Edgar Filing: WALT DISNEY CO/

Document

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 29, 2018




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

500 South Buena Vista Street, Burbank, California 91521

(818) 560-1000

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

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

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



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

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

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

There were 1,490,776,763 shares of common stock outstanding as of January 30, 2019.

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 29, 2018			December 30, 2017
Revenues:
Services	$	12,866		$	12,984
Products	2,437			2,367
Total revenues	15,303			15,351
Costs and expenses:
Cost of services (exclusive of depreciation and amortization)	(7,564		)	(7,324		)
Cost of products (exclusive of depreciation and amortization)	(1,437		)	(1,405		)
Selling, general, administrative and other	(2,152		)	(2,087		)
Depreciation and amortization	(732		)	(742		)
Total costs and expenses	(11,885		)	(11,558		)
Restructuring and impairment charges	—			(15		)
Other income	—			53
Interest expense, net	(63		)	(129		)
Equity in the income of investees	76			43
Income before income taxes	3,431			3,745
Income taxes	(645		)	728
Net income	2,786			4,473
Less: Net (income) loss attributable to noncontrolling interests	2			(50		)
Net income attributable to The Walt Disney Company (Disney)	$	2,788		$	4,423

Earnings per share attributable to Disney:
Diluted	$	1.86		$	2.91

Basic	$	1.87		$	2.93

Weighted average number of common and common equivalent shares outstanding:
Diluted	1,498			1,521

Basic	1,490			1,512

Dividends declared per share	$	0.88		$	0.84

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited; in millions)



	Quarter Ended
	December 29, 2018			December 30, 2017
Net income	$	2,786		$	4,473
Other comprehensive income/(loss), net of tax:
Market value adjustments for investments	—			(1		)
Market value adjustments for hedges	(9		)	18
Pension and postretirement medical plan adjustments	53			61
Foreign currency translation and other	(21		)	87
Other comprehensive income	23			165
Comprehensive income	2,809			4,638
Net (income) loss attributable to noncontrolling interests, including redeemable noncontrolling interests	2			(50		)
Other comprehensive (income) attributable to noncontrolling interests	(2		)	(41		)
Comprehensive income attributable to Disney	$	2,809		$	4,547

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in millions, except per share data)



	December 29, 2018			September 29, 2018
ASSETS
Current assets
Cash and cash equivalents	$	4,455		$	4,150
Receivables	10,123			9,334
Inventories	1,357			1,392
Television costs and advances	824			1,314
Other current assets	778			635
Total current assets	17,537			16,825
Film and television costs	8,177			7,888
Investments	2,970			2,899
Parks, resorts and other property
Attractions, buildings and equipment	55,385			55,238
Accumulated depreciation	(31,069		)	(30,764		)
	24,316			24,474
Projects in progress	4,336			3,942
Land	1,145			1,124
	29,797			29,540
Intangible assets, net	6,747			6,812
Goodwill	31,289			31,269
Other assets	3,424			3,365
Total assets	$	99,941		$	98,598

LIABILITIES AND EQUITY
Current liabilities
Accounts payable and other accrued liabilities	$	10,696		$	9,479
Current portion of borrowings	3,489			3,790
Deferred revenue and other	3,434			4,591
Total current liabilities	17,619			17,860
Borrowings	17,176			17,084
Deferred income taxes	3,177			3,109
Other long-term liabilities	6,452			6,590
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests	1,124			1,123
Equity
Preferred stock	—			—
Common stock, $0.01 par value, Authorized – 4.6 billion shares, Issued – 2.9 billion shares	36,799			36,779
Retained earnings	84,887			82,679
Accumulated other comprehensive loss	(3,782		)	(3,097		)
	117,904			116,361
Treasury stock, at cost, 1.4 billion shares	(67,588		)	(67,588		)
Total Disney Shareholders’ equity	50,316			48,773
Noncontrolling interests	4,077			4,059
Total equity	54,393			52,832
Total liabilities and equity	$	99,941		$	98,598

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in millions)



