the quarter and nine months ended June 30, 2012, amortization of previously capitalized equity-based compensation totaled $15 million and $39 million, respectively.
Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $173 million and $606 million, respectively, as of June 29, 2013.
The weighted average grant date fair values of options issued during the nine months ended June 29, 2013 and June 30, 2012 were $12.38 and $10.65, respectively.
During the nine months ended June 29, 2013, the Company made equity compensation grants consisting of 8.6 million stock options and 7.0 million RSUs, of which 0.4 million RSUs included market and/or performance conditions.

11.
Commitments and Contingencies
Legal Matters
Beef Products, Inc. v. American Broadcasting Companies, Inc. On September 13, 2012, plaintiffs filed an action in South Dakota state court against certain subsidiaries and employees of the Company and others, asserting claims for defamation arising from alleged false statements and implications, statutory and common law product disparagement, and tortious interference with existing and prospective business relationships. The claims arise out of ABC News reports published in March and April 2012 that discussed the subject of labeling requirements for production processes related to a product one plaintiff produces that is added to ground beef before sale to consumers. Plaintiffs seek actual and consequential damages in excess of $400 million, statutory damages (including treble damages) pursuant to South Dakota's Agricultural Food Products Disparagement Act, and punitive damages. On October 24, 2012, the Company removed the action to the United States District Court for the District of South Dakota, and on October 31, 2012, the Company moved to dismiss all claims. On November 28, 2012, plaintiffs filed motion to remand the case to state court. On June 12, 2013, the district court granted plaintiffs' motion to remand to state court and denied the Company's motions to dismiss all claims, without prejudice to its right to move again in state court. On July 9, 2013, the Company moved in state court to dismiss all claims.
The Company, together with, in some instances, certain of its directors and officers, is a defendant or codefendant in various other legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses.
Management does not believe that the Company has incurred a probable, material loss by reason of any of the above actions.
Celador International Ltd. v. American Broadcasting Companies, Inc. 
In connection with the Company's litigation with Celador International Ltd., the Company recorded a $321 million charge in Other income/(expense), net, in the first quarter of fiscal 2013. This amount was paid in the third quarter of fiscal 2013.

17
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


Contractual Guarantees
The Company has guaranteed bond issuances by the Anaheim Public Authority that were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the Disneyland Resort. Revenues from sales, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of June 29, 2013, the remaining debt service obligation guaranteed by the Company was $347 million, of which $78 million was principal. To the extent that tax revenues exceed the debt service payments in subsequent periods, the Company would be reimbursed for any previously funded shortfalls. To date, tax revenues have exceeded the debt service payments for these bonds.
Long-Term Receivables and the Allowance for Credit Losses
The Company has accounts receivable with original maturities greater than one year related to the sale of television program rights within the Media Networks segment and vacation ownership units within the Parks and Resorts segment. Allowances for credit losses are established against these receivables as necessary.
The Company estimates the allowance for credit losses related to receivables from the sale of television programs based upon a number of factors, including historical experience and the financial condition of individual companies with which we do business. The balance of television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $0.8 billion as of June 29, 2013. 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 June 29, 2013. The activity in the current period related to the allowance for credit losses was not material.
 
Income Taxes
During the nine months ended June 29, 2013, the Company increased its gross unrecognized tax benefits by $545 million and settled certain tax matters with various jurisdictions, which reduced its unrecognized tax benefits by $125 million, including interest and penalties. As of June 29, 2013, the Company's gross unrecognized tax benefits were $1,084 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 $387 million, of which $40 million would reduce our income tax expense and effective tax rate if recognized.
 
