Edgar Filing: WALT DISNEY CO/

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FY2014_Q1_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
December 28, 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).

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 1,752,059,060 shares of common stock outstanding as of January 29, 2014.

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited; in millions, except per share data)



	Quarter Ended
	December 28, 2013			December 29, 2012
Revenues	$	12,309		$	11,341
Costs and expenses	(9,644		)	(9,249		)
Restructuring and impairment charges	(19		)	—
Other income/(expense), net	6			(102		)
Interest income/(expense), net	49			(72		)
Equity in the income of investees	239			110
Income before income taxes	2,940			2,028
Income taxes	(1,036		)	(590		)
Net income	1,904			1,438
Less: Net income attributable to noncontrolling interests	(64		)	(56		)
Net income attributable to The Walt Disney Company (Disney)	$	1,840		$	1,382

Earnings per share attributable to Disney:
Diluted	$	1.03		$	0.77
Basic	$	1.04		$	0.78

Weighted average number of common and common equivalent shares outstanding:
Diluted	1,784			1,800
Basic	1,762			1,777

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited; in millions)



	Quarter Ended
	December 28, 2013			December 29, 2012
Net income	$	1,904		$	1,438
Other comprehensive income (loss), net of tax:
Market value adjustments for investments	(19		)	17
Market value adjustments for hedges	31			59
Pension and postretirement medical plan adjustments	25			73
Foreign currency translation and other	14			2
Other comprehensive income	51			151
Comprehensive income	1,955			1,589
Less: Net income attributable to noncontrolling interests	(64		)	(56		)
Less: Other comprehensive income attributable to noncontrolling interests	(8		)	(13		)
Comprehensive income attributable to Disney	$	1,883		$	1,520

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)



	December 28, 2013			September 28, 2013
ASSETS
Current assets
Cash and cash equivalents	$	4,397		$	3,931
Receivables	8,013			6,967
Inventories	1,380			1,487
Television costs and advances	846			634
Deferred income taxes	484			485
Other current assets	643			605
Total current assets	15,763			14,109
Film and television costs	4,992			4,783
Investments	2,784			2,849
Parks, resorts and other property
Attractions, buildings and equipment	41,498			41,192
Accumulated depreciation	(22,874		)	(22,459		)
	18,624			18,733
Projects in progress	2,760			2,476
Land	1,183			1,171
	22,567			22,380
Intangible assets, net	7,313			7,370
Goodwill	27,324			27,324
Other assets	2,423			2,426
Total assets	$	83,166		$	81,241

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other accrued liabilities	$	8,590		$	6,803
Current portion of borrowings	3,687			1,512
Unearned royalties and other advances	3,419			3,389
Total current liabilities	15,696			11,704

Borrowings	11,714			12,776
Deferred income taxes	3,987			4,050
Other long-term liabilities	4,473			4,561
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	33,679			33,440
Retained earnings	48,089			47,758
Accumulated other comprehensive loss	(1,144		)	(1,187		)
	80,624			80,011
Treasury stock, at cost, 1.1 billion shares at December 28, 2013 and 1.0 billion shares at September 28, 2013	(36,300		)	(34,582		)
Total Disney Shareholders' equity	44,324			45,429
Noncontrolling interests	2,972			2,721
Total equity	47,296			48,150
Total liabilities and equity	$	83,166		$	81,241

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)



	Quarter Ended
	December 28, 2013			December 29, 2012
OPERATING ACTIVITIES
Net income	$	1,904		$	1,438
Depreciation and amortization	561			514
Gains on dispositions	(6		)	(219		)
Deferred income taxes	(85		)	(236		)
Equity in the income of investees	(239		)	(110		)
Cash distributions received from equity investees	187			192
Net change in film and television costs and advances	(299		)	(187		)
Equity-based compensation	96			100
Other	(78		)	86
Changes in operating assets and liabilities:
Receivables	(1,175		)	(934		)
Inventories	97			95
Other assets	(20		)	42
Accounts payable and other accrued liabilities	(707		)	(314		)
Income taxes	976			677
Cash provided by operations	1,212			1,144

INVESTING ACTIVITIES
Investments in parks, resorts and other property	(658		)	(545		)
Sales of investments/proceeds from dispositions	136			340
Acquisitions	—			(2,265		)
Other	(5		)	5
Cash used in investing activities	(527		)	(2,465		)