	Quarter Ended
	December 29, 2018			December 30, 2017
OPERATING ACTIVITIES
Net income	$	2,786		$	4,473
Depreciation and amortization	732			742
Deferred income taxes	46			(1,726		)
Equity in the income of investees	(76		)	(43		)
Cash distributions received from equity investees	170			170
Net change in film and television costs and advances	468			34
Equity-based compensation	92			94
Other	61			139
Changes in operating assets and liabilities:
Receivables	(1,078		)	(1,378		)
Inventories	32			65
Other assets	25			(29		)
Accounts payable and other liabilities	(1,289		)	(1,160		)
Income taxes	130			856
Cash provided by operations	2,099			2,237

INVESTING ACTIVITIES
Investments in parks, resorts and other property	(1,195		)	(981		)
Other	(141		)	(62		)
Cash used in investing activities	(1,336		)	(1,043		)

FINANCING ACTIVITIES
Commercial paper borrowings/(payments), net	(302		)	1,140
Borrowings	—			1,025
Reduction of borrowings	—			(1,330		)
Repurchases of common stock	—			(1,313		)
Proceeds from exercise of stock options	37			50
Other	(146		)	(156		)
Cash used in financing activities	(411		)	(584		)

Impact of exchange rates on cash, cash equivalents and restricted cash	(44		)	21

Change in cash, cash equivalents and restricted cash	308			631
Cash, cash equivalents and restricted cash, beginning of period	4,155			4,064
Cash, cash equivalents and restricted cash, end of period	$	4,463		$	4,695

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited; in millions)



	Quarter Ended
	Equity Attributable to Disney
	Shares		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Treasury Stock			Total Disney Equity			Non-controlling Interests ⁽¹⁾			Total Equity
Balance at September 29, 2018	1,488		$	36,779	$	82,679			$	(3,097	)	$	(67,588	)	$	48,773		$	4,059		$	52,832
Comprehensive income	—		—		2,788				21			—			2,809			(1		)	2,808
Equity compensation activity	2		20		—				—			—			20			—			20
Dividends	—		—		(1,310		)		—			—			(1,310		)	—			(1,310		)
Contributions	—		—		—				—			—			—			20			20
Adoption of new accounting standards:
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	—		—		691				(691		)	—			—			—			—
Intra-Entity Transfers of Assets Other Than Inventory	—		—		129				—			—			129			—			129
Revenues from Contracts with Customers	—		—		(116		)		—			—			(116		)	—			(116		)
Other	—		—		22				(15		)	—			7			—			7
Distributions and other	—		—		4				—			—			4			(1		)	3
Balance at December 29, 2018	1,490		$	36,799	$	84,887			$	(3,782	)	$	(67,588	)	$	50,316		$	4,077		$	54,393

Balance at September 30, 2017	1,517		$	36,248	$	72,606			$	(3,528	)	$	(64,011	)	$	41,315		$	3,689		$	45,004
Comprehensive income	—		—		4,423				124			—			4,547			97			4,644
Equity compensation activity	3		6		—				—			—			6			—			6
Common stock repurchases	(13	)	—		—				—			(1,313		)	(1,313		)	—			(1,313		)
Dividends	—		—		(1,266		)		—			—			(1,266		)	—			(1,266		)
Distributions and other	—		—		—				—			—			—			8			8
Balance at December 30, 2017	1,507		$	36,254	$	75,763			$	(3,404	)	$	(65,324	)	$	43,289		$	3,794		$	47,083


⁽¹⁾	Excludes redeemable noncontrolling interest

See Notes to Condensed Consolidated Financial Statements

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


1.	Principles of Consolidation

These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the quarter ended December 29, 2018 are not necessarily indicative of the results that may be expected for the year ending September 28, 2019.

These financial statements should be read in conjunction with the Company’s 2018 Annual Report on Form 10-K.