12. 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. Assets and liabilities measured at fair value are classified in 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

18
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level: 
 
Fair Value Measurement at June 29, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Investments
$
190

 
$
—

 
$
—

 
$
190

Derivatives (1)
 
 
 
 
 
 
 
Interest rate
—

 
181

 
—

 
181

Foreign exchange
—

 
457

 
—

 
457

Liabilities
 
 
 
 
 
 
 
Derivatives (1)
 
 
 
 
 
 
 
Interest rate
—

 
(103
)
 
—

 
(103
)
Foreign exchange
—

 
(87
)
 
—

 
(87
)
Total recorded at fair value
$
190

 
$
448

 
$
—

 
$
638

Fair value of borrowings
$
—

 
$
13,815

 
$
1,515

 
$
15,330

 
 
Fair Value Measurement at September 29, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Investments
$
86

 
$
—

 
$
—

 
$
86

Derivatives (1)
 
 
 
 
 
 
 
Interest rate
—

 
239

 
—

 
239

Foreign exchange
—

 
390

 
—

 
390

Liabilities
 
 
 
 
 
 
 
Derivatives (1)
 
 
 
 
 
 
 
Foreign exchange
—

 
(235
)
 
—

 
(235
)
Total recorded at fair value
$
86

 
$
394

 
$
—

 
$
480

Fair value of borrowings
$
—

 
$
13,493

 
$
1,653

 
$
15,146

 
(1) 
The Company has master netting arrangements by counterparty with respect to certain derivative contracts. Contracts in a liability position totaling $110 million and $153 million have been netted against contracts in an asset position in the Condensed Consolidated Balance Sheets at June 29, 2013 and September 29, 2012, respectively.
The fair values of Level 2 derivatives are primarily determined by internal discounted cash flow models that use observable inputs such as interest rates, yield curves and foreign currency exchange rates. Counterparty credit risk, which is mitigated by master netting agreements and collateral posting arrangements with certain counterparties, did not have a material impact on derivative fair value estimates.
Level 2 borrowings, which include commercial paper and U.S. medium-term notes, are valued based on quoted prices for similar instruments in active markets.
Level 3 borrowings, which include Hong Kong Disneyland borrowings and other foreign currency denominated borrowings, are generally valued based on historical market transactions, prevailing market interest rates and the Company's current borrowing cost and credit risk.
The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.
The Company also has assets and liabilities that are required to be recorded at fair value on a non-recurring basis when certain circumstances occur. During the prior-year nine months ended June 30, 2012, the Company recorded impairment charges of $111 million on film productions. These impairment charges are reported in “Costs and expenses” in the Condensed Consolidated Statements of Income. The film impairment charges reflected the excess of the unamortized cost of the films

19
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


over the estimated fair value using discounted cash flows. The discounted cash flow analysis is a level 3 valuation technique. The aggregate carrying value of the films for which we prepared the fair value analyses was $124 million as of June 30, 2012. Subsequent to the end of the third quarter, the Company released a film which did not meet our expectations.  Accordingly, we updated the fair value assessment of that film which we had performed as of the balance sheet date.  This updated assessment is based on an ultimate loss projection for the film, which includes an estimated loss from theatrical distribution of $75 million to $80 million in the fourth quarter of fiscal 2013. As a result of the projected ultimate loss, the Company also expects to record an impairment charge in the range of $85 million to $110 million in the fourth quarter.

13. Derivative Instruments
The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.
The Company’s derivative positions measured at fair value are summarized in the following tables: 
 
As of June 29, 2013
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
202

 
$
137

 
$
(35
)
 
$
(9
)
Interest rate
—

 
181

 
(103
)
 
—

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
116

 
2

 
(42
)
 
(1
)
Gross fair value of derivatives
318

 
320

 
(180
)
 
(10
)
Counterparty netting
(92
)
 
(18
)
 
100

 
10

Total derivatives (1)
$
226

 
$
302

 
$
(80
)
 
$
—

 
 
As of September 29, 2012
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
84

 
$
30

 
$
(94
)
 
$
(50
)
Interest rate
1

 
238

 
—

 
—

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
258

 
18

 
(91
)
 
—

Gross fair value of derivatives
343

 
286

 
(185
)
 
(50
)
Counterparty netting
(117
)
 
(36
)
 
117

 
36

Total derivatives (1)
$
226

 
$
250

 
$
(68
)
 
$
(14
)
 
(1) 
Refer to Note 12 for further information on derivative fair values and counterparty netting.
Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company typically uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate management activities.