FINANCING ACTIVITIES
Commercial paper borrowings, net	2,149			994
Borrowings	66			3,037
Reduction of borrowings	(1,046		)	(776		)
Dividends	—			(1,300		)
Repurchases of common stock	(1,718		)	(1,044		)
Proceeds from exercise of stock options	94			124
Other	218			101
Cash (used in)/provided by financing activities	(237		)	1,136

Impact of exchange rates on cash and cash equivalents	18			5

Increase/(decrease) in cash and cash equivalents	466			(180		)
Cash and cash equivalents, beginning of period	3,931			3,387
Cash and cash equivalents, end of period	$	4,397		$	3,207

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)



	Quarter Ended
	December 28, 2013									December 29, 2012
	Disney Shareholders			Non- controlling Interests			Total Equity			Disney Shareholders			Non- controlling Interests		Total Equity
Beginning balance	$	45,429		$	2,721		$	48,150		$	39,759		$	2,199	$	41,958
Comprehensive income	1,883			72			1,955			1,520			69		1,589
Equity compensation activity	238			—			238			252			—		252
Dividends	(1,508		)	—			(1,508		)	(1,324		)	—		(1,324		)
Common stock repurchases	(1,718		)	—			(1,718		)	(1,044		)	—		(1,044		)
Acquisition of Lucasfilm	—			—			—			1,853			6		1,859
Contributions	—			180			180			—			71		71
Distributions and other	—			(1		)	(1		)	—			9		9
Ending balance	$	44,324		$	2,972		$	47,296		$	41,016		$	2,354	$	43,370

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 quarter ended December 28, 2013 are not necessarily indicative of the results that may be expected for the year ending September 27, 2014. 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 2013 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 (HKDL) 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
	December 28, 2013			December 29, 2012
Media Networks
Cable Networks	$	257		$	177
Broadcasting	(18		)	(13		)
Equity in the income of investees included in segment operating income	$	239		$	164

During the quarter ended December 29, 2012, 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.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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



	Quarter Ended
	December 28, 2013		December 29, 2012
Revenues ⁽¹⁾:
Media Networks	$	5,290	$	5,101
Parks and Resorts	3,597		3,391
Studio Entertainment	1,893		1,545
Consumer Products	1,126		1,013
Interactive	403		291
	$	12,309	$	11,341
Segment operating income ⁽¹⁾:
Media Networks	$	1,455	$	1,214
Parks and Resorts	671		577
Studio Entertainment	409		234
Consumer Products	430		346
Interactive	55		9
	$	3,020	$	2,380

⁽¹⁾ Studio Entertainment segment revenues and operating income include an allocation of Consumer Products 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
	December 28, 2013			December 29, 2012
Studio Entertainment	$	63		$	55
Consumer Products	(63		)	(55		)
	$	—		$	—

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



	Quarter Ended
	December 28, 2013			December 29, 2012
Segment operating income	$	3,020		$	2,380
Corporate and unallocated shared expenses	(116		)	(123		)
Restructuring and impairment charges	(19		)	—
Other income/(expense), net	6			(102		)
Interest income/(expense), net	49			(72		)
Hulu Equity Redemption charge	—			(55		)
Income before income taxes	$	2,940		$	2,028


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 had a value of $4.1 billion.

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 to the tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the purchase price over those fair values and the related deferred taxes was allocated to goodwill, which is not deductible for tax purposes.



(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 revenue and net income of Lucasfilm included in the Company's Condensed Consolidated Statement of Income for the quarter ended December 28, 2013 was 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 $750 million in cash to fund Hulu's operations and investments for future growth, of which the Company's share is $257 million. To date, the Company has contributed $134 million, increasing its ownership to 33%, and 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.

Goodwill

There were no changes in the carrying amount of goodwill for the quarter ended December 28, 2013. The carrying amount of goodwill at December 28, 2013 and September 28, 2013 includes accumulated impairments of $29 million at Interactive.


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 interest). The gain is reported in "Other income/(expense), net" in the first quarter of fiscal 2013.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Other income/(expense)

Other income/(expense) is as follows:



	Quarter Ended
	December 28, 2013		December 29, 2012
Celador litigation charge⁽¹⁾	$	—	$	(321	)
Gain on sale of equity interest in ESS	—		219
Other	6		—
Other income/(expense), net	$	6	$	(102	)

⁽¹⁾ In connection with the Company's litigation with Celador International Ltd., the Company recorded a $321 million charge in the first quarter of fiscal 2013.