The Company enters into relationships or investments with other entities that may be variable interest entities (VIE). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant (as defined by ASC 810-10-25-38) to the VIE. Hong Kong Disneyland Resort and Shanghai Disney Resort (together the Asia Theme Parks) are VIEs in which the Company has less than 50% equity ownership. Company subsidiaries (the Management Companies) have management agreements with the Asia Theme Parks, which provide the Management Companies, subject to certain protective rights of joint venture partners, with the ability to direct the day-to-day operating activities and the development of business strategies that we believe most significantly impact the economic performance of the Asia Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the Asia Theme Parks. Therefore, the Company has consolidated the Asia Theme Parks in its financial statements.

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.

Use of Estimates

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

Reclassifications

Certain reclassifications have been made in fiscal 2018 financial statements and notes to conform to the fiscal 2019 presentation.


2.	Description of Business and Segment Information

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

Effective in fiscal 2019, the Company started reporting its results in the following operating segments:


•	Media Networks;


•	Parks, Experiences & Consumer Products;


•	Studio Entertainment; and


•	Direct-to-Consumer & International

The Parks, Experiences & Consumer Products segment reflects the combination of the former Parks & Resorts and Consumer Products & Interactive Media segments. Certain businesses that were previously reported in Media Networks, Studio Entertainment and Consumer Products & Interactive Media are now reported in Direct-to-Consumer & International (DTCI). Fiscal 2018 segment operating results have been recast to align with the fiscal 2019 presentation.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

DESCRIPTION OF BUSINESS

Media Networks


•	Significant operations:


◦	Disney, ESPN and Freeform branded domestic cable networks


◦	ABC branded broadcast television network and eight owned domestic television stations


◦	Television programming, production and distribution


◦	A 50% equity investment in A+E Television Networks (A+E), which operates a variety of cable channels including A&E, HISTORY and Lifetime


•	Significant revenues:


◦	Affiliate fees - Fees charged to multi-channel video programming distributors (i.e. cable, satellite, telecommunications and digital over-the-top (e.g. Hulu, YouTube TV) service providers) (“MVPDs”) and to television stations affiliated with the ABC Network for the right to deliver our programming to their customers

◦

Advertising - Sales of ad time/space on our domestic networks and related platforms, except non-ratings-based advertising on digital platforms (“ratings-based ad sales”), and the sale of time on our domestic television stations. Ratings-based ad sales are generally determined using viewership measured with Nielsen ratings. Non-ratings-based advertising on digital platforms will be reported by DTCI as discussed in the DTCI section


◦	TV/SVOD distribution - Licensing fees and other revenues for the right to use our television programs and productions and content transactions with other Company segments (“program sales”)


•	Significant expenses:


◦	Operating expenses consisting primarily of programming and production costs, participations and residuals expense, technical support costs, operating labor, and distribution costs


◦	Selling, general and administrative costs


◦	Depreciation and amortization

Parks, Experiences & Consumer Products


•	Significant operations:


◦	Parks & Experiences:


▪	Theme parks and resorts, which include: Walt Disney World Resort in Florida; Disneyland Resort in California; Disneyland Paris; and 47% and 43% interests in Hong Kong Disneyland Resort and Shanghai Disney Resort, respectively, all of which are consolidated in our results. Additionally, the Company licenses our intellectual property to a third party to operate Tokyo Disney Resort


▪	Disney Cruise Line, Disney Vacation Club and Aulani, a Disney Resort & Spa in Hawaii


◦	Consumer Products:


▪	Licensing of our trade names, characters, visual, literary and other intellectual properties to various manufacturers, game developers, publishers and retailers throughout the world


▪	Sale of branded merchandise through retail, online and wholesale businesses, and development and publishing of books, magazines, comic books and games. As of the end of fiscal 2018, the Company had substantially exited the vertical games development business


•	Significant revenues:


◦	Theme park admissions - Sales of tickets for admission to our theme parks


◦	Parks & Experiences merchandise, food and beverage - Sales of merchandise, food and beverages at our theme parks and resorts and cruise ships


◦	Resorts and vacations - Sales of room nights at hotels, sales of cruise vacations and sales and rentals of vacation club properties


◦	Merchandise licensing and retail


▪	Merchandise licensing - Royalties from intellectual property licensing


▪	Retail - Sales of merchandise at The Disney Stores and through branded internet shopping sites, as well as, to wholesalers (including sales of published materials and games)


◦	Parks licensing and other - Revenues from sponsorships and co-branding opportunities, real estate rent and sales, and royalties from Tokyo Disney Resort

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


•	Significant expenses:


◦	Operating expenses consisting primarily of operating labor, costs of goods sold, infrastructure costs, supplies, commissions and entertainment offerings. Infrastructure costs include information systems expense, repairs and maintenance, utilities and fuel, property taxes, retail occupancy costs, insurance, and transportation


◦	Selling, general and administrative costs


◦	Depreciation and amortization

Studio Entertainment


•	Significant operations:


◦	Motion picture production and distribution under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm and Touchstone banners


◦	Development, production and licensing of live entertainment events on Broadway and around the world (“Stage plays”)


•	Significant revenues:


◦	Theatrical distribution - Rentals from licensing our motion pictures to theaters


◦	Home entertainment - Sale of our motion pictures to retailers and distributors in physical (DVD and Blu-ray) and electronic formats


◦	TV/SVOD distribution and other - Licensing fees and other revenue for the right to use our motion picture productions, content transactions with other Company segments, ticket sales from stage plays and fees from licensing our intellectual properties for use in live entertainment productions


•	Significant expenses:


◦	Operating expenses consisting primarily of amortization of production, participations and residuals costs, distribution costs and costs of sales


◦	Selling, general and administrative costs


◦	Depreciation and amortization

Direct-to-Consumer & International


•	Significant operations:


◦	Disney and ESPN branded international television networks and channels (“International Channels”)


◦	Direct-to-consumer (DTC) businesses:


▪	ESPN+ streaming service, which was launched in April 2018


▪	Disney+ streaming service, which we plan to launch in late 2019


◦	Other Company branded digital content distribution platforms and services


◦	BAMTech LLC (BAMTech) (owned 75% by the Company since September 25, 2017), which provides streaming technology services


◦	Equity investments:


▪	A 30% interest in Hulu, which aggregates acquired television and film entertainment content and original content produced by Hulu and distributes it digitally to internet-connected devices


▪	A 21% effective ownership in Vice Group Holdings, Inc. (Vice), which is a media company that targets millennial audiences. Vice operates Viceland, which is owned 50% by Vice and 50% by A+E


•	Significant revenues:


◦	Affiliate fees - Fees charged to MVPDs for the right to deliver our International Channels to their customers


◦	Advertising - Sales of ad time/space on our International Channels. Sales of non-ratings based ad time/space on digital platforms (“addressable ad sales”). In general, addressable ad sales are delivered using technology that allows for dynamic insertion of advertisements into video content, which can be targeted to specific viewer groups


◦	Subscription fees and other - Fees charged to customers/subscribers for our DTC streaming and other services and fees charged for streaming technology services


•	Significant expenses:


◦	Operating expenses consisting primarily of programming and production costs (including programming, production and branded digital content obtained from other Company segments), technical support costs, operating labor and distribution costs

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


◦	Selling, general and administrative costs


◦	Depreciation and amortization

SEGMENT INFORMATION

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

Intersegment content transactions (e.g. feature films aired on the ABC Television Network) are presented “gross” (i.e. the segment producing the content reports revenue and profit from intersegment transactions in a manner similar to the reporting of third-party transactions, and the required eliminations are reported on a separate “Eliminations” line when presenting a summary of our segment results). Previously, these transactions were reported “net”, and the intersegment revenue was eliminated in the results of the segment producing the content. Fiscal 2018 intersegment content transactions have been recast to align with the fiscal 2019 presentation.

Segment revenues and segment operating income are as follows:



	Quarter Ended
	December 29, 2018			December 30, 2017
Revenues ⁽¹⁾:
Media Networks	$	5,921		$	5,555
Parks, Experiences & Consumer Products	6,824			6,527
Studio Entertainment	1,824			2,509
Direct-to-Consumer & International	918			931
Eliminations⁽²⁾	(184		)	(171		)
	$	15,303		$	15,351
Segment operating income ⁽¹⁾:
Media Networks	$	1,330		$	1,243
Parks, Experiences & Consumer Products	2,152			1,954
Studio Entertainment	309			825
Direct-to-Consumer & International	(136		)	(42		)
Eliminations	—			6
	$	3,655		$	3,986

⁽¹⁾

Studio Entertainment revenues and operating income include an allocation of Parks, Experiences & Consumer Products revenues, which is meant to reflect royalties on sales of merchandise based on film properties. The increase to Studio Entertainment revenues and operating income and corresponding decrease to Parks, Experiences & Consumer Products revenues and operating income was $154 million and $171 million for the quarters ended December 29, 2018 and December 30, 2017, respectively.


⁽²⁾	Intersegment content transactions are as follows:



	Quarter Ended
(in millions)	December 29, 2018			December 30, 2017
Revenues
Studio Entertainment:
Content transactions with Media Networks	$	(21	)	$	(31	)
Content transactions with Direct-to-Consumer & International	(18		)	(8		)
Media Networks:
Content transactions with Direct-to-Consumer & International	(145		)	(132		)
Total revenues	$	(184	)	$	(171	)

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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



	Quarter Ended
	December 29, 2018			December 30, 2017
Media Networks	$	179		$	159
Parks, Experiences & Consumer Products	(12		)	(7		)
Direct-to-Consumer & International	(91		)	(109		)
Equity in the income / (loss) of investees	$	76		$	43

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



	Quarter Ended
	December 29, 2018			December 30, 2017
Segment operating income	$	3,655		$	3,986
Corporate and unallocated shared expenses	(161		)	(150		)
Restructuring and impairment charges	—			(15		)
Other income	—			53
Interest expense, net	(63		)	(129		)
Income before income taxes	$	3,431		$	3,745


3.	Revenues

On September 30, 2018, the Company adopted Financial Accounting Standards Board (FASB) guidance, which replaced the existing accounting standards for revenue recognition with a single comprehensive five-step model (“new revenue standard”). The core principle is to recognize revenue upon the transfer of control of goods or services to customers at an amount that reflects the consideration expected to be received. We adopted the new revenue standard using the modified retrospective method, therefore results for reporting periods beginning after September 30, 2018 are presented under the new revenue standard, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting. Upon adoption, we elected to apply the new revenue standard to all contracts and we recorded a net reduction to opening retained earnings of $116 million.

The most significant changes to the Company’s revenue recognition policies resulting from the adoption of the new revenue standard are as follows:


•	For television and film content licensing agreements with multiple availability windows with the same licensee, the Company now defers more revenue to future windows than under the previous accounting guidance.

•

For licenses of character images, brands and trademarks with minimum guaranteed license fees, the excess of the minimum guaranteed amount over actual amounts earned based on a percentage of the licensee’s underlying sales (“minimum guarantee shortfall”) is now recognized straight-line over the remaining license period once an expected shortfall is identified. Previously, shortfalls were recognized at the end of the contract period.

•

For licenses that include multiple television and film titles with a minimum guaranteed license fee across all titles that earns out against the aggregate fees based on the licensee’s underlying sales, the Company now allocates the minimum guaranteed license fee to each title at contract inception and recognizes the allocated license fee as revenue when the title is made available to the customer. License fees earned in excess of the allocated minimum guaranteed amount by title are deferred until the aggregate contractual minimum guarantee is exceeded and then recognized as revenue as earned based on the licensee’s underlying sales. Previously, license fees were recognized as earned based on the licensee’s underlying sales with any shortfalls recognized at the end of the contract period.


•	For renewals or extensions of license agreements for television and film content, revenues are now recognized when the licensed content becomes available under the renewal or extension. Previously, revenues were recognized when the agreement was renewed or extended.

The adoption of the new revenue standard resulted in certain reclassifications on the Condensed Consolidated Balance Sheet. The primary changes are the reclassification of sales returns reserves (previously reported as a reduction of receivables)

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

to other accrued liabilities ($163 million at December 29, 2018) and the reclassification of refundable customer advances (previously reported as deferred revenues) to other accrued liabilities ($739 million at December 29, 2018).

The cumulative effect of adoption at September 29, 2018 and the impact at December 29, 2018 (had we not applied the new revenue standard) on the Condensed Consolidated Balance Sheet is as follows:



	September 29, 2018							December 29, 2018
	Fiscal 2018 Ending Balances as Reported		Effect of Adoption			Q1 2019 Opening Balances		Balances Assuming Historical Accounting		Q1 2019 Impact of New Revenue Standard			Q1 2019 Ending Balances as Reported
Assets
Receivables - current/non-current	$	11,262	$	(241	)	$	11,021	$	12,030	$	(102	)	$	11,928
Film and television costs and advances - current/non-current	9,202		48			9,250		8,968		33			9,001

Liabilities
Accounts payable and other accrued liabilities	9,479		1,039			10,518		9,799		897			10,696
Deferred revenue and other	4,591		(1,082		)	3,509		4,342		(908		)	3,434
Deferred income taxes	3,109		(34		)	3,075		3,208		(31		)	3,177

Equity	52,832		(116		)	52,716		54,420		(27		)	54,393

The impact on the Condensed Consolidated Statement of Income for the quarter ended December 29, 2018, due to the adoption of the new revenue standard is as follows:



	Quarter ended December 29, 2018
	Results Assuming Historical Accounting			Impact of New Revenue Standard			Reported
Revenues	$	15,109		$	194		$	15,303
Cost and Expenses	(11,806		)	(79		)	(11,885		)
Income Taxes	(619		)	(26		)	(645		)
Net Income	2,697			89			2,786

The most significant impacts were at the Media Networks and Parks, Experiences & Consumer Products segments, both of which reflected a change in the timing of revenue recognition on contracts with minimum guarantees.

Summary of Significant Revenue Recognition Accounting Policies

The Company generates revenue from the sale of both services and products. Revenue is recognized when control of the services or products is transferred to the customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for the services or products.

The Company has three broad categories of service revenues: licenses of rights to use our intellectual property, sales to guests at our Parks and Experiences businesses, and advertising. The Company’s primary product revenues include the sale of food, beverage and merchandise at our parks, resorts and retail stores and the sale of film and television productions in physical formats (DVD and Blu-ray).

The new revenue standard defines two types of licenses of intellectual property (“IP”): IP that has “standalone functionality,” which is called functional IP, and all other IP, which is called symbolic IP. Revenue related to the license of functional IP is generally recognized upon delivery (availability) of the IP to the customer. The substantial majority of the Company’s film and television content distribution activities at the Media Networks, Studio Entertainment and DTCI segments is considered licensing of functional IP. Revenue related to the license of symbolic IP is generally recognized over the term of the license. The Company’s primary revenue stream derived from symbolic IP is the licensing of trade names, characters, visual and literary properties at the Parks, Experiences & Consumer Products segment.

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

More detailed information about the revenue recognition policies for our key revenues is as follows:


•	Affiliate fees - Fees charged to affiliates (i.e., MVPDs or television stations) for the right to deliver our television network programming on a continuous basis to their customers are recognized as the programming is provided based on contractually specified per subscriber rates and the actual number of the affiliate’s customers receiving the programming.

Affiliate contracts may include a minimum guaranteed license fee. For these contracts, the guaranteed license fee is recognized ratably over the guaranteed period and any fees earned in excess of the guarantee are recognized as earned once the minimum guarantee has been exceeded.

Affiliate agreements may also include a license to use the network programming for on demand viewing. As the fees charged under these contracts are generally based on a contractually specified per subscriber rate for the number of underlying subscribers of the affiliate, revenues are recognized as earned.


•	Subscription fees - Fees charged to customers/subscribers for our DTC streaming and other services are recognized ratably over the term of the subscription.

•

Advertising - Sales of advertising time/space on our television networks, digital platforms, and television stations are recognized as revenue, net of agency commissions, when commercials are aired on television or delivered online. The performance obligation in advertising agreements is the delivery of ad time/space and may include a guaranteed number of impressions. When a contract contains a guaranteed number of impressions and the guaranteed number of impressions is not met (“ratings shortfall”), revenues are not recognized for the ratings shortfall until the guaranteed impressions are provided through the delivery of additional advertising time/space.


•	Theme park admissions - Sales of theme park tickets are recognized when the tickets are used. Sales of annual passes are recognized ratably over the period for which the pass is available for use.


•	Resorts and vacations - Sales of hotel room nights and cruise vacations and rentals of vacation club properties are recognized as the services are provided to the guest. Sales of vacation club properties are recognized when title to the property transfers to the customer.

•

Merchandise, food and beverage - Sales of merchandise, food and beverages at our theme parks and resorts, cruise ships and Disney Stores are recognized at the time of sale. Sales from our branded internet shopping sites and to wholesalers are recognized upon delivery. We estimate returns and customer incentives based upon historical return experience, current economic trends and projections of consumer demand for our products.


•	TV/SVOD distribution licensing - Fees charged for the right to use our television and motion picture productions are recognized as revenue when the content is available for use by the licensee. Contractual license fees may be for a fixed amount, based on performance in previous distribution windows (e.g., box office receipts) or based on underlying sales of the licensee.

TV/SVOD distribution contracts may contain more than one title and/or provide that certain titles are only available for use during defined periods of time during the contract term. In these instances, each title and/or period of availability is generally considered a separate performance obligation. For these contracts, license fees are allocated to each title and period of availability at contract inception based on relative standalone selling price using management’s best estimate. Revenue is recognized when the content is made available for use by the licensee.

For TV/SVOD licenses that include multiple titles subject to an aggregate minimum guaranteed license fee across all titles, the minimum guaranteed license fee is allocated to each title at contract inception and recognized as revenue when the title is available for use by the licensee. License fees earned in excess of the allocated minimum guarantee are deferred until the aggregate contractual minimum guaranteed license fee has been exceeded with the excess then recognized as earned.

When the term of an existing agreement is renewed or extended, revenues are recognized when the licensed content becomes available under the renewal or extension.


•	Theatrical distribution licensing - Fees charged for licensing of our motion pictures to theaters are recognized as revenue based on the contractual royalty rate applied to the theater’s underlying sales from exhibition of the film.


•	Merchandise licensing - Fees charged for the use of our trade names and characters in connection with the sale of a licensee’s products are recognized as revenue as the products are sold by the licensee applying a contractual royalty rate to the licensee sales. For licenses with minimum guaranteed license fees, the excess of the minimum guaranteed

THE WALT DISNEY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

amount over actual royalties earned from licensee sales (shortfall) is recognized straight-line over the remaining license period once an expected shortfall is probable.

•

Home entertainment - Sales of our motion pictures to retailers and distributors in physical formats (DVD and Blu-ray) are recognized as revenue on the later of the delivery date or the date that the product can be sold by retailers. We reduce home entertainment revenues for estimated future returns of merchandise and sales incentives based upon historical return experience, current economic trends and projections of consumer demand for our products. Sales of our motion pictures in electronic formats are recognized as revenue when the product is available for use by the consumer.


•	Taxes - Taxes collected from customers and remitted to governmental authorities are excluded from revenue.


•	Shipping and handling - Fees collected from customers for shipping and handling are recorded as revenue upon delivery of the product to the consumer. The related shipping expenses are recorded in cost of products upon delivery of the product to the customer.

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



	Quarter Ended December 29, 2018
	Media Networks		Parks, Experiences & Consumer Products		Studio Entertainment		Direct-to-Consumer & International		Eliminations			Consolidated
Affiliate fees	$	3,075	$	—	$	—	$	323	$	—		$	3,398
Advertising	2,023		2		—		417					2,442
Theme park admissions	—		1,933		—		—		—			1,933
Resort and vacations	—		1,531		—		—		—			1,531
Retail and wholesale sales of merchandise, food and beverage	—		2,122		—		—		—			2,122
TV/SVOD distribution licensing	722		—		605		34		(184		)	1,177
Theatrical distribution licensing	—		—		373		—		—			373