20
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of June 29, 2013 and September 29, 2012, the total notional amount of the Company’s pay-floating interest rate swaps was $5.6 billion and $3.1 billion, respectively. The following table summarizes adjustments related to fair value hedges included in net interest expense in the Condensed Consolidated Statements of Income. 
 
Quarter Ended
 
Nine Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Gain (loss) on interest rate swaps
$
(114
)
 
$
25

 
$
(178
)
 
$
9

Gain (loss) on hedged borrowings
114

 
(25
)
 
178

 
(9
)
The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at June 29, 2013 or at September 29, 2012.
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 June 29, 2013 and September 29, 2012, the notional amounts of the Company’s net foreign exchange cash flow hedges were $4.5 billion and $4.6 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 nine months ended June 29, 2013 and June 30, 2012 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $167 million.

21
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)


Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at June 29, 2013 and September 29, 2012 were $4.5 billion and $4.1 billion, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the offsetting net foreign exchange gains or losses on the related foreign exchange contracts for the quarters and nine months ended June 29, 2013 and June 30, 2012 by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of Income.
 
Costs and Expenses
 
Interest Expense
 
Quarter Ended
 
Nine Months Ended
 
Quarter Ended
 
Nine Months Ended
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
 
June 29,
2013
 
June 30,
2012
Net gains (losses) on foreign currency denominated assets and liabilities
$
(15
)
 
$
(120
)
 
$
(122
)
 
$
(136
)
 
$
39

 
$
(16
)
 
$
192

 
$
27

Net gains (losses) on foreign exchange risk management contracts not designated as hedges
(3
)
 
107

 
91

 
103

 
(36
)
 
18

 
(187
)
 
(30
)
Net gains (losses)
$
(18
)
 
$
(13
)
 
$
(31
)
 
$
(33
)
 
$
3

 
$
2

 
$
5

 
$
(3
)

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 fair value of the commodity hedging contracts at June 29, 2013 and September 29, 2012 were not material. The related gains or losses recognized in earnings were not material for the nine months ended June 29, 2013 and June 30, 2012.
Risk Management – Other Derivatives Not Designated as Hedges
The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which include certain commodity swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings. The fair value of these contracts at June 29, 2013 and September 29, 2012 were not material. The related gains or losses recognized in earnings were not material for the nine months ended June 29, 2013 and June 30, 2012.
Contingent Features
The Company’s derivative financial instruments may require the Company 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. If the Company’s credit ratings were to fall below investment grade, such counterparties 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 value of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $80 million and $82 million on June 29, 2013 and September 29, 2012, respectively.
 
14. Restructuring and Impairment Charges
The Company recorded $121 million of restructuring charges in the current nine-month period for severance costs related to organizational and cost structure initiatives across various of our businesses, contract termination costs and certain asset impairments, including charges in connection with the acquisition of Lucasfilm. In the prior-year nine-month period, the Company recorded $51 million of restructuring charges for severance costs related to organizational and cost structure initiatives across various of our businesses.


22


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

ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
Overview
Seasonality
Business Segment Results
Other Financial Information
Financial Condition
Commitments and Contingencies
Other Matters
Market Risk
OVERVIEW
Our summary consolidated results are presented below: 
 
Quarter Ended
 
% Change
 
Nine Months Ended
 
% Change
(in millions, except per share data)
June 29,
2013
 
June 30,
2012
 
Better/
(Worse)
 
June 29,
2013
 
June 30,
2012
 
Better/
(Worse)
Revenues
$
11,578

 
$
11,088

 
4
 %

 
$
33,473

 
$
31,496

 
6
 %
 
Costs and expenses
(8,574
)
 
(8,128
)
 
(5)
 %

 
(26,182
)
 
(24,657
)
 
(6)
 %
 
Restructuring and impairment charges
(60
)
 
(7