5.	Borrowings

For the quarter ended December 28, 2013, the Company’s borrowing activity is as follows:



	September 28, 2013		Additions		Payments			Other Activity⁽¹⁾			December 28, 2013
Commercial paper borrowings	$	—	$	2,149	$	—		$	—		$	2,149
U.S. medium-term notes	13,155		—		(1,000		)	3			12,158
European medium-term notes and other foreign currency denominated borrowings	509		66		(41		)	(10		)	524
HKDL borrowings	275		—		(12		)	2			265
Other	349		—		(12		)	(32		)	305
Total	$	14,288	$	2,215	$	(1,065	)	$	(37	)	$	15,401

⁽¹⁾ The other activity is primarily market value adjustments for debt with qualifying hedges.

Interest income/(expense)

Interest and investment income and interest expense are reported net in the Condensed Consolidated Statements of Income. Interest expense, net of capitalized interest, for the quarters ended December 28, 2013 and December 29, 2012 was $81 million and $92 million, respectively. Interest and investment income for the quarters ended December 28, 2013 and December 29, 2012 was $130 million and $20 million, respectively. The quarter ended December 28, 2013 included net gains realized on available-for-sale and non-publicly traded cost method investments of $59 million and $46 million, respectively.


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 HKDL and a 43% ownership interest in the operations of Shanghai Disney Resort, all of which are VIEs consolidated in the Company’s financial statements. See Note 1 for the Company's policy on consolidating VIEs.

THE 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 December 28, 2013 and September 28, 2013, reflecting the impact of consolidating the International Theme Parks balance sheets.



	As of December 28, 2013
	Before International Theme Parks Consolidation		International Theme Parks and Adjustments			Total
Cash and cash equivalents	$	3,785	$	612		$	4,397
Other current assets	11,111		255			11,366
Total current assets	14,896		867			15,763
Investments/Advances	6,524		(3,740		)	2,784
Parks, resorts and other property	17,017		5,550			22,567
Other assets	42,021		31			42,052
Total assets	$	80,458	$	2,708		$	83,166

Current portion of borrowings	$	3,687	$	—		$	3,687
Other current liabilities	11,520		489			12,009
Total current liabilities	15,207		489			15,696
Borrowings	11,449		265			11,714
Deferred income taxes and other long-term liabilities	8,306		154			8,460
Equity	45,496		1,800			47,296
Total liabilities and equity	$	80,458	$	2,708		$	83,166



	As of September 28, 2013
	Before International Theme Parks Consolidation		International Theme Parks and Adjustments			Total
Cash and cash equivalents	$	3,325	$	606		$	3,931
Other current assets	9,896		282			10,178
Total current assets	13,221		888			14,109
Investments/Advances	6,415		(3,566		)	2,849
Parks, resorts and other property	17,117		5,263			22,380
Other assets	41,879		24			41,903
Total assets	$	78,632	$	2,609		$	81,241

Current portion of borrowings	$	1,512	$	—		$	1,512
Other current liabilities	9,622		570			10,192
Total current liabilities	11,134		570			11,704
Borrowings	12,501		275			12,776
Deferred income taxes and other long-term liabilities	8,466		145			8,611
Equity	46,531		1,619			48,150
Total liabilities and equity	$	78,632	$	2,609		$	81,241

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 quarter ended December 28, 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	$	11,745		$	564		$	12,309
Cost and expenses	(9,086		)	(558		)	(9,644		)
Restructuring and impairment charges	(19		)	—			(19		)
Other income/(expense), net	6			—			6
Interest income/(expense), net	65			(16		)	49
Equity in the income of investees	235			4			239
Income before income taxes	2,946			(6		)	2,940
Income taxes	(1,036		)	—			(1,036		)
Net income	$	1,910		$	(6	)	$	1,904


⁽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 $14 million of royalties and management fees recognized for the quarter ended December 28, 2013.

The following table presents summarized cash flow statement information of the Company for the quarter ended December 28, 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/(used in) operations	$	1,268		$	(56	)	$	1,212
Investments in parks, resorts and other property	(334		)	(324		)	(658		)
Cash (used in)/provided by other investing activities	(71		)	202			131
Cash (used in)/provided by financing activities	(417		)	180			(237		)
Impact of exchange rates on cash and cash equivalents	14			4			18
Increase in cash and cash equivalents	460			6			466
Cash and cash equivalents, beginning of period	3,325			606			3,931
Cash and cash equivalents, end of period	$	3,785		$	612		$	4,397

During the quarter ended December 28, 2013, Disneyland Paris borrowed €50 million ($68 million) under a line of credit with the Company and subsequent to the quarter end borrowed an additional €50 million.

In July 2009, the Company entered into a capital realignment and expansion plan for HKDL with the Government of the Hong Kong Special Administrative Region (HKSAR), HKDL’s majority shareholder. The expansion cost approximately $0.5 billion, was completed in 2013 and was financed equally by the Company and HKSAR. As a result the Company’s equity interest in HKDL increased from 43% to 48%.

In addition, HKSAR holds a right to receive additional shares over time if HKDL exceeds certain return on asset performance targets. The amount of additional shares HKSAR can receive varies with the extent to which the performance targets are exceeded but is capped on both an annual and cumulative basis. Based on the number of shares currently outstanding, the additional shares could decrease the Company’s equity interest to no less than 38% over a period no shorter than 18 years. HKDL may begin to exceed the performance targets in fiscal 2014, in which case HKSAR would be entitled to receive additional equity interests beginning in 2015. The maximum additional interest which HKSAR can receive in 2015 would reduce the Company's equity interest by approximately 1 percentage point.


7.	Pension and Other Benefit Programs

The components of net periodic benefit cost are as follows:



	Pension Plans						Postretirement Medical Plans
	December 28, 2013			December 29, 2012			December 28, 2013			December 29, 2012
Service costs	$	71		$	86		$	3		$	4
Interest costs	122			109			16			17
Expected return on plan assets	(161		)	(151		)	(9		)	(8		)
Amortization of prior-year service costs	4			2			—			(1		)
Recognized net actuarial loss/(gain)	36			104			(2		)	10
Net periodic benefit cost	$	72		$	150		$	8		$	22

During the quarter ended December 28, 2013, the Company did not make any material contributions to its pension and postretirement medical plans. The Company expects total pension and postretirement medical plan contributions in fiscal 2014 of approximately $275 million to $325 million. Final minimum pension plan funding requirements for fiscal 2014 will be determined based on our January 1, 2014 funding actuarial valuation, which will be available in the fourth quarter of fiscal 2014.


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
	December 28, 2013	December 29, 2012
Shares (in millions):
Weighted average number of common and common equivalent shares outstanding (basic)	1,762	1,777
Weighted average dilutive impact of Awards	22	23
Weighted average number of common and common equivalent shares outstanding (diluted)	1,784	1,800
Awards excluded from diluted earnings per share	10	1


9.	Equity

On December 4, 2013, the Company declared a $0.86 per share dividend ($1.5 billion) related to fiscal 2013 for shareholders of record on December 16, 2013, which was paid on January 16, 2014. The Company paid a $0.75 per share dividend ($1.3 billion) during the first quarter of fiscal 2013 related to fiscal 2012.

During the quarter ended December 28, 2013, the Company repurchased 25 million shares of its common stock for $1.7 billion. As of December 28, 2013, the Company had remaining authorization in place to repurchase 136 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 the changes in each component of accumulated other comprehensive income (loss) (AOCI) including our proportional share of equity method investee amounts, net of 37% estimated tax:



							Unrecognized Pension and Postretirement Medical Expense			Foreign Currency Translation and Other			AOCI
	Market Value Adjustments
	Investments, net			Cash Flow Hedges
Balance at Sept. 28, 2013	$	95		$	83		$	(1,271	)	$	(94	)	$	(1,187	)
Unrealized gains (losses) arising during the period	18			41			—			6			65
Reclassifications of net (gains) losses to net income	(37		)	(10		)	25			—			(22		)
Balance at Dec. 28, 2013	$	76		$	114		$	(1,246	)	$	(88	)	$	(1,144	)

Balance at Sept. 29, 2012	$	3		$	(52	)	$	(3,234	)	$	17		$	(3,266	)
Unrealized gains (losses) arising during the period	17			65			—			(17		)	65
Reclassifications of net (gains) losses to net income	—			(6		)	73			6			73
Balance at Dec. 29, 2012	$	20		$	7		$	(3,161	)	$	6		$	(3,128	)

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
Gains/(losses) in net income:		December 28, 2013			December 29, 2012
Investments, net	Interest income/(expense), net	$	59		$	—
Estimated tax	Income taxes	(22		)	—
		37			—

Cash flow hedges	Primarily revenue	16			10
Estimated tax	Income taxes	(6		)	(4		)
		10			6

Pension and postretirement medical expense	Primarily included in the computation of net periodic benefit cost (see Note 7)	(40		)	(116		)
Estimated tax	Income taxes	15			43
		(25		)	(73		)

Foreign currency translation and other	Other income/(expense), net	—			(10		)
Estimated tax	Income taxes	—			4
		—			(6		)

Total reclassifications for the period		$	22		$	(73	)

At December 28, 2013, the Company held available-for-sale investments in net unrecognized gain positions totaling $121 million and no investments in significant unrecognized loss positions. At September 28, 2013, the Company held available-for-sale investments in net unrecognized gain positions totaling $156 million and no investments in significant unrecognized loss positions.


10.	Equity-Based Compensation

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



	Quarter Ended
	December 28, 2013		December 29, 2012
Stock options/rights ⁽¹⁾	$	25	$	25
RSUs	74		76
Total equity-based compensation expense ⁽²⁾	$	99	$	101
Equity-based compensation expense capitalized during the period	$	14	$	14


⁽¹⁾	Includes stock appreciation rights.


⁽²⁾	Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. During the quarters ended December 28, 2013 and December 29, 2012, amortization of previously capitalized equity-based compensation totaled $13 million and $24 million, respectively.

Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $220 million and $719 million, respectively, as of December 28, 2013.

The weighted average grant date fair values of options issued during the quarters ended December 28, 2013 and December 29, 2012 were $19.15 and $12.19, respectively.

During the quarter ended December 28, 2013, the Company made equity compensation grants consisting of 5.6 million stock options and 5.0 million RSUs, of which 0.3 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, and the hearing on those motions occurred on December 17, 2013.

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.

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 December 28, 2013, the remaining debt service obligation guaranteed by the Company was $343 million, of which $75 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 $0.9 billion as of December 28, 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 December 28, 2013. The activity in the current period related to the allowance for credit losses was not material.

Income Taxes

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 $537 million, of which $81 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 and is 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

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 December 28, 2013
	Level 1		Level 2			Level 3		Total
Assets
Investments	$	186	$	—		$	—	$	186
Derivatives ⁽¹⁾
Interest rate	—		163			—		163
Foreign exchange	—		366			—		366
Liabilities
Derivatives ⁽¹⁾
Interest rate	—		(117		)	—		(117		)
Foreign exchange	—		(246		)	—		(246		)
Total recorded at fair value	$	186	$	166		$	—	$	352
Fair value of borrowings	$	—	$	14,694		$	907	$	15,601



	Fair Value Measurement at September 28, 2013
	Level 1		Level 2			Level 3		Total
Assets
Investments	$	305	$	—		$	—	$	305
Derivatives ⁽¹⁾
Interest rate	—		170			—		170
Foreign exchange	—		267			—		267
Liabilities
Derivatives ⁽¹⁾
Interest rate	—		(94		)	—		(94		)
Foreign exchange	—		(201		)	—		(201		)
Total recorded at fair value	$	305	$	142		$	—	$	447
Fair value of borrowings	$	—	$	13,630		$	914	$	14,544


⁽¹⁾	The Company has master netting arrangements by counterparty with respect to certain derivative contracts. Contracts in a liability position totaling $219 million and $171 million have been netted against contracts in an asset position in the Condensed Consolidated Balance Sheets at December 28, 2013 and September 28, 2013, 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 HKDL 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 WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 December 28, 2013
	Current Assets			Other Assets			Other Accrued Liabilities			Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	186		$	143		$	(86	)	$	(32	)
Interest rate	—			163			(117		)	—
Derivatives not designated as hedges
Foreign exchange	37			—			(81		)	(47		)
Gross fair value of derivatives	223			306			(284		)	(79		)
Counterparty netting	(172		)	(47		)	178			41
Total derivatives ⁽¹⁾	$	51		$	259		$	(106	)	$	(38	)



	As of September 28, 2013
	Current Assets			Other Assets			Other Accrued Liabilities			Other Long- Term Liabilities
Derivatives designated as hedges
Foreign exchange	$	146		$	106		$	(68	)	$	(24	)
Interest rate	—			170			(94		)	—
Derivatives not designated as hedges
Foreign exchange	15			—			(82		)	(27		)
Gross fair value of derivatives	161			276			(244		)	(51		)
Counterparty netting	(137		)	(34		)	143			28
Total derivatives ⁽¹⁾	$	24		$	242		$	(101	)	$	(23	)


⁽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.

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 both December 28, 2013 and September 28, 2013, the total notional amount of the Company’s pay-floating interest rate swaps was $5.6 billion. The following table summarizes adjustments related to fair value hedges included in "Interest income/(expense), net" in the Condensed Consolidated Statements of Income.



	Quarter Ended
	December 28, 2013			December 29, 2012
Gain (loss) on interest rate swaps	$	(31	)	$	(26	)
Gain (loss) on hedged borrowings	31			26

In addition, the Company realized net benefits of $22 million and $17 million for the quarters ended December 28, 2013 and December 29, 2012, respectively, in net interest expense related to the pay-floating interest rate swaps.

The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at December 28, 2013 or at September 28, 2013.

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 December 28, 2013 and September 28, 2013, the notional amounts of the Company’s net foreign exchange cash flow hedges were $4.6 billion and $4.3 billion, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for the quarters ended December 28, 2013 and December 29, 2012 were not material. Net deferred gains recorded in AOCI for contracts that will mature in the next twelve months totaled $86 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 December 28, 2013 and September 28, 2013 were $4.8 billion and $4.3 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 ended December 28, 2013 and December 29, 2012 by the corresponding line item in which they are recorded in the Condensed Consolidated Statements of Income.



	Costs and Expenses						Interest Income/(Expense), net
	December 28, 2013			December 29, 2012			December 28, 2013			December 29, 2012
Net gains (losses) on foreign currency denominated assets and liabilities	$	9		$	38		$	12		$	82
Net gains (losses) on foreign exchange risk management contracts not designated as hedges	(22		)	(48		)	(10		)	(84		)
Net gains (losses)	$	(13	)	$	(10	)	$	2		$	(2	)

Commodity Price Risk Management

The Company is subject to the volatility of commodities prices and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The fair value of the commodity hedging contracts at December 28, 2013 and September 28, 2013 were not material. The related gains or losses recognized in earnings were not material for the quarters ended December 28, 2013 and December 29, 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 December 28, 2013 and September 28, 2013 were not material. The related gains or losses recognized in earnings were not material for the quarters ended December 28, 2013 and December 29, 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 values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $144 million and $124 million on December 28, 2013 and September 28, 2013, respectively. The Company had posted collateral of $71 million and $54 million related to these derivative contracts at December 28, 2013 and September 28, 2013, respectively.

14. Restructuring and Impairment Charges

The Company recorded $19 million of restructuring and impairment charges in the current quarter for an investment impairment, contract termination costs and severance costs related to organizational and cost structure initiatives across various of our businesses.

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
(in millions, except per share data)	December 28, 2013			December 29, 2012			Better/ (Worse)
Revenues	$	12,309		$	11,341		9	%
Costs and expenses	(9,644		)	(9,249		)	(4)	%
Restructuring and impairment charges	(19		)	—			nm
Other income/(expense), net	6			(102		)	nm
Interest income/(expense), net	49			(72		)	nm
Equity in the income of investees	239			110			>100 %
Income before income taxes	2,940			2,028			45	%
Income taxes	(1,036		)	(590		)	(76)	%
Net income	1,904			1,438			32	%
Less: Net income attributable to noncontrolling interests	(64		)	(56		)	(14)	%
Net income attributable to Disney	$	1,840		$	1,382		33	%
Diluted earnings per share attributable to Disney	$	1.03		$	0.77		34	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Quarter Results

Diluted earnings per share (EPS) for the quarter increased 34% from $0.77 to $1.03 driven by higher operating results at all of our segments and investment gains, partially offset by a higher effective tax rate. The increase in segment operating results was led by Media Networks, which benefited from higher fees from Multi-channel Video Programming Distributors or MVPDs (Affiliate Fees) at ESPN and higher equity income from A&E Television Networks (AETN), partially offset by higher programming costs at the ABC Television Network. Operating income growth at Studio Entertainment was driven by the strong theatrical performance of Frozen. Growth at Parks and Resorts was primarily due to higher average guest spending at domestic parks and resorts, partially offset by higher operating costs, including costs for MyMagic+. Consumer Products growth was driven by merchandise licensing due to the inclusion of Lucasfilm and the strength of our Disney properties. The increase at Interactive reflected the success of Disney Infinity, which was released in the fourth quarter of the prior year, and growth at our Japan mobile business.

EPS for the prior-year quarter included a charge related to the Celador litigation ($321 million) and a gain on the sale of our 50% interest in ESPN STAR Sports (ESS) ($219 million), both of which were recorded in "Other income/(expense), net." EPS also included a charge for our share of expense at our Hulu joint venture related to an equity redemption transaction (Hulu Equity Redemption) ($55 million) and a tax benefit related to an increase in prior-year foreign earnings indefinitely reinvested outside the United States ($64 million). In aggregate, these four items had an adverse impact on EPS of $0.02 in the prior-year quarter as follows:



(in millions, except per share data)	Pre-Tax Income/(Loss)			Tax Benefit/(Expense)			After-Tax Income/(Loss)			EPS Favorable/(Adverse)⁽³⁾
Quarter Ended December 29, 2012:
Celador litigation charge	$	(321	)	$	119		$	(202	)	$	(0.11	)
Gain on sale of interest in ESS ⁽¹⁾	219			(64		)	155			0.07
Tax impact for foreign reinvestment	—			64			64			0.04
Hulu Equity Redemption charge ⁽²⁾	(55		)	20			(35		)	(0.02		)
Total prior-year quarter	$	(157	)	$	139		$	(18	)	$	(0.02	)

⁽¹⁾ EPS is net of the noncontrolling interest share.


⁽²⁾	See Note 3 of the Condensed Consolidated Financial Statements for discussion of the Hulu Equity Redemption charge.

⁽³⁾ Total may not equal the sum of the column due to rounding.

SEASONALITY

The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 28, 2013 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 and changes in viewership levels. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Affiliate revenues are typically collected ratably throughout the year. Certain affiliate revenues at ESPN are deferred until annual programming commitments are met, and these commitments are typically satisfied during the second half of the Company’s fiscal year, which generally results in higher revenue recognition during that period.

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

Interactive revenues fluctuate due to the timing and performance of video game releases, which are determined by several factors, including theatrical releases and cable programming broadcasts, competition and the timing of holiday periods. Revenues from certain of our internet and mobile operations are subject to similar seasonal trends.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

BUSINESS SEGMENT RESULTS

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



	Quarter Ended				% Change
(in millions)	December 28, 2013		December 29, 2012		Better/ (Worse)
Revenues:
Media Networks	$	5,290	$	5,101	4	%
Parks and Resorts	3,597		3,391		6	%
Studio Entertainment	1,893		1,545		23	%
Consumer Products	1,126		1,013		11	%
Interactive	403		291		38	%
	$	12,309	$	11,341	9	%
Segment operating income:
Media Networks	$	1,455	$	1,214	20	%
Parks and Resorts	671		577		16	%
Studio Entertainment	409		234		75	%
Consumer Products	430		346		24	%
Interactive	55		9		>100 %
	$	3,020	$	2,380	27	%

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



	Quarter Ended						% Change
(in millions)	December 28, 2013			December 29, 2012			Better/ (Worse)
Segment operating income	$	3,020		$	2,380		27	%
Corporate and unallocated shared expenses	(116		)	(123		)	6	%
Restructuring and impairment charges	(19		)	—			nm
Other income/(expense), net	6			(102		)	nm
Interest income/(expense), net	49			(72		)	nm
Hulu Equity Redemption charge	—			(55		)	—	%
Income before income taxes	$	2,940		$	2,028		45	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Depreciation expense is as follows:



	Quarter Ended				% Change
(in millions)	December 28, 2013		December 29, 2012		Better/ (Worse)
Media Networks
Cable Networks	$	33	$	32	(3)	%
Broadcasting	23		24		4	%
Total Media Networks	56		56		—	%
Parks and Resorts
Domestic	279		255		(9)	%
International	86		80		(8)	%
Total Parks and Resorts	365		335		(9)	%
Studio Entertainment	12		9		(33)	%
Consumer Products	12		14		14	%
Interactive	1		5		80	%
Corporate	58		54		(7)	%
Total depreciation expense	$	504	$	473	(7)	%

Amortization of intangible assets is as follows:



	Quarter Ended				% Change
(in millions)	December 28, 2013		December 29, 2012		Better/ (Worse)
Media Networks	$	2	$	5	60	%
Parks and Resorts	1		—		nm
Studio Entertainment	23		15		(53)	%
Consumer Products	28		16		(75)	%
Interactive	3		5		40	%
Total amortization of intangible assets	$	57	$	41	(39)	%

Media Networks

Operating results for the Media Networks segment are as follows:



	Quarter Ended						% Change
(in millions)	December 28, 2013			December 29, 2012			Better/ (Worse)
Revenues
Affiliate Fees	$	2,384		$	2,260		5	%
Advertising	2,333			2,257			3	%
Other	573			584			(2)	%
Total revenues	5,290			5,101			4	%
Operating expenses	(3,437		)	(3,346		)	(3)	%
Selling, general, administrative and other	(579		)	(644		)	10	%
Depreciation and amortization	(58		)	(61		)	5	%
Equity in the income of investees	239			164			46	%
Operating Income	$	1,455		$	1,214		20	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)

Revenues

The 5% increase in Affiliate Fee revenue was due to an increase of 9% from higher contractual rates at ESPN and, to a lesser extent, the domestic Disney Channels and ABC. The increase was partially offset by a decrease of 3% due to the sale of our ESPN UK business in the fourth quarter of the prior year.

The 3% increase in advertising revenues was due to an increase of $88 million at Cable Networks, from $1,139 million to $1,227 million, partially offset by a decrease of $12 million at Broadcasting, from $1,118 million to $1,106 million. The increase at Cable Networks was driven by a 7% increase due to higher rates and a 5% increase from more units delivered, partially offset by a 4% decrease due to lower ratings. The decrease in advertising revenues at Broadcasting reflected a 4% decrease due to lower ABC Television Network ratings and a 2% decrease resulting from a decline at the owned television stations, partially offset by a 4% increase from higher Network rates and a 2% increase due to more Network units delivered.

Other revenue, which is primarily program sales, decreased $11 million from $584 million to $573 million as lower domestic subscription video on demand sales were partially offset by the inclusion of Lucasfilm home entertainment revenues.

Costs and Expenses

Operating expenses include programming and production costs, which increased $90 million from $2,963 million to $3,053 million. At Cable Networks, programming and production costs increased $13 million due to higher sports rights costs. The increase in sports rights costs was driven by contractual rate increases for NFL and college football, partially offset by lower costs as a result of the sale of our ESPN UK business. At Broadcasting, programming and production costs increased $77 million due to higher program write-offs and a contractual rate increase for Modern Family.

Selling, general, administrative and other costs decreased by $65 million from $644 million to $579 million due to lower marketing and labor costs. Marketing costs declined at ESPN, the domestic Disney Channels and the ABC Television Network. The decrease at ESPN was due to the absence of costs related to the ESPN UK business. Lower labor costs were driven by lower pension and postretirement medical expense.

Equity in the Income of Investees

Income from equity investees increased $75 million from $164 million to $239 million primarily due to an increase at AETN due to lower programming and marketing costs and higher advertising revenue. Additionally, in the prior-year quarter, the Company recognized an equity loss from its investment in ESS. The Company sold its interest in ESS during the first quarter of the prior year and, accordingly, the current quarter includes no equity loss from ESS.

Segment Operating Income

Segment operating income increased 20%, or $241 million, to $1,455 million due to increases at ESPN, AETN and the domestic Disney Channels, partially offset by a decrease at the ABC Television Network.

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



	Quarter Ended				% Change
(in millions)	December 28, 2013		December 29, 2012		Better/ (Worse)
Revenues
Cable Networks	$	3,759	$	3,538	6	%
Broadcasting	1,531		1,563		(2)	%
	$	5,290	$	5,101	4	%
Segment operating income
Cable Networks	$	1,277	$	952	34	%
Broadcasting	178		262		(32)	%
	$	1,455	$	1,214	20	%

Restructuring and impairment charges

The Company recorded restructuring and impairment charges of $12 million related to Media Networks in the current quarter for an investment impairment and contract termination costs.

Parks and Resorts

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



	Quarter Ended						% Change
(in millions)	December 28, 2013			December 29, 2012			Better/ (Worse)
Revenues
Domestic	$	2,922		$	2,732		7	%
International	675			659			2	%
Total revenues	3,597			3,391			6	%
Operating expenses	(2,152		)	(2,053		)	(5)	%
Selling, general, administrative and other	(408		)	(426		)	4	%
Depreciation and amortization	(366		)	(335		)	(9)	%
Operating Income	$	671		$	577		16	%

Revenues

Parks and Resorts revenues increased 6%, or $206 million, to $3.6 billion due to an increase of $190 million at our domestic operations and an increase of $16 million at our international operations.

Revenue growth of 7% at our domestic operations reflected an increase of 6% from higher average guest spending primarily due to higher average ticket prices and food, beverage and merchandise spending.

Revenue growth of 2% at our international operations reflected a 4% increase from higher average guest spending at Disneyland Paris and HKDL, partially offset by a 3% decrease from lower volume. Guest spending growth was due to higher average daily hotel room rates, merchandise, food and beverage spending and average ticket prices. Lower volume was due to declines in attendance and occupied room nights at Disneyland Paris, partially offset by attendance growth at HKDL.

The following table presents supplemental park and hotel statistics: