NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except per share amounts)
|
|
1
|
Description of the Business and Segment Information
|
The Walt Disney Company, together with the subsidiaries through which businesses are conducted (the Company), is a diversified worldwide entertainment company with operations in the following business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The Company combined its former Consumer Products and Interactive segments into a single segment, Consumer Products & Interactive Media, and began reporting the financial results of the combined segment in fiscal 2016.
DESCRIPTION OF THE BUSINESS
Media Networks
The Company operates cable programming services including the ESPN, Disney Channels and Freeform networks, broadcast businesses, which include the ABC TV Network and
eight
owned television stations, radio businesses consisting of the ESPN Radio Network, including
four
owned ESPN radio stations, and the Radio Disney network, which operates from an owned radio station in Los Angeles. The ABC TV and ESPN Radio networks have affiliated stations providing coverage to consumers throughout the U.S. The Company also produces original live-action and animated television programming, which may be sold in network, first-run syndication and other television markets worldwide, to subscription video on demand services and in home entertainment formats such as DVD, Blu-Ray and iTunes. The Company has interests in media businesses that are accounted for under the equity method including A+E Television Networks LLC (A+E), BAMTech LLC (BAMTech), CTV Specialty Television, Inc. (CTV), Hulu LLC (Hulu), Seven TV and Vice Group Holdings, Inc. (Vice). Our Media Networks business also operates branded internet sites and apps.
Parks and Resorts
The Company owns and operates the Walt Disney World Resort in Florida and the Disneyland Resort in California. The Walt Disney World Resort includes
four
theme parks (the Magic Kingdom, Epcot, Disney’s Hollywood Studios and Disney’s Animal Kingdom);
18
resort hotels; a retail, dining and entertainment complex; a sports complex; conference centers; campgrounds; water parks; and other recreational facilities. The Disneyland Resort includes
two
theme parks (Disneyland and Disney California Adventure),
three
resort hotels and a retail, dining and entertainment complex. Internationally, the Company manages and has an
81%
effective ownership interest in Disneyland Paris, which includes
two
theme parks (Disneyland Park and Walt Disney Studios Park);
seven
themed resort hotels;
two
convention centers; a shopping, dining and entertainment complex; and a 27-hole golf facility. The Company manages and has a
47%
ownership interest in Hong Kong Disneyland Resort, which includes
one
theme park and
two
themed resort hotels. The Company has a
43%
ownership interest in Shanghai Disney Resort, which opened in June 2016 and includes
one
theme park;
two
themed resort hotels; a retail, dining and entertainment complex; and an outdoor recreational area. The Company also has a
70%
ownership interest in the management company of Shanghai Disney Resort. The Company also earns royalties on revenues generated by the Tokyo Disney Resort, which includes
two
theme parks (Tokyo Disneyland and Tokyo DisneySea) and
four
Disney-branded hotels, and is owned and operated by an unrelated Japanese corporation. The Company manages and markets vacation club ownership interests through the Disney Vacation Club; operates the Disney Cruise Line; the Adventures by Disney guided group vacations business; and Aulani, a hotel and vacation club resort in Hawaii. The Company’s Walt Disney Imagineering unit designs and develops theme park concepts and attractions as well as resort properties.
Studio Entertainment
The Company produces and acquires live-action and animated motion pictures for worldwide distribution in the theatrical, home entertainment and television markets. The Company distributes these products through its own distribution and marketing companies in the U.S. and both directly and through independent companies and joint ventures in foreign markets primarily under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm and Touchstone banners. Certain motion pictures produced by DreamWorks Studios are distributed under our Touchstone Pictures banner. The Company also produces stage plays and musical recordings, licenses and produces live entertainment events and provides visual and audio effects and other post-production services.
Consumer Products & Interactive Media
The Company licenses its trade names, characters and visual and literary properties to various manufacturers, game developers, publishers and retailers throughout the world. We also develop and publish games, primarily for mobile platforms. The Company’s operations include retail, online and wholesale distribution of products through The Disney Store, DisneyStore.com and MarvelStore.com and direct to retailers. We operate The Disney Store in North America, Europe, Japan and China. The Company publishes entertainment and educational books and magazines and comic books for children and
families and operates English language learning centers in China. In addition, the segment’s operations include website management and design, primarily for other Company businesses. We also develop and distribute online video content, which includes content developed by Maker Studios. Revenues and costs generated by Maker Studios have been allocated primarily to the Media Networks and Studio Entertainment segments.
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.
Segment operating results reflect earnings before corporate and unallocated shared expenses, restructuring and impairment charges, other expense, interest income/(expense), income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees. Corporate and unallocated shared expenses principally consist of corporate functions, executive management and certain unallocated administrative support functions.
Equity in the income of investees included in segment operating results is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Media Networks
|
|
|
|
|
|
Cable Networks
|
$
|
783
|
|
|
$
|
896
|
|
|
$
|
895
|
|
Broadcasting
|
(186
|
)
|
|
(82
|
)
|
|
(39
|
)
|
Parks and Resorts
|
(3
|
)
|
|
—
|
|
|
(2
|
)
|
Equity in the income of investees included in segment operating income
|
$
|
594
|
|
|
$
|
814
|
|
|
$
|
854
|
|
Vice Gain
|
332
|
|
|
—
|
|
|
—
|
|
Total equity in the income of investees
|
$
|
926
|
|
|
$
|
814
|
|
|
$
|
854
|
|
During fiscal
2016
, the Company recognized its share of a net gain recorded by A+E, a joint venture owned
50%
by the Company, in connection with A+E’s acquisition of an interest in Vice (Vice Gain). The Company’s
$332 million
share of the Vice Gain is recorded in “Equity in the income of investees” in the Consolidated Statement of Income but is not included in segment operating income. See Note 3 for further discussion of the transaction.
The following segment results include allocations of certain costs, including information technology, pension, legal and other shared services costs, which are allocated based on metrics designed to correlate with consumption. These allocations are agreed-upon amounts between the businesses and may differ from amounts that would be negotiated in arm’s length transactions. In addition, all significant intersegment transactions have been eliminated except that Studio Entertainment revenues and operating income include an allocation of Consumer Products & Interactive Media revenues, which is meant to reflect royalties on revenue generated by Consumer Products & Interactive Media on merchandise based on intellectual property from certain Studio Entertainment films.
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|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Revenues
|
|
|
|
|
|
Media Networks
|
$
|
23,689
|
|
|
$
|
23,264
|
|
|
$
|
21,152
|
|
Parks and Resorts
|
16,974
|
|
|
16,162
|
|
|
15,099
|
|
Studio Entertainment
|
|
|
|
|
|
Third parties
|
8,701
|
|
|
6,838
|
|
|
6,988
|
|
Intersegment
|
740
|
|
|
528
|
|
|
290
|
|
|
9,441
|
|
|
7,366
|
|
|
7,278
|
|
Consumer Products & Interactive Media
|
|
|
|
|
|
Third parties
|
6,268
|
|
|
6,201
|
|
|
5,574
|
|
Intersegment
|
(740
|
)
|
|
(528
|
)
|
|
(290
|
)
|
|
5,528
|
|
|
5,673
|
|
|
5,284
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
$
|
55,632
|
|
|
$
|
52,465
|
|
|
$
|
48,813
|
|
Segment operating income
|
|
|
|
|
|
Media Networks
|
$
|
7,755
|
|
|
$
|
7,793
|
|
|
$
|
7,321
|
|
Parks and Resorts
|
3,298
|
|
|
3,031
|
|
|
2,663
|
|
Studio Entertainment
|
2,703
|
|
|
1,973
|
|
|
1,549
|
|
Consumer Products & Interactive Media
|
1,965
|
|
|
1,884
|
|
|
1,472
|
|
Total segment operating income
|
$
|
15,721
|
|
|
$
|
14,681
|
|
|
$
|
13,005
|
|
Reconciliation of segment operating income to
income before income taxes
|
|
|
|
|
|
Segment operating income
|
$
|
15,721
|
|
|
$
|
14,681
|
|
|
$
|
13,005
|
|
Corporate and unallocated shared expenses
|
(640
|
)
|
|
(643
|
)
|
|
(611
|
)
|
Restructuring and impairment charges
|
(156
|
)
|
|
(53
|
)
|
|
(140
|
)
|
Other expense, net
|
—
|
|
|
—
|
|
|
(31
|
)
|
Interest income/(expense), net
|
(260
|
)
|
|
(117
|
)
|
|
23
|
|
Vice Gain
|
332
|
|
|
—
|
|
|
—
|
|
Infinity Charge
(1)
|
(129
|
)
|
|
—
|
|
|
—
|
|
Income before income taxes
|
$
|
14,868
|
|
|
$
|
13,868
|
|
|
$
|
12,246
|
|
Capital expenditures
|
|
|
|
|
|
Media Networks
|
|
|
|
|
|
Cable Networks
|
$
|
86
|
|
|
$
|
127
|
|
|
$
|
172
|
|
Broadcasting
|
80
|
|
|
71
|
|
|
88
|
|
Parks and Resorts
|
|
|
|
|
|
Domestic
|
2,180
|
|
|
1,457
|
|
|
1,184
|
|
International
|
2,035
|
|
|
2,147
|
|
|
1,504
|
|
Studio Entertainment
|
86
|
|
|
107
|
|
|
63
|
|
Consumer Products & Interactive Media
|
53
|
|
|
87
|
|
|
48
|
|
Corporate
|
253
|
|
|
269
|
|
|
252
|
|
Total capital expenditures
|
$
|
4,773
|
|
|
$
|
4,265
|
|
|
$
|
3,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Depreciation expense
|
|
|
|
|
|
Media Networks
|
$
|
237
|
|
|
$
|
245
|
|
|
$
|
238
|
|
Parks and Resorts
|
|
|
|
|
|
Domestic
|
1,273
|
|
|
1,169
|
|
|
1,117
|
|
International
|
445
|
|
|
345
|
|
|
353
|
|
Studio Entertainment
|
51
|
|
|
55
|
|
|
48
|
|
Consumer Products & Interactive Media
|
63
|
|
|
69
|
|
|
69
|
|
Corporate
|
251
|
|
|
249
|
|
|
239
|
|
Total depreciation expense
|
$
|
2,320
|
|
|
$
|
2,132
|
|
|
$
|
2,064
|
|
Amortization of intangible assets
|
|
|
|
|
|
Media Networks
|
$
|
18
|
|
|
$
|
21
|
|
|
$
|
12
|
|
Parks and Resorts
|
3
|
|
|
3
|
|
|
2
|
|
Studio Entertainment
|
74
|
|
|
84
|
|
|
88
|
|
Consumer Products & Interactive Media
|
112
|
|
|
114
|
|
|
122
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
Total amortization of intangible assets
|
$
|
207
|
|
|
$
|
222
|
|
|
$
|
224
|
|
Identifiable assets
(2)
|
|
|
|
|
|
Media Networks
|
$
|
32,706
|
|
|
$
|
30,638
|
|
|
|
Parks and Resorts
|
28,275
|
|
|
25,510
|
|
|
|
Studio Entertainment
|
15,359
|
|
|
15,334
|
|
|
|
Consumer Products & Interactive Media
|
9,332
|
|
|
9,678
|
|
|
|
Corporate
(3)
|
6,361
|
|
|
7,022
|
|
|
|
Total consolidated assets
|
$
|
92,033
|
|
|
$
|
88,182
|
|
|
|
Supplemental revenue data
|
|
|
|
|
|
Affiliate fees
|
$
|
12,259
|
|
|
$
|
12,029
|
|
|
$
|
10,632
|
|
Advertising
|
8,649
|
|
|
8,499
|
|
|
8,094
|
|
Retail merchandise, food and beverage
|
6,116
|
|
|
5,986
|
|
|
5,598
|
|
Theme park admissions
|
5,900
|
|
|
5,483
|
|
|
5,114
|
|
Revenues
|
|
|
|
|
|
United States and Canada
|
$
|
42,616
|
|
|
$
|
40,320
|
|
|
$
|
36,769
|
|
Europe
|
6,714
|
|
|
6,507
|
|
|
6,505
|
|
Asia Pacific
|
4,582
|
|
|
3,958
|
|
|
3,930
|
|
Latin America and Other
|
1,720
|
|
|
1,680
|
|
|
1,609
|
|
|
$
|
55,632
|
|
|
$
|
52,465
|
|
|
$
|
48,813
|
|
Segment operating income
|
|
|
|
|
|
United States and Canada
|
$
|
12,139
|
|
|
$
|
10,820
|
|
|
$
|
9,594
|
|
Europe
|
1,815
|
|
|
1,964
|
|
|
1,581
|
|
Asia Pacific
|
1,324
|
|
|
1,365
|
|
|
1,342
|
|
Latin America and Other
|
443
|
|
|
532
|
|
|
488
|
|
|
$
|
15,721
|
|
|
$
|
14,681
|
|
|
$
|
13,005
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Long-lived assets
(4)
|
|
|
|
United States and Canada
|
$
|
56,388
|
|
|
$
|
53,976
|
|
Europe
|
8,125
|
|
|
8,254
|
|
Asia Pacific
|
8,228
|
|
|
6,817
|
|
Latin America and Other
|
210
|
|
|
182
|
|
|
$
|
72,951
|
|
|
$
|
69,229
|
|
|
|
(1)
|
In fiscal 2016, the Company discontinued its Infinity console game business, which is reported in the Consumer Products & Interactive Media segment, and recorded a charge primarily to write down inventory. The charge also included severance and other asset impairments. The charge was reported in “Cost of products” in the Consolidated Statement of Income.
|
|
|
(2)
|
Identifiable assets include amounts associated with equity method investments, goodwill and intangible assets. Equity method investments by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Media Networks
|
$
|
4,032
|
|
|
$
|
2,454
|
|
Parks and Resorts
|
22
|
|
|
9
|
|
Studio Entertainment
|
3
|
|
|
2
|
|
Consumer Products & Interactive Media
|
—
|
|
|
1
|
|
Corporate
|
25
|
|
|
17
|
|
|
$
|
4,082
|
|
|
$
|
2,483
|
|
Goodwill and intangible assets by segment are as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Media Networks
|
$
|
18,153
|
|
|
$
|
18,186
|
|
Parks and Resorts
|
373
|
|
|
376
|
|
Studio Entertainment
|
8,450
|
|
|
8,538
|
|
Consumer Products & Interactive Media
|
7,653
|
|
|
7,768
|
|
Corporate
|
130
|
|
|
130
|
|
|
$
|
34,759
|
|
|
$
|
34,998
|
|
|
|
(3)
|
Primarily fixed assets, cash and cash equivalents, deferred tax assets and investments.
|
|
|
(4)
|
Long-lived assets are total assets less the following: current assets, long-term receivables, deferred taxes, financial investments and derivatives.
|
|
|
2
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of The Walt Disney Company and its majority-owned and controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
The Company enters into relationships or investments with other entities that may be a variable interest entity (VIE). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE (as defined by ASC 810-10-25-38). Disneyland Paris, Hong Kong Disneyland Resort and Shanghai Disney Resort (collectively the International Theme Parks) are VIEs. Company subsidiaries (the Management Companies) have management agreements with the International Theme Parks, which provide the Management Companies, subject to certain protective rights of joint venture partners, with the ability to direct the day-to-day operating activities and the development of business strategies that we believe most significantly impact the economic performance of the International Theme Parks. In addition, the Management Companies receive management fees under these arrangements that we believe could be significant to the International Theme Parks. Therefore, the Company has consolidated the International Theme Parks in its financial statements.
Reporting Period
The Company’s fiscal year ends on the Saturday closest to September 30 and consists of fifty-two weeks with the exception that approximately every six years, we have a fifty-three week year. When a fifty-three week year occurs, the Company reports the additional week in the fourth quarter. Fiscal
2016
and
2014
were fifty-two week years. Fiscal 2015 was a fifty-three week year.
Reclassifications
Certain reclassifications have been made in the fiscal
2015
and fiscal
2014
financial statements and notes to conform to the fiscal
2016
presentation.
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.
Revenues and Costs from Services and Products
The Company generates revenue from the sale of both services and tangible products and revenues and operating costs are classified under these two categories in the Consolidated Statements of Income. Certain costs related to both the sale of services and tangible products are not specifically allocated between the service or tangible product revenue streams but are instead attributed to the principal revenue stream. The cost of services and tangible products exclude depreciation and amortization.
Significant service revenues include:
|
|
•
|
Revenue from the licensing and distribution of film and television properties
|
|
|
•
|
Admissions to our theme parks, charges for room nights at hotels and sales of cruise vacation packages
|
|
|
•
|
Licensing of intellectual property for use on consumer merchandise, published materials and in multi-platform games
|
Significant operating costs related to the sale of services include:
|
|
•
|
Amortization of programming, production, participations and residuals costs
|
|
|
•
|
Facilities and infrastructure costs
|
Significant tangible product revenues include:
|
|
•
|
The sale of food, beverage and merchandise at our retail locations
|
|
|
•
|
The sale of DVDs, Blu-ray discs and video game discs and accessories
|
|
|
•
|
The sale of books, comic books and magazines
|
Significant operating costs related to the sale of tangible products include:
|
|
•
|
Amortization of programming, production, participations and residuals costs
|
Revenue Recognition
Television advertising revenues are recognized when commercials are aired. Affiliate fee revenue is recognized as services are provided based on per subscriber rates set out in agreements with Multi-channel Video Programming Distributors (MVPD) and the number of subscribers reported by the MVPDs.
Revenues from advance theme park ticket sales are recognized when the tickets are used. Revenues from expiring multi-use tickets are recognized ratably over the estimated usage period. The estimated usage periods are derived from historical usage patterns.
Revenues from the theatrical distribution of motion pictures are recognized when motion pictures are exhibited. Revenues from home entertainment and video game sales, net of anticipated returns and customer incentives, are recognized on the later of the delivery date or the date that the product can be sold by retailers. Revenues from the licensing of feature films and television programming are recorded when the content is available for telecast by the licensee and when certain other conditions are met. Revenues from the sale of electronic formats of feature films and television programming are recognized when the product is received by the consumer.
Merchandise licensing advances and guarantee royalty payments are recognized based on the contractual royalty rate when the licensed product is sold by the licensee. Non-refundable advances and minimum guarantee royalty payments in excess of royalties earned are generally recognized as revenue at the end of the contract period.
Revenues from our branded online and mobile operations are recognized as services are rendered. Advertising revenues at our internet operations or associated with the distribution of our video content online are recognized when advertisements are viewed online.
Taxes collected from customers and remitted to governmental authorities are presented in the Consolidated Statements of Income on a net basis.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. The allowance for doubtful accounts is estimated based on our analysis of trends in overall receivables aging, specific identification of certain receivables that are at risk of not being paid, past collection experience and current economic trends.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for fiscal years
2016
,
2015
and
2014
was
$2.9 billion
,
$2.6 billion
and
$2.8 billion
, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less.
Investments
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and reported at amortized cost. Debt securities not classified as held-to-maturity and marketable equity securities are considered “available-for-sale” and recorded at fair value with unrealized gains and losses included in accumulated other comprehensive income/(loss) (AOCI). All other equity securities are accounted for using either the cost method or the equity method.
The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other-than-temporary. If the decline in fair value is determined to be other-than-temporary, the cost basis of the investment is written down to fair value.
Translation Policy
The U.S. dollar is the functional currency for the majority of our international operations. The local currency is the functional currency for the International Theme Parks, international locations of The Disney Stores, our UTV businesses in India, our English language learning centers in China and certain international equity method investments.
For U.S. dollar functional currency locations, foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for non-monetary balance sheet accounts, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the non-monetary balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in income.
For local currency functional locations, assets and liabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of AOCI.
Inventories
Inventory primarily includes vacation timeshare units, merchandise, food, materials and supplies. Carrying amounts of vacation ownership units are recorded at the lower of cost or net realizable value. Carrying amounts of merchandise, food, materials and supplies inventories are generally determined on a moving average cost basis and are recorded at the lower of cost or market.
Film and Television Costs
Film and television costs include capitalizable production costs, production overhead, interest, development costs and acquired production costs and are stated at the lower of cost, less accumulated amortization, or fair value. Acquired programming costs for the Company’s cable and broadcast television networks are stated at the lower of cost, less accumulated amortization, or net realizable value. Acquired television broadcast program licenses and rights are recorded when the license period begins and the program is available for use. Marketing, distribution and general and administrative costs are expensed as incurred.
Film and television production, participation and residual costs are expensed over the applicable product life cycle based upon the ratio of the current period’s revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For film productions, Ultimate Revenues include revenues from all sources that will be earned within
ten
years from the date of the initial theatrical release. For television series, Ultimate Revenues include revenues that will be earned within
ten
years from delivery of the first episode, or if still in production,
five
years from delivery of the most recent episode, if later. For acquired film libraries, remaining revenues include amounts to be earned for up to
twenty
years from the date of acquisition. Costs of film and television productions are subject to regular recoverability assessments, which compare the estimated fair values with the unamortized costs. The Company bases these fair value measurements on the Company’s assumptions about how market participants would price the assets at the balance sheet date, which may be different than the amounts ultimately realized in future periods. The amount by which the unamortized costs of film and television productions exceed their estimated fair values is written off. Film development costs for projects that have been abandoned or have not been set for production within
three
years are generally written off.
The costs of television broadcast rights for acquired series, movies and other programs are expensed based on the number of times the program is expected to be aired or on a straight-line basis over the useful life, as appropriate. Rights costs for multi-year sports programming arrangements are amortized during the applicable seasons based on the estimated relative value of each year in the arrangement. The estimated value of each year is based on our projections of revenues over the contract period, which include advertising revenue and an allocation of affiliate revenue. If the annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season. Individual programs are written off when there are no plans to air or sublicense the program.
The net realizable values of network television broadcast program licenses and rights are reviewed for recoverability using a daypart methodology. A daypart is defined as an aggregation of programs broadcast during a particular time of day or programs of a similar type. The Company’s dayparts are: primetime, daytime, late night, news and sports (includes broadcast and cable networks). The net realizable values of other cable programming assets are reviewed on an aggregated basis for each cable network.
Internal-Use Software Costs
The Company expenses costs incurred in the preliminary project stage of developing or acquiring internal use software, such as research and feasibility studies as well as costs incurred in the post-implementation/operational stage, such as maintenance and training. Capitalization of software development costs occurs only after the preliminary-project stage is complete, management authorizes the project and it is probable that the project will be completed and the software will be used for the function intended. As of
October 1, 2016
and
October 3, 2015
, capitalized software costs, net of accumulated depreciation, totaled
$714 million
and
$753 million
, respectively. The capitalized costs are amortized on a straight-line basis over the estimated useful life of the software, ranging from
3
-
10
years.
Software Product Development Costs
Software product development costs incurred prior to reaching technological feasibility are expensed. We have determined that technological feasibility of our video game software is generally not established until substantially all product development is complete.
Parks, Resorts and Other Property
Parks, resorts and other property are carried at historical cost. Depreciation is computed on the straight-line method over estimated useful lives as follows:
|
|
|
|
Attractions
|
|
25 – 40 years
|
Buildings and improvements
|
|
20 – 40 years
|
Leasehold improvements
|
|
Life of lease or asset life if less
|
Land improvements
|
|
20 – 40 years
|
Furniture, fixtures and equipment
|
|
3 – 25 years
|
Goodwill, Other Intangible Assets and Long-Lived Assets
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. The Company compares the fair value of each reporting unit to its carrying amount to determine if there is a potential goodwill impairment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of the goodwill.
To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flows) corroborated by market multiples when available and as appropriate. We apply what we believe to be the most appropriate valuation methodology for each of our reporting units. We include in the projected cash flows an estimate of the revenue we believe the reporting unit would receive if the intellectual property developed by the reporting unit that is being used by other reporting units was licensed to an unrelated third party at its fair market value. These amounts are not necessarily the same as those included in segment operating results.
In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges.
The Company is required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized for the excess. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate. The Company has determined that there are currently no legal, competitive, economic or other factors that materially limit the useful life of our FCC licenses and trademarks.
Amortizable intangible assets are generally amortized on a straight-line basis over periods up to
40 years
. The costs to periodically renew our intangible assets are expensed as incurred.
The Company tests long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of cash flows expected to be generated over the useful life of an asset group to the carrying value of the asset group. An asset group is established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses or segments. If the carrying value of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the group’s long-lived assets and the carrying value of the group’s long-lived assets. The impairment is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts, but only to the extent the carrying value of each asset is above its fair value. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference.
The Company tested its goodwill and other indefinite-lived intangible assets, investments and long-lived assets for impairment and recorded non-cash impairment charges of
$7 million
,
$10 million
and
$46 million
in fiscal years 2016, 2015 and 2014, respectively. The fiscal 2014 impairment charges related to radio FCC licenses held by businesses in the Media Networks segment. The fair values of the radio FCC licenses were derived from market transactions. These impairment charges were recorded in “Restructuring and impairment charges” in the Consolidated Statements of Income.
The Company expects its aggregate annual amortization expense for existing amortizable intangible assets for fiscal years
2017
through
2021
to be as follows:
|
|
|
|
|
2017
|
$
|
192
|
|
2018
|
191
|
|
2019
|
186
|
|
2020
|
180
|
|
2021
|
175
|
|
Risk Management Contracts
In the normal course of business, the Company employs a variety of financial instruments (derivatives) including interest rate and cross-currency swap agreements and forward and option contracts to manage its exposure to fluctuations in interest rates, foreign currency exchange rates and commodity prices.
The Company formally documents all relationships between hedges and hedged items as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company primarily enters into
two
types of derivatives: hedges of fair value exposure and hedges of cash flow exposure. Hedges of fair value exposure are entered into in order to hedge the fair value of a recognized asset, liability, or a firm commitment. Hedges of cash flow exposure are entered into in order to hedge a forecasted transaction (e.g. forecasted revenue) or the variability of cash flows to be paid or received, related to a recognized liability or asset (e.g. floating rate debt).
The Company designates and assigns the derivatives as hedges of forecasted transactions, specific assets or specific liabilities. When hedged assets or liabilities are sold or extinguished or the forecasted transactions being hedged occur or are no longer expected to occur, the Company recognizes the gain or loss on the designated derivatives.
The Company’s hedge positions are measured at fair value on the balance sheet. Realized gains and losses from hedges are classified in the income statement consistent with the accounting treatment of the items being hedged. The Company accrues the differential for interest rate swaps to be paid or received under the agreements as interest rates change as adjustments to interest expense over the lives of the swaps. Gains and losses on the termination of effective swap agreements, prior to their original maturity, are deferred and amortized to interest expense over the remaining term of the underlying hedged transactions.
The Company enters into derivatives that are not designated as hedges and do not qualify for hedge accounting. These derivatives are intended to offset certain economic exposures of the Company and are carried at fair value with changes in value recorded in earnings. Cash flows from hedging activities are classified in the Consolidated Statements of Cash Flows under the same category as the cash flows from the related assets, liabilities or forecasted transactions (see Notes 8 and 16).
Income Taxes
Deferred income tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. Where, based on the weight of available evidence, it is more likely than not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is established for the amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized.
A tax position must meet a minimum probability threshold before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than
fifty percent
likely of being realized upon ultimate settlement.
Earnings Per Share
The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income attributable to Disney by the weighted average number of common shares outstanding during the year. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the year, which is calculated using the treasury-stock method for equity-based awards (Awards). Common equivalent shares are excluded from the computation in periods for which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and, accordingly, are excluded from the calculation.
A reconciliation of the weighted average number of common and common equivalent shares outstanding and the number of Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Weighted average number of common and common equivalent shares outstanding (basic)
|
1,629
|
|
|
1,694
|
|
|
1,740
|
|
Weighted average dilutive impact of Awards
|
10
|
|
|
15
|
|
|
19
|
|
Weighted average number of common and common equivalent shares outstanding (diluted)
|
1,639
|
|
|
1,709
|
|
|
1,759
|
|
Awards excluded from diluted earnings per share
|
6
|
|
|
3
|
|
|
6
|
|
BAMTech
In August 2016, the Company acquired a
15%
interest in BAMTech, an entity which holds Major League Baseball’s streaming technology and content delivery businesses, for
$450 million
. The Company is committed to acquire an additional
18%
interest for
$557 million
in January 2017. The Company accounts for its interest in BAMTech as an equity method investment. In addition, the Company has an option to increase its ownership to
66%
by acquiring additional shares at fair market value from Major League Baseball between August 2020 and August 2023.
Vice/A+E
Vice is a media company targeting a millennial audience through news and pop culture content and creative brand integration. During fiscal 2016, A+E acquired an
8%
interest in Vice in exchange for a
49.9%
interest in one of A+E’s cable channels, H2, which has been rebranded as Viceland and programmed with Vice content. As a result of this exchange, A+E recognized a net non-cash gain based on the estimated fair value of H2. The Company’s share of the Vice Gain totaled
$332 million
and was recorded in “Equity in the income of investees” in the Consolidated Statement of Income in fiscal 2016. At
October 1, 2016
, A+E had a
20%
interest in Vice.
In addition, during fiscal 2016, the Company acquired an
11%
interest in Vice for
$400 million
of cash.
The Company accounts for its interests in A+E and Vice as equity method investments.
Maker Studios
On May 7, 2014, the Company acquired Maker Studios, Inc. (Maker), a leading network of online video content, for approximately
$500 million
of cash consideration. Maker shareholders were eligible to receive up to
$450 million
of additional cash upon Maker’s achievement of certain performance targets for calendar years 2014 and 2015. At the date of the acquisition, the Company recorded a
$198 million
liability for the fair value of the contingent consideration (determined by a probability weighting of potential payouts). In fiscal 2015 and fiscal 2016, the Company paid
$105 million
and
$70 million
, respectively, for the contingent consideration. The majority of the purchase price was allocated to goodwill, which is not deductible for tax purposes. Goodwill reflects the synergies expected from enhancing the presence of Disney’s franchises and brands through the use of Maker’s distribution platform, advanced technology and business intelligence capability. The revenue and net income of Maker included in the Company’s Consolidated Statements of Income for fiscal years 2016, 2015 and 2014 were not material.
Hulu
At the end of fiscal 2015, the Company had a
33%
interest in Hulu, a joint venture owned one-third each by the Company, Twenty-First Century Fox, Inc. and Comcast Corporation. In August 2016, Time Warner, Inc. (TW) acquired a
10%
interest in the venture from Hulu for
$583 million
diluting the Company’s ownership interest to
30%
, which results in a deemed sale by the Company. For not more than 36 months from August 2016, TW may put its shares to Hulu or Hulu may call the shares from TW under certain limited circumstances arising from regulatory review. The Company and Twenty-First Century Fox, Inc. have agreed to make a capital contribution for up to approximately
$300 million
each if required to fund the repurchase of shares from TW. The Company expects to recognize a gain of approximately
$175 million
associated with the deemed sale of a portion of its ownership interest in Hulu if the put and call options are not exercised.
In addition, the Company has guaranteed
$113 million
of Hulu’s
$338 million
term loan, which expires in October 2017.
The Company accounts for its interest in Hulu as an equity method investment.
Goodwill
The changes in the carrying amount of goodwill for the years ended
October 1, 2016
and
October 3, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
Networks
|
|
Parks and
Resorts
|
|
Studio
Entertainment
|
|
Consumer
Products & Interactive Media
|
|
Total
|
Balance at Sept. 27, 2014
|
$
|
16,378
|
|
|
$
|
291
|
|
|
$
|
6,856
|
|
|
$
|
4,356
|
|
|
$
|
27,881
|
|
Acquisitions
|
3
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
5
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Other, net
|
(27
|
)
|
|
—
|
|
|
(22
|
)
|
|
(10
|
)
|
|
(59
|
)
|
Balance at Oct. 3, 2015
|
$
|
16,354
|
|
|
$
|
291
|
|
|
$
|
6,836
|
|
|
$
|
4,345
|
|
|
$
|
27,826
|
|
Acquisitions
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
2
|
|
Dispositions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other, net
|
(10
|
)
|
|
—
|
|
|
(7
|
)
|
|
(1
|
)
|
|
(18
|
)
|
Balance at Oct. 1, 2016
|
$
|
16,345
|
|
|
$
|
291
|
|
|
$
|
6,830
|
|
|
$
|
4,344
|
|
|
$
|
27,810
|
|
|
|
4
|
Dispositions and Other Expense, net
|
Other expense, net is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Venezuelan foreign currency translation loss
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(143
|
)
|
Gain on sale of property and other
|
—
|
|
|
—
|
|
|
112
|
|
Other expense, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
Venezuela foreign currency loss
The Company has operations in Venezuela, including film and television distribution and merchandise licensing and has net monetary assets denominated in Venezuelan bolivares (BsF), which primarily consist of cash. The Venezuelan government (Government) has foreign currency exchange controls, which provide different exchange mechanisms that impact the Company’s ability to convert its BsF denominated monetary assets to U.S. dollars. During fiscal 2014, the Government launched a new currency exchange mechanism, and the Company began translating its BsF denominated net monetary assets at the rates determined in this market resulting in a loss of
$143 million
reported in “Other expense, net” in the Consolidated Statement of Income. In fiscal 2015 and 2016, the Government introduced additional exchange mechanisms (including the Divisa Comercial “DICOM”) resulting in immaterial losses in those fiscal years, which are included in “Costs and expenses” in the Consolidated Statements of Income. At October 1, 2016, the Company translated its approximately
4.3 billion
BsF denominated net monetary assets using rates determined by the Venezuelan DICOM market (
656
BsF per U.S. dollar).
Gain on sale of property and other
In fiscal 2014, the Company recognized
$83 million
of gains primarily due to the sale of a property and
$29 million
for a portion of a settlement of an affiliate contract dispute.
Investments consist of the following:
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
Investments, equity basis
|
$
|
4,082
|
|
|
$
|
2,483
|
|
Investments, other
|
198
|
|
|
160
|
|
|
$
|
4,280
|
|
|
$
|
2,643
|
|
Investments, Equity Basis
A summary of combined financial information for equity investments, which primarily consist of media investments, A
+
E, BAMTech, CTV Specialty Television, Inc., Hulu, Seven TV and Vice, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Results of Operations:
|
|
|
|
|
|
Revenues
|
$
|
7,416
|
|
|
$
|
6,561
|
|
|
$
|
6,573
|
|
Net income
|
$
|
1,855
|
|
|
$
|
1,912
|
|
|
$
|
2,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
|
September 27,
2014
|
Balance Sheet
|
|
|
|
|
|
Current assets
|
$
|
4,801
|
|
|
$
|
3,676
|
|
|
$
|
2,640
|
|
Non-current assets
|
8,906
|
|
|
6,429
|
|
|
6,294
|
|
|
$
|
13,707
|
|
|
$
|
10,105
|
|
|
$
|
8,934
|
|
Current liabilities
|
$
|
2,018
|
|
|
$
|
1,614
|
|
|
$
|
1,504
|
|
Non-current liabilities
|
4,531
|
|
|
4,128
|
|
|
3,298
|
|
Shareholders’ equity
|
7,158
|
|
|
4,363
|
|
|
4,132
|
|
|
$
|
13,707
|
|
|
$
|
10,105
|
|
|
$
|
8,934
|
|
As of
October 1, 2016
, the book value of the Company’s equity method investments exceeded our share of the book value of the investees’ underlying net assets by approximately
$1.4 billion
, which represents amortizable intangible assets and goodwill arising from acquisitions.
The Company enters into transactions in the ordinary course of business with our equity investees, primarily related to the licensing of television and film programming. Revenues from these transactions were
$0.5 billion
,
$0.4 billion
and
$0.3 billion
in fiscal 2016, 2015 and 2014, respectively. The Company defers a portion of its profits from transactions with investees until the investee recognizes third-party revenue from the exploitation of the rights. The portion that is deferred reflects our ownership interest in the investee.
Investments, Other
As of
October 1, 2016
and
October 3, 2015
, the Company held
$85 million
and
$36 million
, respectively, of securities classified as available-for-sale,
$91 million
and
$81 million
, respectively, of non-publicly traded cost-method investments and
$22 million
and
$43 million
, respectively, of investments in leveraged leases.
In fiscal
2016
, the Company had no significant realized gains or losses on available-for-sale securities. In fiscal years
2015
and
2014
, the Company had realized gains of
$31 million
and
$165 million
, respectively, on available-for-sale securities.
In fiscal years
2016
,
2015
and
2014
, the Company had realized gains of
$23 million
,
$11 million
and
$53 million
, respectively, on non-publicly traded cost-method investments.
In fiscal years
2016
,
2015
and
2014
, the Company recorded non-cash charges of
$44 million
,
$14 million
and
$13 million
, respectively, to reflect other-than-temporary losses in investment value.
Realized gains and losses on available-for-sale and non-publicly traded cost-method investments are reported in “Interest income/(expense), net” in the Consolidated Statements of Income.
|
|
6
|
International Theme Park Investments
|
The Company has a
47%
ownership interest in the operations of Hong Kong Disneyland Resort, a
43%
ownership interest in the operations of Shanghai Disney Resort and an
81%
effective ownership interest in the operations of Disneyland Paris. The International Theme Parks are VIEs consolidated in the Company’s financial statements. See Note 2 for the Company’s policy on consolidating VIEs.
The following table summarizes the carrying amounts of the International Theme Parks’ assets and liabilities included in the Company’s consolidated balance sheets as of
October 1, 2016
and
October 3, 2015
:
|
|
|
|
|
|
|
|
|
|
International Theme Parks
|
|
October 1, 2016
|
|
October 3, 2015
|
Cash and cash equivalents
|
$
|
1,008
|
|
|
$
|
781
|
|
Other current assets
|
331
|
|
|
252
|
|
Total current assets
|
1,339
|
|
|
1,033
|
|
Parks, resorts and other property
|
9,270
|
|
|
7,748
|
|
Other assets
|
88
|
|
|
62
|
|
Total assets
|
$
|
10,697
|
|
|
$
|
8,843
|
|
|
|
|
|
Current liabilities
|
$
|
1,499
|
|
|
$
|
1,027
|
|
Borrowings - long-term
|
1,087
|
|
|
319
|
|
Other long-term liabilities
|
256
|
|
|
195
|
|
Total liabilities
|
$
|
2,842
|
|
|
$
|
1,541
|
|
The following table summarizes the International Theme Parks’ revenues and costs and expenses included in the Company’s consolidated statements of income as of
October 1, 2016
:
|
|
|
|
|
|
October 1, 2016
|
Revenues
|
$
|
2,455
|
|
Costs and expenses
|
(2,754
|
)
|
Royalty and management fees from the International Theme Parks recognized by the Company totaled
$148 million
for fiscal 2016. Royalty and management fees are eliminated in consolidation but are considered in calculating earnings allocated to noncontrolling interests.
Fiscal 2016 International Theme Parks’ cash flows included in the Company’s consolidated cash flow statement are
$0.4 billion
generated from operating activities,
$2.1 billion
used in investing activities and
$0.9 billion
generated from financing activities.
Disneyland Paris
During calendar 2015, Disneyland Paris completed a recapitalization consisting of the following:
|
|
•
|
In February 2015, Disneyland Paris completed a
€0.4 billion
equity rights offering at
€1.00
per share of which the Company funded
€0.2 billion
. The Company purchased shares that were unsubscribed by other Disneyland Paris shareholders, which increased the Company’s effective ownership by approximately
four
percentage points.
|
|
|
•
|
In February 2015, the Company converted
€0.6 billion
of its loans to Disneyland Paris into equity at a conversion price of
€1.25
per share. The conversion increased the Company’s effective ownership by an additional
23
percentage points. In addition, Disneyland Paris repaid
€0.3 billion
that was outstanding under then existing lines of credit from the Company. These lines of credit were replaced by a new
€0.4 billion
line of credit from the Company bearing interest at EURIBOR plus
2%
and maturing in
2023
.
|
|
|
•
|
In September 2015, the Company completed a mandatory tender offer to the other Disneyland Paris shareholders and acquired
€0.1 billion
in shares at
€1.25
per share, which increased the Company’s effective ownership by an additional
eight
percentage points.
|
|
|
•
|
In November 2015, to offset the dilution caused by the loan conversion, Disneyland Paris shareholders purchased
€0.05 billion
in shares from the Company at
€1.25
per share, which decreased the Company’s effective ownership by
four
percentage points, resulting in an
81%
effective ownership interest in Disneyland Paris.
|
As a result of the recapitalization, in fiscal 2015 the Company wrote off a
$399 million
deferred income tax asset (see Note 9).
The Company has term loans to Disneyland Paris with outstanding balances totaling
€1.0 billion
at
October 1, 2016
bearing interest at a
4%
fixed rate and maturing in 2024. In addition,
€130 million
is outstanding under the line of credit at
October 1, 2016
.
The Company has waived payment of royalties and management fees for the fourth quarter of fiscal 2016 through the third quarter of fiscal 2018.
Hong Kong Disneyland Resort
At
October 1, 2016
, the Government of the Hong Kong Special Administrative Region (HKSAR) and the Company had
53%
and
47%
equity interests in Hong Kong Disneyland Resort, respectively. HKSAR has the right to receive additional shares over time to the extent Hong Kong Disneyland Resort exceeds certain return on asset performance targets. The amount of additional shares HKSAR can receive is capped on both an annual and cumulative basis and could decrease the Company’s equity interest by up to an additional
7
percentage points over a period no shorter than
16 years
.
As part of financing the construction of a third hotel, which we expect to open in 2017, the Company contributed
$113 million
of equity in fiscal 2016. HKSAR also converted
$113 million
of a loan to equity, leaving a balance at
October 1, 2016
of HK
$0.4 billion
(
$45 million
) (see Note 8 for further details of this loan). In addition, the Company and HKSAR have committed to provide additional loans up to
$149 million
and
$104 million
, respectively. At
October 1, 2016
, the additional loans provided by the Company and HKSAR are
$116 million
and
$77 million
, respectively, bearing interest at a rate of three month HIBOR plus
2%
and mature in September 2025.
The net impact to HKSAR and the Company’s ownership of Hong Kong Disneyland Resort during fiscal 2016 and 2015 as a result of the above activities was not material.
Shanghai Disney Resort
Shanghai Disney Resort is owned through two joint venture companies, in which Shanghai Shendi (Group) Co., Ltd (Shendi) owns
57%
and the Company owns
43%
. A management company, in which the Company has a
70%
interest and Shendi a
30%
interest, is responsible for operating Shanghai Disney Resort. The investment in Shanghai Disney Resort has been funded in accordance with each shareholder’s ownership percentage, with approximately
67%
from equity contributions and
33%
from shareholder loans.
The Company has provided Shanghai Disney Resort with term loans totaling
$757 million
, bearing interest at rates up to
8%
and maturing in 2036. In addition, the Company has an outstanding balance of
$318 million
due from Shanghai Disney Resort related to development and pre-opening costs of the resort, which is anticipated to be paid by the end of 2018. The Company has also provided Shanghai Disney Resort with a
$157 million
line of credit bearing interest at
8%
. There is no outstanding balance under the line of credit at October 1, 2016.
Shendi has provided Shanghai Disney Resort with term loans totaling
6.4 billion
yuan (approximately
$1.0 billion
), bearing interest at rates up to
8%
and maturing in 2036; however, early repayment is permitted. Shendi has also provided Shanghai Disney Resort with a
1.4 billion
yuan (approximately
$205 million
) line of credit bearing interest at
8%
. There is no outstanding balance under the line of credit at October 1, 2016.
|
|
7
|
Film and Television Costs and Advances
|
Film and television costs and advances are as follows:
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
October 3, 2015
|
Theatrical film costs
|
|
|
|
Released, less amortization
|
$
|
1,677
|
|
|
$
|
1,445
|
|
Completed, not released
|
—
|
|
|
—
|
|
In-process
|
2,179
|
|
|
2,499
|
|
In development or pre-production
|
336
|
|
|
304
|
|
|
4,192
|
|
|
4,248
|
|
Television costs
|
|
|
|
Released, less amortization
|
1,015
|
|
|
895
|
|
Completed, not released
|
365
|
|
|
395
|
|
In-process
|
417
|
|
|
352
|
|
In development or pre-production
|
13
|
|
|
10
|
|
|
1,810
|
|
|
1,652
|
|
Television programming rights and advances
|
1,545
|
|
|
1,453
|
|
|
7,547
|
|
|
7,353
|
|
Less current portion
|
1,208
|
|
|
1,170
|
|
Non-current portion
|
$
|
6,339
|
|
|
$
|
6,183
|
|
Based on management’s total gross revenue estimates as of
October 1, 2016
, approximately
79%
of unamortized film and television costs for released productions (excluding amounts allocated to acquired film and television libraries) are expected to be amortized during the next three years.
By the end of fiscal 2020, we will have reached on a cumulative basis, 80% amortization of the October 1, 2016 balance of unamortized film and television costs.
Approximately
$0.9 billion
of accrued participation and residual liabilities will be paid in fiscal year
2017
. The Company expects to amortize, based on current estimates, approximately
$1.4 billion
in capitalized film and television production costs during fiscal
2017
.
At
October 1, 2016
, acquired film and television libraries have remaining unamortized costs of
$200 million
, which are generally amortized straight-line over a weighted-average remaining period of approximately
14 years
.
The Company’s borrowings at
October 1, 2016
and
October 3, 2015
, including the impact of interest rate and cross-currency swaps, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2016
|
|
2015
|
|
Stated
Interest
Rate
(1)
|
|
Pay Floating Interest rate and Cross-
Currency Swaps
(2)
|
|
Effective
Interest
Rate
(3)
|
|
Swap
Maturities
|
Commercial paper
|
|
$
|
1,521
|
|
|
$
|
2,430
|
|
|
—
|
|
|
$
|
—
|
|
|
0.54
|
%
|
|
|
U.S. medium-term notes
(4)
|
|
16,827
|
|
|
13,873
|
|
|
2.80
|
%
|
|
8,275
|
|
|
2.58
|
%
|
|
2017-2026
|
Foreign currency denominated debt
|
|
448
|
|
|
447
|
|
|
4.88
|
%
|
|
249
|
|
|
4.83
|
%
|
|
2017
|
Capital Cities/ABC debt
|
|
107
|
|
|
108
|
|
|
8.75
|
%
|
|
—
|
|
|
6.01
|
%
|
|
|
Other
(5)
|
|
180
|
|
|
159
|
|
|
|
|
—
|
|
|
|
|
|
|
|
19,083
|
|
|
17,017
|
|
|
2.66
|
%
|
|
8,524
|
|
|
2.49
|
%
|
|
|
International Theme Parks borrowings
|
|
1,087
|
|
|
319
|
|
|
1.92
|
%
|
|
—
|
|
|
4.30
|
%
|
|
|
Total borrowings
|
|
20,170
|
|
|
17,336
|
|
|
2.62
|
%
|
|
8,524
|
|
|
2.59
|
%
|
|
|
Less current portion
|
|
3,687
|
|
|
4,563
|
|
|
1.24
|
%
|
|
1,500
|
|
|
1.47
|
%
|
|
|
Total long-term borrowings
|
|
$
|
16,483
|
|
|
$
|
12,773
|
|
|
|
|
$
|
7,024
|
|
|
|
|
|
|
|
(1)
|
The stated interest rate represents the weighted-average coupon rate for each category of borrowings. For floating rate borrowings, interest rates are the rates in effect at
October 1, 2016
; these rates are not necessarily an indication of future interest rates.
|
|
|
(2)
|
Amounts represent notional values of interest rate and cross-currency swaps outstanding as of
October 1, 2016
.
|
|
|
(3)
|
The effective interest rate includes the impact of existing and terminated interest rate and cross-currency swaps, purchase accounting adjustments and debt issuance premiums, discounts and costs.
|
|
|
(4)
|
Includes net debt issuance premiums, discounts and costs totaling
$132 million
and
$88 million
at
October 1, 2016
and
October 3, 2015
, respectively.
|
|
|
(5)
|
Includes market value adjustments for debt with qualifying hedges totaling
$146 million
and
$131 million
at
October 1, 2016
and
October 3, 2015
, respectively.
|
Commercial Paper
The Company has bank facilities with a syndicate of lenders to support commercial paper borrowings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed
Capacity
|
|
Capacity
Used
|
|
Unused
Capacity
|
Facility expiring March 2017
|
$
|
1,500
|
|
|
$
|
—
|
|
|
$
|
1,500
|
|
Facility expiring March 2019
|
2,250
|
|
|
—
|
|
|
2,250
|
|
Facility expiring March 2021
|
2,250
|
|
|
—
|
|
|
2,250
|
|
Total
|
$
|
6,000
|
|
|
$
|
—
|
|
|
$
|
6,000
|
|
All of the above bank facilities allow for borrowings at LIBOR-based rates plus a spread depending on the credit default swap spread applicable to the Company’s debt, subject to a cap and floor that vary with the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. The spread above LIBOR can range from 0.23% to 1.63%.
The Company also has the ability to issue up to
$800 million
of letters of credit under the facility expiring in
March 2019
, which if utilized, reduces available borrowings under this facility. As of
October 1, 2016
, the Company has
$169 million
of outstanding letters of credit, of which none were issued under this facility. The facilities specifically exclude certain entities, including the International Theme Parks, from any representations, covenants, or events of default and contain only one financial covenant, relating to interest coverage, which the Company met on
October 1, 2016
by a significant margin.
Commercial paper activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper with original maturities less than three months, net
(1)
|
|
Commercial paper with original maturities greater than three months
|
|
Total
|
Balance at Sept 27, 2014
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
50
|
|
Additions
|
2,277
|
|
|
3,019
|
|
|
5,296
|
|
Payments
|
—
|
|
|
(2,920
|
)
|
|
(2,920
|
)
|
Other Activity
|
3
|
|
|
1
|
|
|
4
|
|
Balance at Oct 3, 2015
|
$
|
2,330
|
|
|
$
|
100
|
|
|
$
|
2,430
|
|
Additions
|
—
|
|
|
4,794
|
|
|
4,794
|
|
Payments
|
(1,559
|
)
|
|
(4,155
|
)
|
|
(5,714
|
)
|
Other Activity
|
6
|
|
|
5
|
|
|
11
|
|
Balance at Oct 1, 2016
|
$
|
777
|
|
|
$
|
744
|
|
|
$
|
1,521
|
|
(1)
Borrowings and reductions of borrowings are reported net.
Credit facility for cruise ships
In October 2016, the Company entered into two credit facilities to finance new cruise ships, which are expected to be delivered in 2021 and 2023. The financing may be used for up to
80%
of the contract price of the cruise ships. Under the agreements,
$1.0 billion
in financing is available beginning in April 2021 and
$1.1 billion
is available beginning in April 2023. If utilized, the interest rates will be fixed at
3.48%
and
3.74%
, respectively, and payable semi-annually. The loans will be repaid in 24 equal installments over a 12-year period from the borrowing date. Early repayment is permitted subject to cancellation fees.
Shelf Registration Statement
The Company has a shelf registration statement in place, which allows the Company to issue various types of debt instruments, such as fixed or floating rate notes, U.S. dollar or foreign currency denominated notes, redeemable notes, global notes, and dual currency or other indexed notes. Issuances under the shelf registration will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. Our ability to issue debt is subject to market conditions and other factors impacting our borrowing capacity.
U.S. Medium-Term Note Program
At
October 1, 2016
, the total debt outstanding under the U.S. medium-term note program was
$16.8 billion
with maturities ranging from
1
to
77
years. The debt outstanding includes
$16.1 billion
of fixed rate notes, which have stated interest rates that range from
0.88%
to
7.55%
and
$660 million
of floating rate notes that bear interest at U.S. LIBOR plus or minus a spread. At
October 1, 2016
, the effective rate on floating rate notes was
1.10%
.
European Medium-Term Note Program
The Company has a European medium-term note program, which allows the Company to issue various types of debt instruments such as fixed or floating rate notes, U.S. dollar or foreign currency denominated notes, redeemable notes and index linked or dual currency notes. Capacity under the program is
$4.0 billion
, subject to market conditions and other factors impacting our borrowing capacity. Capacity under the program replenishes as outstanding debt under the program is repaid. The Company had
no
outstanding borrowings under the program at
October 1, 2016
.
Foreign Currency Denominated Debt
At
October 1, 2016
, the Company had Canadian $
328 million
(
$249 million
) of debt outstanding, which bears interest at the Canadian Dealer Offered Rate plus
0.83%
(
1.72%
at
October 1, 2016
) and matures in
2017
.
The Company has short-term credit facilities of Indian rupee (INR)
11.6 billion
(
$173 million
), which bear interest at rates determined at the time of drawdown and expire in
2017
. At
October 1, 2016
, the outstanding balance was INR
3.6 billion
(
$54 million
), which bears interest at an average rate of
8.35%
.
At
October 1, 2016
, the Company had long-term credit facilities of INR
9.6 billion
(
$144 million
). In October 2016, the balance was repaid and the facilities were canceled.
Capital Cities/ABC Debt
In connection with the Capital Cities/ABC, Inc. acquisition in 1996, the Company assumed debt previously issued by Capital Cities/ABC, Inc. At
October 1, 2016
, the outstanding balance was
$107 million
, which includes unamortized fair value adjustments recorded in purchase accounting. The debt matures in
2021
and has a stated interest rate of
8.75%
.
International Theme Parks Borrowings
As part of financing the construction of a third hotel at Hong Kong Disneyland Resort, HKSAR converted
$113 million
of a loan to equity, leaving a balance at
October 1, 2016
of HK$
0.4 billion
(
$45 million
). The interest rate on this loan is subject to biannual revisions and determined based on the Hong Kong prime rate less
0.875
%, but is capped at an annual rate of
7.625%
until
March 2022
. After March 2022, the interest rate is based on the Hong Kong prime rate but is capped at an annual rate of
8.50%
. As of
October 1, 2016
, the rate on the loan was
4.13%
. Debt service payments will be made depending on sufficient available funds. Repayment is required by
September 30, 2022
; however, early repayment is permitted.
In addition, HKSAR provided Hong Kong Disneyland Resort with a loan facility totaling HK
$0.8 billion
(
$104 million
) that bears interest at a rate of three month HIBOR plus
2%
and matures in
2025
; however, earlier repayment is permitted. At October 1, 2016, Hong Kong Disneyland Resort had borrowed HK
$0.6 billion
(
$77 million
) under the loan facility, which bears interest at a rate of
2.57%
.
Shendi has provided Shanghai Disney Resort with term loans totaling
6.4 billion
yuan (approximately
$1.0 billion
) bearing interest at rates up to
8%
and maturing in 2036; however, early repayment is permitted. Shendi has also provided Shanghai Disney Resort with a
1.4 billion
yuan (approximately
$205 million
) line of credit bearing interest at
8%
. There is no outstanding balance under the line of credit at October 1, 2016.
Total borrowings, excluding market value adjustments and debt issuance premiums, discounts and costs, have the following scheduled maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
International
Theme Parks
Consolidation
|
|
International
Theme Parks
|
|
Total
|
2017
|
$
|
3,686
|
|
|
$
|
—
|
|
|
$
|
3,686
|
|
2018
|
1,804
|
|
|
11
|
|
|
1,815
|
|
2019
|
2,759
|
|
|
—
|
|
|
2,759
|
|
2020
|
896
|
|
|
—
|
|
|
896
|
|
2021
|
2,100
|
|
|
17
|
|
|
2,117
|
|
Thereafter
|
7,824
|
|
|
1,059
|
|
|
8,883
|
|
|
$
|
19,069
|
|
|
$
|
1,087
|
|
|
$
|
20,156
|
|
The Company capitalizes interest on assets constructed for its parks and resorts and on theatrical productions. In fiscal years
2016
,
2015
and
2014
, total interest capitalized was
$139 million
,
$110 million
and
$73 million
, respectively. Interest expense, net of capitalized interest, for fiscal years
2016
,
2015
and
2014
was
$354 million
,
$265 million
and
$294 million
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Income Before Income Taxes
|
|
|
|
|
|
Domestic (including U.S. exports)
|
$
|
14,018
|
|
|
$
|
12,825
|
|
|
$
|
11,376
|
|
Foreign subsidiaries
|
850
|
|
|
1,043
|
|
|
870
|
|
|
$
|
14,868
|
|
|
$
|
13,868
|
|
|
$
|
12,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense/(Benefit)
|
|
|
|
|
|
Current
|
|
|
|
|
|
Federal
|
$
|
3,146
|
|
|
$
|
4,182
|
|
|
$
|
2,932
|
|
State
|
154
|
|
|
333
|
|
|
206
|
|
Foreign
(1)
|
533
|
|
|
525
|
|
|
600
|
|
|
3,833
|
|
|
5,040
|
|
|
3,738
|
|
Deferred
|
|
|
|
|
|
Federal
|
1,172
|
|
|
82
|
|
|
409
|
|
State
|
100
|
|
|
(52
|
)
|
|
81
|
|
Foreign
|
(27
|
)
|
|
(54
|
)
|
|
14
|
|
|
1,245
|
|
|
(24
|
)
|
|
504
|
|
|
$
|
5,078
|
|
|
$
|
5,016
|
|
|
$
|
4,242
|
|
(1)
Includes foreign withholding taxes
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
October 3, 2015
|
Components of Deferred Tax Assets and Liabilities
|
|
|
|
Deferred tax assets
|
|
|
|
Accrued liabilities
|
$
|
(2,385
|
)
|
|
$
|
(2,244
|
)
|
Net operating losses and tax credit carryforwards
|
(1,567
|
)
|
|
(1,396
|
)
|
Other
|
(917
|
)
|
|
(945
|
)
|
Total deferred tax assets
|
(4,869
|
)
|
|
(4,585
|
)
|
Deferred tax liabilities
|
|
|
|
Depreciable, amortizable and other property
|
5,682
|
|
|
5,260
|
|
Foreign subsidiaries
|
348
|
|
|
583
|
|
Licensing revenues
|
480
|
|
|
396
|
|
Other
|
295
|
|
|
297
|
|
Total deferred tax liabilities
|
6,805
|
|
|
6,536
|
|
Net deferred tax liability before valuation allowance
|
1,936
|
|
|
1,951
|
|
Valuation allowance
|
1,602
|
|
|
1,288
|
|
Net deferred tax liability
|
$
|
3,538
|
|
|
$
|
3,239
|
|
At October 1, 2016 and October 3, 2015, the valuation allowance primarily related to
$1.2 billion
and
$1.1 billion
, respectively, of deferred tax assets for International Theme Parks’s net operating losses primarily in France and Hong Kong, and to a lesser extent, China. The noncontrolling interest share of the net operating losses were
$0.4 billion
and
$0.4 billion
at October 1, 2016 and October 3, 2015, respectively. The International Theme Parks net operating losses have an
indefinite carryforward period in France and Hong Kong and a five-year carryforward period in China
.
In the prior year, the Company had a
$399 million
deferred income tax asset on the difference between the Company’s tax basis in its investment in Disneyland Paris and the Company’s financial statement carrying value of Disneyland Paris. As a result of the Disneyland Paris recapitalization and the increase in the Company’s ownership interest (see Note 6 for further discussion of this transaction), the deferred tax asset was written off to income tax expense in fiscal 2015.
As of
October 1, 2016
, the Company had undistributed earnings of foreign subsidiaries of approximately
$3.4 billion
for which deferred U.S. federal income taxes have not been provided. The Company intends to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of dividends or otherwise, the Company would be
subject to additional U.S. income taxes. Assuming these foreign earnings were repatriated under laws and rates applicable at
2016
fiscal year end, the incremental federal tax applicable to the earnings would be approximately
$0.7 billion
.
A reconciliation of the effective income tax rate to the federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Federal income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
1.8
|
|
|
1.9
|
|
|
2.0
|
|
Domestic production activity deduction
|
(1.6
|
)
|
|
(1.9
|
)
|
|
(2.1
|
)
|
Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate
|
(1.1
|
)
|
|
(1.5
|
)
|
|
(0.7
|
)
|
Disneyland Paris recapitalization
|
—
|
|
|
2.9
|
|
|
—
|
|
Other, including tax reserves and related interest
|
0.1
|
|
|
(0.2
|
)
|
|
0.4
|
|
|
34.2
|
%
|
|
36.2
|
%
|
|
34.6
|
%
|
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding the related accrual for interest, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at the beginning of the year
|
$
|
912
|
|
|
$
|
803
|
|
|
$
|
1,120
|
|
Increases for current year tax positions
|
71
|
|
|
98
|
|
|
51
|
|
Increases for prior year tax positions
|
142
|
|
|
280
|
|
|
133
|
|
Decreases in prior year tax positions
|
(158
|
)
|
|
(193
|
)
|
|
(487
|
)
|
Settlements with taxing authorities
|
(123
|
)
|
|
(76
|
)
|
|
(14
|
)
|
Balance at the end of the year
|
$
|
844
|
|
|
$
|
912
|
|
|
$
|
803
|
|
The fiscal year-end
2016
,
2015
and
2014
balances include
$469 million
,
$501 million
and
$453 million
, respectively, that if recognized, would reduce our income tax expense and effective tax rate. These amounts are net of the offsetting benefits from other tax jurisdictions.
As of the end of fiscal
2016
,
2015
and
2014
, the Company had
$221 million
,
$231 million
and
$216 million
, respectively, in accrued interest and penalties related to unrecognized tax benefits. During fiscal years
2016
,
2015
and
2014
, the Company accrued additional interest and penalties of
$22 million
,
$68 million
and
$25 million
, respectively, and recorded reductions in accrued interest and penalties of
$32 million
,
$54 million
and
$21 million
, respectively, as a result of audit settlements and other prior-year adjustments. The Company’s policy is to report interest and penalties as a component of income tax expense.
The Company is no longer subject to U.S. federal examination for years prior to 2013 and is no longer subject to examination in any of its major state or foreign tax jurisdictions for years prior to 2006.
In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to the resolution of certain tax matters, which could include payments on those tax matters. These resolutions and payments could reduce our unrecognized tax benefits by
$143 million
.
In fiscal years
2016
,
2015
and
2014
, income tax benefits attributable to equity-based compensation transactions exceeded the amounts recorded based on grant date fair value. Accordingly,
$207 million
,
$313 million
and
$255 million
were credited to shareholders’ equity, respectively, in these years.
10
Pension and Other Benefit Programs
The Company maintains pension and postretirement medical benefit plans covering certain of its employees not covered by union or industry-wide plans. The Company’s defined benefit pension plans cover employees hired prior to January 1, 2012. For employees hired after this date, the Company has a defined contribution plan. Benefits under these pension plans are generally based on years of service and/or compensation and generally require
3 years
of vesting service. Employees generally hired after January 1, 1987 for certain of our media businesses and other employees generally hired after January 1, 1994 are not eligible for postretirement medical benefits.
Defined Benefit Plans
The Company measures the actuarial value of its benefit obligations and plan assets for its defined benefit pension and postretirement medical benefit plans at September 30 and adjusts for any plan contributions or significant events between September 30 and our fiscal year end.
The following chart summarizes the benefit obligations, assets, funded status and balance sheet impacts associated with the defined benefit pension and postretirement medical benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Medical Plans
|
|
October 1, 2016
|
|
October 3, 2015
|
|
October 1, 2016
|
|
October 3,
2015
|
Projected benefit obligations
|
|
|
|
|
|
|
|
Beginning obligations
|
$
|
(12,379
|
)
|
|
$
|
(12,190
|
)
|
|
$
|
(1,590
|
)
|
|
$
|
(1,567
|
)
|
Service cost
|
(318
|
)
|
|
(332
|
)
|
|
(11
|
)
|
|
(14
|
)
|
Interest cost
|
(458
|
)
|
|
(521
|
)
|
|
(61
|
)
|
|
(68
|
)
|
Actuarial gain / (loss)
|
(1,769
|
)
|
|
(176
|
)
|
|
(142
|
)
|
|
33
|
|
Plan amendments and other
|
8
|
|
|
28
|
|
|
(9
|
)
|
|
(9
|
)
|
Benefits paid
(1)
|
436
|
|
|
812
|
|
|
54
|
|
|
35
|
|
Ending obligations
|
$
|
(14,480
|
)
|
|
$
|
(12,379
|
)
|
|
$
|
(1,759
|
)
|
|
$
|
(1,590
|
)
|
Fair value of plans’ assets
|
|
|
|
|
|
|
|
Beginning fair value
|
$
|
9,415
|
|
|
$
|
9,765
|
|
|
$
|
568
|
|
|
$
|
538
|
|
Actual return on plan assets
|
624
|
|
|
163
|
|
|
34
|
|
|
9
|
|
Contributions
|
839
|
|
|
337
|
|
|
61
|
|
|
48
|
|
Benefits paid
(1)
|
(436
|
)
|
|
(812
|
)
|
|
(54
|
)
|
|
(35
|
)
|
Expenses and other
|
(41
|
)
|
|
(38
|
)
|
|
5
|
|
|
8
|
|
Ending fair value
|
$
|
10,401
|
|
|
$
|
9,415
|
|
|
$
|
614
|
|
|
$
|
568
|
|
|
|
|
|
|
|
|
|
Underfunded status of the plans
|
$
|
(4,079
|
)
|
|
$
|
(2,964
|
)
|
|
$
|
(1,145
|
)
|
|
$
|
(1,022
|
)
|
Amounts recognized in the balance sheet
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(40
|
)
|
|
(36
|
)
|
|
—
|
|
|
(13
|
)
|
Non-current liabilities
|
(4,039
|
)
|
|
(2,931
|
)
|
|
(1,145
|
)
|
|
(1,009
|
)
|
|
$
|
(4,079
|
)
|
|
$
|
(2,964
|
)
|
|
$
|
(1,145
|
)
|
|
$
|
(1,022
|
)
|
|
|
(1)
|
Fiscal 2015 pension plans include
$340 million
of payments under a plan offered for a limited time to certain former employees who had vested benefits in our qualified defined benefit pension plans. These employees elected to receive an immediate lump-sum distribution in lieu of benefits they would have received following their retirement.
|
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Medical Plans
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
318
|
|
|
$
|
332
|
|
|
$
|
277
|
|
|
$
|
11
|
|
|
$
|
14
|
|
|
$
|
10
|
|
Interest cost
|
458
|
|
|
521
|
|
|
488
|
|
|
61
|
|
|
68
|
|
|
65
|
|
Expected return on plan assets
|
(747
|
)
|
|
(711
|
)
|
|
(645
|
)
|
|
(45
|
)
|
|
(39
|
)
|
|
(36
|
)
|
Amortization of prior year service costs
|
14
|
|
|
16
|
|
|
14
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Recognized net actuarial loss / (gain)
|
242
|
|
|
247
|
|
|
145
|
|
|
8
|
|
|
10
|
|
|
(7
|
)
|
Net periodic benefit cost
|
$
|
285
|
|
|
$
|
405
|
|
|
$
|
279
|
|
|
$
|
34
|
|
|
$
|
52
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Medical Plans
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Discount rate used to determine the benefit obligation
|
3.73
|
%
|
|
4.47
|
%
|
|
4.40
|
%
|
|
3.73
|
%
|
|
4.47
|
%
|
|
4.40
|
%
|
Discount rate used to determine the net periodic benefit cost
|
3.81
|
%
|
|
4.40
|
%
|
|
5.00
|
%
|
|
3.81
|
%
|
|
4.40
|
%
|
|
5.00
|
%
|
Rate of return on plan assets
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
Rate of salary increase
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Year 1 increase in cost of benefits
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
7.00
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
Rate of increase to which the cost of benefits is assumed to decline (the ultimate trend rate)
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
4.25
|
%
|
|
4.25
|
%
|
|
4.25
|
%
|
Year that the rate reaches the ultimate trend rate
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
|
2030
|
|
|
2029
|
|
|
2028
|
|
In addition to the assumptions in the above table, assumed mortality is also a key assumption in determining benefit obligations. Net periodic benefit cost is based on assumptions determined at the prior-year end measurement date.
AOCI, before tax, as of
October 1, 2016
consists of the following amounts that have not yet been recognized in net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement
Medical Plans
|
|
Total
|
Prior service cost
|
$
|
(56
|
)
|
|
$
|
—
|
|
|
$
|
(56
|
)
|
Net actuarial loss
|
(5,470
|
)
|
|
(263
|
)
|
|
(5,733
|
)
|
Total amounts included in AOCI
|
(5,526
|
)
|
|
(263
|
)
|
|
(5,789
|
)
|
Prepaid / (accrued) pension cost
|
1,447
|
|
|
(882
|
)
|
|
565
|
|
Net balance sheet liability
|
$
|
(4,079
|
)
|
|
$
|
(1,145
|
)
|
|
$
|
(5,224
|
)
|
Amounts included in AOCI, before tax, as of
October 1, 2016
that are expected to be recognized as components of net periodic benefit cost during fiscal 2017 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Medical Plans
|
|
Total
|
Prior service cost
|
$
|
(11
|
)
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
Net actuarial loss
|
(403
|
)
|
|
(16
|
)
|
|
(419
|
)
|
Total
|
$
|
(414
|
)
|
|
$
|
(16
|
)
|
|
$
|
(430
|
)
|
Plan Funded Status
The projected benefit obligation, accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were
$13.4 billion
,
$12.4 billion
and
$9.5 billion
, respectively, as of
October 1, 2016
and
$11.5 billion
,
$10.6 billion
and
$8.5 billion
as of
October 3, 2015
, respectively.
For pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation and aggregate fair value of plan assets were
$14.5 billion
and
$10.4 billion
, respectively, as of
October 1, 2016
and
$12.4 billion
and
$9.4 billion
as of
October 3, 2015
, respectively.
The Company’s total accumulated pension benefit obligations at
October 1, 2016
and
October 3, 2015
were
$13.3 billion
and
$11.4 billion
, respectively, of which
99%
and
98%
, respectively, was vested.
The accumulated postretirement medical benefit obligations and fair value of plan assets for postretirement medical plans with accumulated postretirement medical benefit obligations in excess of plan assets were
$1.8 billion
and
$0.6 billion
, respectively, at
October 1, 2016
and
$1.6 billion
and
$0.6 billion
, respectively, at
October 3, 2015
.
Plan Assets
A significant portion of the assets of the Company’s defined benefit plans are managed in a third-party master trust. The investment policy and allocation of the assets in the master trust were approved by the Company’s Investment and Administrative Committee, which has oversight responsibility for the Company’s retirement plans. The investment policy ranges for the major asset classes are as follows:
|
|
|
|
|
|
|
|
Asset Class
|
|
Minimum
|
|
Maximum
|
|
|
|
|
|
Equity investments
|
|
30
|
%
|
|
60
|
%
|
Fixed income investments
|
|
20
|
%
|
|
40
|
%
|
Alternative investments
|
|
10
|
%
|
|
30
|
%
|
Cash & money market funds
|
|
0
|
%
|
|
10
|
%
|
The primary investment objective for the assets within the master trust is the prudent and cost effective management of assets to satisfy benefit obligations to plan participants. Financial risks are managed through diversification of plan assets, selection of investment managers and through the investment guidelines incorporated in investment management agreements. Assets are monitored to ensure that investment returns are commensurate with risks taken.
The long-term asset allocation policy for the master trust was established taking into consideration a variety of factors that include, but are not limited to, the average age of participants, the number of retirees, the duration of liabilities and the expected payout ratio. Liquidity needs of the master trust are generally managed using cash generated by investments or by liquidating securities.
Assets are generally managed by external investment managers, and we have investment management agreements with respect to securities in the master trust. These agreements include account guidelines that establish permitted securities and risk controls commensurate with the account’s investment strategy. Some agreements permit the use of derivative securities (futures, options, interest rate swaps, credit default swaps) that enable investment managers to enhance returns and manage exposures within their accounts.
Fair Value Measurements of Plan Assets
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and is classified in one of the following three categories:
Level 1 – Quoted prices for identical instruments in active markets
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
The following is a description of the valuation methodologies used for assets reported at fair value. There have been no changes in the methodologies used at
October 1, 2016
and
October 3, 2015
.
Level 1 investments are valued based on reported market prices on the last trading day of the year. Investments in common and preferred stocks are valued based on the securities exchange-listed price or a broker’s quote in an active market. Investments in U.S. Treasury securities are valued based on a broker’s quote in an active market.
Level 2 investments in government and federal agency bonds, mortgage-backed securities (MBS), asset-backed securities and corporate bonds are valued using a broker’s quote in a non-active market or an evaluated price based on a compilation of reported market information, such as benchmark yield curves, credit spreads and estimated default rates. Derivative financial instruments are valued based on models that incorporate observable inputs for the underlying securities, such as interest rates or foreign currency exchange rates. Shares in money market and mutual funds and certain alternative investments are valued at the net asset value of the shares held by the Plan at year-end based on the fair value of the underlying investments.
Level 3 investments primarily consist of investments in limited partnerships, which are valued based on the master trust’s pro-rata share of the partnerships’ underlying net investment holdings as reported in the partnerships’ financial statements. The investments held by the partnerships are recorded at fair value, and the partnerships’ financial statements are generally audited annually. The fair values of the underlying investments are estimated using significant unobservable inputs (e.g., discounted
cash flow models or relative valuation methods that incorporate comparable market information such as earnings and cash flow multiples from similar publicly traded companies or real estate properties).
The Company’s defined benefit plan assets are summarized by level in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 1, 2016
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Plan Asset Mix
|
|
|
|
|
|
|
|
|
|
|
|
Cash & money market funds
|
|
$
|
116
|
|
|
$
|
916
|
|
|
$
|
—
|
|
|
$
|
1,032
|
|
|
9
|
%
|
Common and preferred stocks
(1)
|
|
2,238
|
|
|
945
|
|
|
—
|
|
|
3,183
|
|
|
29
|
%
|
Mutual funds
|
|
636
|
|
|
232
|
|
|
—
|
|
|
868
|
|
|
8
|
%
|
Common collective funds
|
|
13
|
|
|
558
|
|
|
—
|
|
|
571
|
|
|
5
|
%
|
Government and federal agency bonds, notes and MBS
|
|
2,114
|
|
|
458
|
|
|
—
|
|
|
2,572
|
|
|
24
|
%
|
Corporate bonds
|
|
—
|
|
|
577
|
|
|
—
|
|
|
577
|
|
|
5
|
%
|
Mortgage- and asset-backed securities
|
|
—
|
|
|
86
|
|
|
—
|
|
|
86
|
|
|
1
|
%
|
Alternative investments
|
|
84
|
|
|
975
|
|
|
1,067
|
|
|
2,126
|
|
|
19
|
%
|
Derivatives and other, net
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
Total
|
|
$
|
5,200
|
|
|
$
|
4,748
|
|
|
$
|
1,067
|
|
|
$
|
11,015
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 3, 2015
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Plan Asset Mix
|
|
|
|
|
|
|
|
|
|
|
|
Cash & money market funds
|
|
$
|
56
|
|
|
$
|
1,036
|
|
|
$
|
—
|
|
|
$
|
1,092
|
|
|
11
|
%
|
Common and preferred stocks
(1)
|
|
2,000
|
|
|
883
|
|
|
—
|
|
|
2,883
|
|
|
29
|
%
|
Mutual funds
|
|
476
|
|
|
215
|
|
|
—
|
|
|
691
|
|
|
7
|
%
|
Common collective funds
|
|
13
|
|
|
476
|
|
|
—
|
|
|
489
|
|
|
5
|
%
|
Government and federal agency bonds, notes and MBS
|
|
1,090
|
|
|
483
|
|
|
—
|
|
|
1,573
|
|
|
16
|
%
|
Corporate bonds
|
|
—
|
|
|
671
|
|
|
—
|
|
|
671
|
|
|
7
|
%
|
Mortgage- and asset-backed securities
|
|
—
|
|
|
137
|
|
|
—
|
|
|
137
|
|
|
1
|
%
|
Alternative investments
|
|
80
|
|
|
952
|
|
|
1,200
|
|
|
2,232
|
|
|
22
|
%
|
Derivatives and other, net
|
|
212
|
|
|
3
|
|
|
—
|
|
|
215
|
|
|
2
|
%
|
Total
|
|
$
|
3,927
|
|
|
$
|
4,856
|
|
|
$
|
1,200
|
|
|
$
|
9,983
|
|
|
100
|
%
|
|
|
(1)
|
Includes
2.8 million
shares of Company common stock valued at
$264 million
(
2%
of total plan assets) and
2.8 million
shares valued at
$290 million
(
3%
of total plan assets) at
October 1, 2016
and
October 3, 2015
, respectively.
|
Changes in Level 3 assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
October 1, 2016
|
|
October 3, 2015
|
Balance, beginning of year
|
|
$
|
1,200
|
|
|
$
|
1,266
|
|
Additions
|
|
174
|
|
|
168
|
|
Distributions
|
|
(300
|
)
|
|
(332
|
)
|
Gain / (Loss)
|
|
(7
|
)
|
|
98
|
|
Balance, end of year
|
|
$
|
1,067
|
|
|
$
|
1,200
|
|
Uncalled Capital Commitments
Alternative investments held by the master trust include interests in investments that have rights to make capital calls to the investors. In such cases, the master trust would be contractually obligated to make a cash contribution at the time of the capital call. At
October 1, 2016
, the total committed capital still uncalled and unpaid was
$623 million
.
Plan Contributions
During fiscal
2016
, the Company made contributions to its pension and postretirement medical plans totaling
$900 million
. In the first quarter of 2017, we contributed
$1.3 billion
and do not expect to make any additional material contributions for the remainder of fiscal 2017. However, final minimum funding requirements for fiscal
2017
will be determined based on our January 1, 2017 funding actuarial valuation, which we expect to receive during the fourth quarter of fiscal
2017
.
Estimated Future Benefit Payments
The following table presents estimated future benefit payments for the next ten fiscal years:
|
|
|
|
|
|
|
|
|
|
Pension
Plans
|
|
Postretirement
Medical Plans
(1)
|
2017
|
$
|
470
|
|
|
$
|
45
|
|
2018
|
469
|
|
|
49
|
|
2019
|
502
|
|
|
53
|
|
2020
|
535
|
|
|
57
|
|
2021
|
567
|
|
|
62
|
|
2022 – 2026
|
3,374
|
|
|
378
|
|
|
|
(1)
|
Estimated future benefit payments are net of expected Medicare subsidy receipts of
$72 million
.
|
Assumptions
Assumptions, such as discount rates, long-term rate of return on plan assets and the healthcare cost trend rate, have a significant effect on the amounts reported for net periodic benefit cost as well as the related benefit obligations.
Discount Rate
— The assumed discount rate for pension and postretirement medical plans reflects the market rates for high-quality corporate bonds currently available. The Company’s discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans’ liability cash flows to the yield curves.
At the end of fiscal 2015, the Company changed the approach used to measure service and interest costs for pension and other postretirement benefits. For fiscal 2015, the Company measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For fiscal 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. The Company believes the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations but generally results in lower pension expense in periods when the yield curve is upward sloping, which was the case in fiscal 2016. The Company has accounted for this change as a change in accounting estimate and, accordingly, has accounted for it on a prospective basis starting in fiscal 2016.
Long-term rate of return on plan assets
— The long-term rate of return on plan assets represents an estimate of long-term returns on an investment portfolio consisting of a mixture of equities, fixed income and alternative investments. When determining the long-term rate of return on plan assets, the Company considers long-term rates of return on the asset classes (both historical and forecasted) in which the Company expects the pension funds to be invested. The following long-term rates of return by asset class were considered in setting the long-term rate of return on plan assets assumption:
|
|
|
|
|
|
|
Equity Securities
|
7
|
%
|
to
|
11
|
%
|
Debt Securities
|
3
|
%
|
to
|
5
|
%
|
Alternative Investments
|
8
|
%
|
to
|
12
|
%
|
Healthcare cost trend rate
— The Company reviews external data and its own historical trends for healthcare costs to determine the healthcare cost trend rates for the postretirement medical benefit plans. For the
2016
actuarial valuation, we assumed a
7.00%
annual rate of increase in the per capita cost of covered healthcare claims with the rate decreasing in even increments over fourteen years until reaching
4.25%
.
Sensitivity
— A one percentage point (ppt) change in the key assumptions would have the following effects on the projected benefit obligations for pension and postretirement medical plans as of
October 1, 2016
and on cost for fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
Expected
Long-Term
Rate of Return
On Assets
|
|
Assumed Healthcare
Cost Trend Rate
|
Increase/(decrease)
|
Benefit
Expense
|
|
Projected Benefit Obligations
|
|
Benefit
Expense
|
|
Net Periodic Postretirement Medical Cost
|
|
Projected Benefit Obligations
|
1 ppt decrease
|
$
|
271
|
|
|
$
|
2,853
|
|
|
$
|
123
|
|
|
$
|
(25
|
)
|
|
$
|
(233
|
)
|
1 ppt increase
|
(235
|
)
|
|
(2,401
|
)
|
|
(123
|
)
|
|
41
|
|
|
287
|
|
Multiemployer Benefit Plans
The Company participates in a number of multiemployer pension plans under union and industry-wide collective bargaining agreements that cover our union-represented employees and expenses its contributions to these plans as incurred. These plans generally provide for retirement, death and/or termination benefits for eligible employees within the applicable collective bargaining units, based on specific eligibility/participation requirements, vesting periods and benefit formulas. The risks of participating in these multiemployer plans are different from single-employer plans. For example:
|
|
•
|
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
•
|
If a participating employer stops contributing to the multiemployer plan, the unfunded obligations of the plan may become the obligation of the remaining participating employers.
|
|
|
•
|
If the Company chooses to stop participating in these multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan.
|
The Company also participates in several multiemployer health and welfare plans that cover both active and retired employees. Health care benefits are provided to participants who meet certain eligibility requirements under the applicable collective bargaining unit.
The following table sets forth our contributions to multiemployer pension and health and welfare benefit plans that were expensed during the fiscal years
2016
,
2015
and
2014
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Pension plans
|
$
|
126
|
|
|
$
|
128
|
|
|
$
|
115
|
|
Health & welfare plans
|
167
|
|
|
173
|
|
|
158
|
|
Total contributions
|
$
|
293
|
|
|
$
|
301
|
|
|
$
|
273
|
|
Defined Contribution Plans
The Company has defined contribution retirement plans for domestic employees who began service after December 31, 2011 and are not eligible to participate in the defined benefit pension plans. In general, the Company contributes from
3%
to
9%
of an employee’s compensation depending on the employee’s age and years of service with the Company up to plan limits. The Company has savings and investment plans that allow eligible employees to contribute up to
50%
of their salary through payroll deductions depending on the plan in which the employee participates. The Company matches
50%
of the employee’s contribution up to plan limits. In fiscal years
2016
,
2015
and
2014
, the costs of these defined contribution plans were
$131 million
,
$110 million
and
$87 million
, respectively. The Company also has defined contribution retirement plans for employees in our international operations. In each of fiscal years
2016
,
2015
and
2014
, the costs of these defined contribution plans were
$19 million
.
11
Equity
The Company paid the following dividends in fiscal
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
Per Share
|
|
Total Paid
|
|
Payment Timing
|
|
Related to Fiscal Period
|
$0.71
|
|
$1.1 billion
|
|
Fourth Quarter of Fiscal 2016
|
|
First Half 2016
|
$0.71
|
|
$1.2 billion
|
|
Second Quarter of Fiscal 2016
|
|
Second Half 2015
|
$0.66
|
|
$1.1 billion
|
|
Fourth Quarter of Fiscal 2015
|
|
First Half 2015
|
$1.15
|
|
$1.9 billion
|
|
Second Quarter of Fiscal 2015
|
|
2014
|
$0.86
|
|
$1.5 billion
|
|
Second Quarter of Fiscal 2014
|
|
2013
|
The Company repurchased its common stock in fiscal
2016
,
2015
and
2014
as follows:
|
|
|
|
|
|
Fiscal year
|
|
Shares acquired
|
|
Total paid
|
2016
|
|
74 million
|
|
$7.5 billion
|
2015
|
|
60 million
|
|
$6.1 billion
|
2014
|
|
84 million
|
|
$6.5 billion
|
On January 30, 2015, the Company’s Board of Directors increased the amount of shares that can be repurchased to
400 million
shares as of that date. As of
October 1, 2016
, the Company had remaining authorization in place to repurchase
282 million
additional shares. The repurchase program does not have an expiration date.
The following table summarizes the changes in each component of AOCI including our proportional share of equity method investee amounts, net of
37%
estimated tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value Adjustments
|
|
Unrecognized
Pension and
Postretirement
Medical
Expense
|
|
Foreign
Currency
Translation
and Other
|
|
AOCI
|
|
Investments
|
|
Cash Flow
Hedges
|
|
Balance at Sept. 28, 2013
|
$
|
95
|
|
|
$
|
83
|
|
|
$
|
(1,271
|
)
|
|
$
|
(94
|
)
|
|
$
|
(1,187
|
)
|
Unrealized gains (losses) arising during the period
|
109
|
|
|
169
|
|
|
(1,022
|
)
|
|
18
|
|
|
(726
|
)
|
Reclassifications of realized net (gains) losses to net income
|
(104
|
)
|
|
(48
|
)
|
|
97
|
|
|
—
|
|
|
(55
|
)
|
Balance at Sept. 27, 2014
|
100
|
|
|
204
|
|
|
(2,196
|
)
|
|
(76
|
)
|
|
(1,968
|
)
|
Unrealized gains (losses) arising during the period
|
(37
|
)
|
|
421
|
|
|
(474
|
)
|
|
(195
|
)
|
|
(285
|
)
|
Reclassifications of realized net (gains) losses to net income
|
(50
|
)
|
|
(291
|
)
|
|
173
|
|
|
—
|
|
|
(168
|
)
|
Balance at Oct. 3, 2015
|
13
|
|
|
334
|
|
|
(2,497
|
)
|
|
(271
|
)
|
|
(2,421
|
)
|
Unrealized gains (losses) arising during the period
|
13
|
|
|
(193
|
)
|
|
(1,321
|
)
|
|
(58
|
)
|
|
(1,559
|
)
|
Reclassifications of realized net (gains) losses to net income
|
—
|
|
|
(166
|
)
|
|
167
|
|
|
—
|
|
|
1
|
|
Balance at Oct. 1, 2016
|
$
|
26
|
|
|
$
|
(25
|
)
|
|
$
|
(3,651
|
)
|
|
$
|
(329
|
)
|
|
$
|
(3,979
|
)
|
Details about AOCI components reclassified to net income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(losses) in net income:
|
|
Affected line item in the Consolidated Statements of Income:
|
|
2016
|
|
2015
|
|
2014
|
Investments, net
|
|
Interest income/(expense), net
|
|
$
|
—
|
|
|
$
|
79
|
|
|
$
|
165
|
|
Estimated tax
|
|
Income taxes
|
|
—
|
|
|
(29
|
)
|
|
(61
|
)
|
|
|
|
|
—
|
|
|
50
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
Primarily revenue
|
|
264
|
|
|
462
|
|
|
76
|
|
Estimated tax
|
|
Income taxes
|
|
(98
|
)
|
|
(171
|
)
|
|
(28
|
)
|
|
|
|
|
166
|
|
|
291
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement medical expense
|
|
Cost and expenses
|
|
(265
|
)
|
|
(274
|
)
|
|
(154
|
)
|
Estimated tax
|
|
Income taxes
|
|
98
|
|
|
101
|
|
|
57
|
|
|
|
|
|
(167
|
)
|
|
(173
|
)
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
|
|
$
|
(1
|
)
|
|
$
|
168
|
|
|
$
|
55
|
|
At
October 1, 2016
and
October 3, 2015
, the Company held available-for-sale investments in unrecognized gain positions totaling
$49 million
and
$21 million
, respectively, and no investments in significant unrecognized loss positions.
12
Equity-Based Compensation
Under various plans, the Company may grant stock options and other equity-based awards to executive, management and creative personnel. The Company’s approach to long-term incentive compensation contemplates awards of stock options and restricted stock units (RSUs). Certain RSUs awarded to senior executives vest based upon the achievement of market or performance conditions (Performance RSUs).
Stock options are generally granted at exercise prices equal to or exceeding the market price at the date of grant and become exercisable ratably over a
four
-year period from the grant date. The contractual terms for our outstanding stock option grants are
10
years. At the discretion of the Compensation Committee of the Company’s Board of Directors, options can occasionally extend up to
15 years
after date of grant. RSUs generally vest ratably over
four
years and Performance RSUs fully vest after
three
years, subject to achieving market or performance conditions. Equity-based award grants generally provide continued vesting, in the event of termination, for employees that reach age 60 or greater, have at least ten years of service and have held the award for at least one year.
Each share granted subject to a stock option award reduces the number of shares available under the Company’s stock incentive plans by one share while each share granted subject to a RSU award reduces the number of shares available by two shares. As of
October 1, 2016
, the maximum number of shares available for issuance under the Company’s stock incentive plans (assuming all the awards are in the form of stock options) was approximately
77 million
shares and the number available for issuance assuming all awards are in the form of RSUs was approximately
39 million
shares. The Company satisfies stock option exercises and vesting of RSUs with newly issued shares. Stock options and RSUs are generally forfeited by employees who terminate prior to vesting.
Each year, during the first half of the year, the Company awards stock options and restricted stock units to a broad-based group of management and creative personnel. The fair value of options is estimated based on the binomial valuation model. The binomial valuation model takes into account variables such as volatility, dividend yield and the risk-free interest rate. The binomial valuation model also considers the expected exercise multiple (the multiple of exercise price to grant price at which exercises are expected to occur on average) and the termination rate (the probability of a vested option being canceled due to the termination of the option holder) in computing the value of the option.
In fiscal years
2016
,
2015
and
2014
, the weighted average assumptions used in the option-valuation model were as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
2.3
|
%
|
|
2.1
|
%
|
|
3.0
|
%
|
Expected volatility
|
26
|
%
|
|
24
|
%
|
|
25
|
%
|
Dividend yield
|
1.32
|
%
|
|
1.37
|
%
|
|
1.37
|
%
|
Termination rate
|
4.0
|
%
|
|
3.2
|
%
|
|
3.2
|
%
|
Exercise multiple
|
1.62
|
|
|
1.48
|
|
|
1.48
|
|
Although the initial fair value of stock options is not adjusted after the grant date, changes in the Company’s assumptions may change the value of, and therefore the expense related to, future stock option grants. The assumptions that cause the greatest variation in fair value in the binomial valuation model are the expected volatility and expected exercise multiple. Increases or decreases in either the expected volatility or expected exercise multiple will cause the binomial option value to increase or decrease, respectively. The volatility assumption considers both historical and implied volatility and may be impacted by the Company’s performance as well as changes in economic and market conditions.
Compensation expense for RSUs and stock options is recognized ratably over the service period of the award. Compensation expense for RSUs is based on the market price of the shares underlying the awards on the grant date. Compensation expense for Performance RSUs reflects the estimated probability that the market or performance conditions will be met.
The impact of stock options/rights and RSUs on income and cash flows for fiscal years
2016
,
2015
and
2014
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Stock option/rights compensation expense
(1)
|
$
|
93
|
|
|
$
|
102
|
|
|
$
|
102
|
|
RSU compensation expense
|
293
|
|
|
309
|
|
|
312
|
|
Total equity-based compensation expense
(2)
|
386
|
|
|
411
|
|
|
414
|
|
Tax impact
|
(131
|
)
|
|
(134
|
)
|
|
(139
|
)
|
Reduction in net income
|
$
|
255
|
|
|
$
|
277
|
|
|
$
|
275
|
|
Equity-based compensation expense capitalized during the period
|
$
|
78
|
|
|
$
|
57
|
|
|
$
|
49
|
|
Tax benefit reported in cash flow from financing activities
|
$
|
208
|
|
|
$
|
313
|
|
|
$
|
255
|
|
|
|
(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.
|
The following table summarizes information about stock option transactions (shares in millions):
|
|
|
|
|
|
|
|
|
2016
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
Outstanding at beginning of year
|
29
|
|
|
$
|
54.93
|
|
Awards forfeited
|
(1
|
)
|
|
91.27
|
|
Awards granted
|
4
|
|
|
112.69
|
|
Awards exercised
|
(7
|
)
|
|
39.13
|
|
Awards expired/canceled
|
—
|
|
|
—
|
|
Outstanding at end of year
|
25
|
|
|
66.91
|
|
Exercisable at end of year
|
14
|
|
|
$
|
49.65
|
|
The following tables summarize information about stock options vested and expected to vest at
October 1, 2016
(shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
Range of Exercise Prices
|
|
Number of
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Years of
Contractual
Life
|
$ 0 — $ 35
|
|
2
|
|
|
$
|
30.44
|
|
|
3.2
|
$ 36 — $ 45
|
|
6
|
|
|
39.10
|
|
|
4.9
|
$ 46 — $ 90
|
|
5
|
|
|
58.20
|
|
|
6.6
|
$ 91 — $ 115
|
|
1
|
|
|
92.40
|
|
|
8.2
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to Vest
|
Range of Exercise Prices
|
|
Number of
Options
(1)
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Years of
Contractual
Life
|
$ 0 — $ 55
|
|
2
|
|
|
$
|
50.97
|
|
|
6.3
|
$ 56 — $ 75
|
|
3
|
|
|
72.50
|
|
|
7.2
|
$ 76 — $ 95
|
|
3
|
|
|
92.09
|
|
|
8.2
|
$ 96 — $ 115
|
|
3
|
|
|
113.06
|
|
|
9.2
|
|
|
11
|
|
|
|
|
|
|
|
(1)
|
Number of options expected to vest is total unvested options less estimated forfeitures.
|
The following table summarizes information about RSU transactions (shares in millions):
|
|
|
|
|
|
|
|
|
2016
|
|
Units
|
|
Weighted
Average
Grant-Date
Fair Value
|
Unvested at beginning of year
|
12
|
|
|
$
|
68.71
|
|
Granted
(1)
|
4
|
|
|
112.49
|
|
Vested
|
(5
|
)
|
|
58.51
|
|
Forfeited
|
(1
|
)
|
|
88.77
|
|
Unvested at end of year
(2)
|
10
|
|
|
$
|
88.84
|
|
(1)
Includes
0.2 million
Performance RSUs.
(2)
Includes
0.7 million
Performance RSUs.
The weighted average grant-date fair values of options granted during fiscal
2016
,
2015
and
2014
were
$30.93
,
$22.65
and
$19.21
, respectively. The total intrinsic value (market value on date of exercise less exercise price) of options exercised and RSUs vested during fiscal
2016
,
2015
and
2014
totaled
$981 million
,
$1,332 million
and
$1,257 million
, respectively. The aggregate intrinsic values of stock options vested and expected to vest at
October 1, 2016
were
$603 million
and
$127 million
, respectively.
As of
October 1, 2016
, unrecognized compensation cost related to unvested stock options and RSUs was
$129 million
and
$469 million
, respectively. That cost is expected to be recognized over a weighted-average period of
1.8 years
for stock options and
1.6 years
for RSUs.
Cash received from option exercises for fiscal
2016
,
2015
and
2014
was
$259 million
,
$329 million
and
$404 million
, respectively. Tax benefits realized from tax deductions associated with option exercises and RSUs vesting for fiscal
2016
,
2015
and
2014
totaled
$342 million
,
$457 million
and
$431 million
, respectively.
13
Detail of Certain Balance Sheet Accounts
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
Current receivables
|
|
|
|
|
Accounts receivable
|
|
$
|
8,458
|
|
|
$
|
7,613
|
|
Other
|
|
760
|
|
|
563
|
|
Allowance for doubtful accounts
|
|
(153
|
)
|
|
(157
|
)
|
|
|
$
|
9,065
|
|
|
$
|
8,019
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
|
|
Prepaid expenses
|
|
$
|
449
|
|
|
$
|
469
|
|
Other
|
|
244
|
|
|
493
|
|
|
|
$
|
693
|
|
|
$
|
962
|
|
|
|
|
|
|
|
|
|
|
|
Parks, resorts and other property
|
|
|
|
|
Attractions, buildings and improvements
|
|
$
|
27,930
|
|
|
$
|
21,556
|
|
Leasehold improvements
|
|
830
|
|
|
769
|
|
Furniture, fixtures and equipment
|
|
16,912
|
|
|
16,068
|
|
Land improvements
|
|
4,598
|
|
|
4,352
|
|
|
|
50,270
|
|
|
42,745
|
|
Accumulated depreciation
|
|
(26,849
|
)
|
|
(24,844
|
)
|
Projects in progress
|
|
2,684
|
|
|
6,028
|
|
Land
|
|
1,244
|
|
|
1,250
|
|
|
|
$
|
27,349
|
|
|
$
|
25,179
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
Character/franchise intangibles and copyrights
|
|
$
|
5,829
|
|
|
$
|
5,830
|
|
Other amortizable intangible assets
|
|
893
|
|
|
901
|
|
Accumulated amortization
|
|
(1,635
|
)
|
|
(1,426
|
)
|
Net amortizable intangible assets
|
|
5,087
|
|
|
5,305
|
|
FCC licenses
|
|
624
|
|
|
629
|
|
Trademarks
|
|
1,218
|
|
|
1,218
|
|
Other indefinite lived intangible assets
|
|
20
|
|
|
20
|
|
|
|
$
|
6,949
|
|
|
$
|
7,172
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
|
|
|
|
Receivables
|
|
$
|
1,651
|
|
|
$
|
1,589
|
|
Prepaid expenses
|
|
229
|
|
|
211
|
|
Other
|
|
460
|
|
|
621
|
|
|
|
$
|
2,340
|
|
|
$
|
2,421
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
6,860
|
|
|
$
|
5,504
|
|
Payroll and employee benefits
|
|
1,747
|
|
|
1,797
|
|
Other
|
|
523
|
|
|
543
|
|
|
|
$
|
9,130
|
|
|
$
|
7,844
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
Pension and postretirement medical plan liabilities
|
|
$
|
5,184
|
|
|
$
|
3,940
|
|
Other
|
|
2,522
|
|
|
2,429
|
|
|
|
$
|
7,706
|
|
|
$
|
6,369
|
|
14
Commitments and Contingencies
Commitments
The Company has various contractual commitments for broadcast rights for sports, feature films and other programming, totaling approximately
$51.0 billion
, including approximately
$0.4 billion
for available programming as of
October 1, 2016
, and approximately
$48.7 billion
related to sports programming rights, primarily college football (including bowl games and the College Football Playoff) and basketball, NBA, NFL, MLB, US Open Tennis, various soccer rights, the Wimbledon Championships and the Masters golf tournament.
The Company has entered into operating leases for various real estate and equipment needs, including retail outlets and distribution centers for consumer products, broadcast equipment and office space for general and administrative purposes. Rental expense for operating leases during fiscal years
2016
,
2015
and
2014
, including common-area maintenance and contingent rentals, was
$847 million
,
$859 million
and
$883 million
, respectively.
The Company also has contractual commitments for two new cruise ships, creative talent and employment agreements and unrecognized tax benefits. Creative talent and employment agreements include obligations to actors, producers, sports, television and radio personalities and executives.
Contractual commitments for broadcast programming rights, future minimum lease payments under non-cancelable operating leases, cruise ships, creative talent and other commitments totaled
$60.8 billion
at
October 1, 2016
, payable as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcast
Programming
|
|
Operating
Leases
|
|
Other
|
|
Total
|
2017
|
$
|
6,119
|
|
|
$
|
477
|
|
|
$
|
1,880
|
|
|
$
|
8,476
|
|
2018
|
6,015
|
|
|
376
|
|
|
1,006
|
|
|
7,397
|
|
2019
|
6,221
|
|
|
329
|
|
|
502
|
|
|
7,052
|
|
2020
|
6,416
|
|
|
278
|
|
|
486
|
|
|
7,180
|
|
2021
|
6,314
|
|
|
227
|
|
|
206
|
|
|
6,747
|
|
Thereafter
|
19,925
|
|
|
1,419
|
|
|
2,567
|
|
|
23,911
|
|
|
$
|
51,010
|
|
|
$
|
3,106
|
|
|
$
|
6,647
|
|
|
$
|
60,763
|
|
Certain contractual commitments, principally broadcast programming rights and operating leases, have payments that are variable based primarily on revenues and are not included in the table above.
The Company has non-cancelable capital leases, primarily for land and broadcast equipment, which had gross carrying values of
$464 million
and
$469 million
at
October 1, 2016
and
October 3, 2015
, respectively. Accumulated amortization related to these capital leases totaled
$216 million
and
$196 million
at
October 1, 2016
and
October 3, 2015
, respectively. Future payments under these leases as of
October 1, 2016
are as follows:
|
|
|
|
|
2017
|
$
|
35
|
|
2018
|
24
|
|
2019
|
17
|
|
2020
|
15
|
|
2021
|
15
|
|
Thereafter
|
495
|
|
Total minimum obligations
|
601
|
|
Less amount representing interest
|
(407
|
)
|
Present value of net minimum obligations
|
194
|
|
Less current portion
|
(20
|
)
|
Long-term portion
|
$
|
174
|
|
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
October 1, 2016
, the remaining debt service obligation guaranteed by the Company was
$316 million
, of which
$51 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 the Anaheim bonds.
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 about a product, Lean Finely Textured Beef, that was included in ground beef and hamburger meat. Plaintiffs’ complaint sought actual and consequential damages in excess of
$400 million
(which in March 2016 they asserted could be as much as
$1.9 billion
), statutory damages (including treble damages) pursuant to South Dakota’s Agricultural Food Products Disparagement Act, and punitive damages. Trial is set for June 2017. At this time, the Company is not able to predict the ultimate outcome of this matter, nor can it estimate the range of possible loss.
The Company, together with, in some instances, certain of its directors and officers, is a defendant or codefendant in various other legal actions involving copyright, breach of contract and various other claims incident to the conduct of its businesses.
Management does not believe that the Company has incurred a probable material loss by reason of any of the above actions.
Long-Term Receivables and the Allowance for Credit Losses
The Company has accounts receivable with original maturities greater than one year related to the sale of television program rights and vacation ownership units. Allowances for credit losses are established against these receivables as necessary.
The Company estimates the allowance for credit losses related to receivables from the sale of television programs based upon a number of factors, including historical experience and the financial condition of individual companies with which we do business. The balance of television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was
$0.9 billion
as of
October 1, 2016
. Fiscal
2016
activity 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
$0.7 billion
as of
October 1, 2016
. Fiscal
2016
activity related to the allowance for credit losses was not material.
15
Fair Value Measurement
The Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level. See Note 10 for the definitions of fair value and each Level within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 1, 2016
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
Investments
|
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
85
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate
|
|
—
|
|
|
132
|
|
|
—
|
|
|
132
|
|
Foreign exchange
|
|
—
|
|
|
596
|
|
|
—
|
|
|
596
|
|
Other
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate
|
|
—
|
|
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
Foreign exchange
|
|
—
|
|
|
(510
|
)
|
|
—
|
|
|
(510
|
)
|
Other
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Total recorded at fair value
|
|
$
|
85
|
|
|
$
|
207
|
|
|
$
|
—
|
|
|
$
|
292
|
|
Fair value of borrowings
|
|
$
|
—
|
|
|
$
|
19,500
|
|
|
$
|
1,579
|
|
|
$
|
21,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 3, 2015
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Interest rate
|
|
—
|
|
|
101
|
|
|
—
|
|
|
101
|
|
Foreign exchange
|
|
—
|
|
|
910
|
|
|
—
|
|
|
910
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
—
|
|
|
(178
|
)
|
|
—
|
|
|
(178
|
)
|
Other
|
|
—
|
|
|
(38
|
)
|
|
—
|
|
|
(38
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
(96
|
)
|
|
(96
|
)
|
Total recorded at fair value
|
|
$
|
36
|
|
|
$
|
795
|
|
|
$
|
(96
|
)
|
|
$
|
735
|
|
Fair value of borrowings
|
|
$
|
—
|
|
|
$
|
17,036
|
|
|
$
|
752
|
|
|
$
|
17,788
|
|
The fair values of Level 2 derivatives are primarily determined by internal discounted cash flow models that use observable inputs such as interest rates, yield curves and foreign currency exchange rates. Counterparty credit risk, which is mitigated by master netting agreements and collateral posting arrangements with certain counterparties, did not have a material impact on derivative fair value estimates.
Level 2 borrowings, which include commercial paper and U.S. medium-term notes, are valued based on quoted prices for similar instruments in active markets.
The fair value of the Level 3 other liabilities represented the estimated fair value of the contingent consideration for Maker, which was settled in fiscal 2016.
Level 3 borrowings, which include International Theme Park borrowings and other foreign currency denominated borrowings, are generally valued based on historical market transactions, prevailing market interest rates and the Company’s current borrowing cost and credit risk.
The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.
The Company also has assets that are required to be recorded at fair value on a non-recurring basis when the estimated future cash flows provide indicators that the asset may be impaired. During fiscal 2016 and 2015, the Company recorded film production cost impairment charges of
$102 million
and
$65 million
, respectively. At
October 1, 2016
and
October 3, 2015
, the aggregate carrying value of the films for which we prepared the fair value analyses in fiscal 2016 and 2015 was
$297 million
and
$184 million
, respectively. The majority of the fiscal 2016 and all of the fiscal 2015 impairment charges are reported in “Cost of services” in the Consolidated Statements of Income. The balance of the fiscal 2016 charges related to the shutdown of certain international film production operations and are reported in “Restructuring and impairment charges” in the Consolidated Statements of Income. The film impairment charges reflected the excess of the unamortized cost of the impaired films over their estimated fair value using discounted cash flows, which is a Level 3 valuation technique.
Credit Concentrations
The Company monitors its positions with, and the credit quality of, the financial institutions that are counterparties to its financial instruments on an ongoing basis and does not currently anticipate nonperformance by the counterparties.
The Company does not expect that it would realize a material loss, based on the fair value of its derivative financial instruments as of
October 1, 2016
, in the event of nonperformance by any single derivative counterparty. The Company generally enters into derivative transactions only with counterparties that have a credit rating of A- or better and requires collateral in the event credit ratings fall below A- or aggregate exposures exceed limits as defined by contract. In addition, the Company limits the amount of investment credit exposure with any one institution.
The Company does not have material cash and cash equivalent balances with financial institutions that have below investment grade credit ratings. As of
October 1, 2016
, the Company’s balances with individual financial institutions that exceeded 10% of the Company’s total cash and cash equivalents were
34%
of total cash and cash equivalents compared to
31%
as of
October 3, 2015
.
The Company’s trade receivables and financial investments do not represent a significant concentration of credit risk at
October 1, 2016
due to the wide variety of customers and markets into which the Company’s products are sold, their dispersion across geographic areas and the diversification of the Company’s portfolio among issuers.
16
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 October 1, 2016
|
|
Current
Assets
|
|
Other Assets
|
|
Other
Accrued
Liabilities
|
|
Other Long-
Term
Liabilities
|
Derivatives designated as hedges
|
|
|
|
|
|
|
|
Foreign exchange
|
$
|
278
|
|
|
$
|
191
|
|
|
$
|
(209
|
)
|
|
$
|
(163
|
)
|
Interest rate
|
—
|
|
|
132
|
|
|
(13
|
)
|
|
—
|
|
Other
|
3
|
|
|
3
|
|
|
(4
|
)
|
|
—
|
|
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
Foreign exchange
|
125
|
|
|
2
|
|
|
(133
|
)
|
|
(5
|
)
|
Gross fair value of derivatives
|
406
|
|
|
328
|
|
|
(359
|
)
|
|
(168
|
)
|
Counterparty netting
|
(241
|
)
|
|
(199
|
)
|
|
316
|
|
|
124
|
|
Cash collateral (received)/paid
|
(77
|
)
|
|
(44
|
)
|
|
7
|
|
|
—
|
|
Net derivative positions
|
$
|
88
|
|
|
$
|
85
|
|
|
$
|
(36
|
)
|
|
$
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 3, 2015
|
|
Current
Assets
|
|
Other Assets
|
|
Other
Accrued
Liabilities
|
|
Other Long-
Term
Liabilities
|
Derivatives designated as hedges
|
|
|
|
|
|
|
|
Foreign exchange
|
$
|
406
|
|
|
$
|
271
|
|
|
$
|
(54
|
)
|
|
$
|
(17
|
)
|
Interest rate
|
—
|
|
|
101
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
(18
|
)
|
|
(3
|
)
|
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
Foreign exchange
|
146
|
|
|
87
|
|
|
(102
|
)
|
|
(5
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(17
|
)
|
Gross fair value of derivatives
|
552
|
|
|
459
|
|
|
(174
|
)
|
|
(42
|
)
|
Counterparty netting
|
(136
|
)
|
|
(56
|
)
|
|
169
|
|
|
23
|
|
Cash collateral received
|
(238
|
)
|
|
(191
|
)
|
|
—
|
|
|
—
|
|
Net derivative positions
|
$
|
178
|
|
|
$
|
212
|
|
|
$
|
(5
|
)
|
|
$
|
(19
|
)
|
Interest Rate Risk Management
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. In accordance with its policy, the Company targets its fixed-rate debt as a percentage of its net debt between a minimum and maximum percentage. The Company typically uses pay-floating and pay-fixed interest rate swaps to facilitate its interest rate management activities.
The Company designates pay-floating interest rate swaps as fair value hedges of fixed-rate borrowings effectively converting fixed-rate borrowings to variable rate borrowings indexed to LIBOR. As of
October 1, 2016
and
October 3, 2015
, the total notional amount of the Company’s pay-floating interest rate swaps was
$8.3 billion
and
$6.4 billion
, respectively. The following table summarizes adjustments related to fair value hedges included in “Interest income/(expense), net” in the Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Gain (loss) on interest rate swaps
|
$
|
18
|
|
|
$
|
60
|
|
|
$
|
(38
|
)
|
Gain (loss) on hedged borrowings
|
(18
|
)
|
|
(60
|
)
|
|
38
|
|
In addition, the Company realized net benefits of
$94 million
,
$97 million
and
$93 million
for fiscal years
2016
,
2015
and
2014
, respectively, in “Interest income/(expense), net” related to the pay-floating interest rate swaps.
The Company may designate pay-fixed interest rate swaps as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating rate borrowings to fixed-rate borrowings. The unrealized gains or losses from these cash flow hedges are deferred in AOCI and recognized in interest expense as the interest payments occur. The Company did not have pay-fixed interest rate swaps that were designated as cash flow hedges of interest payments at
October 1, 2016
or at
October 3, 2015
, and gains and losses related to pay-fixed swaps recognized in earnings for fiscal years
2016
,
2015
and
2014
were not material.
Foreign Exchange Risk Management
The Company transacts business globally and is subject to risks associated with changing foreign currency exchange rates. The Company’s objective is to reduce earnings and cash flow fluctuations associated with foreign currency exchange rate changes, enabling management to focus on core business issues and challenges.
The Company enters into option and forward contracts that change in value as foreign currency exchange rates change to protect the value of its existing foreign currency assets, liabilities, firm commitments and forecasted but not firmly committed foreign currency transactions. In accordance with policy, the Company hedges its forecasted foreign currency transactions for periods generally not to exceed
four
years within an established minimum and maximum range of annual exposure. The gains and losses on these contracts offset changes in the U.S. dollar equivalent value of the related forecasted transaction, asset, liability or firm commitment. The principal currencies hedged are the euro, Japanese yen, Canadian dollar and British pound. Cross-currency swaps are used to effectively convert foreign currency-denominated borrowings into U.S. dollar denominated borrowings.
The Company designates foreign exchange forward and option contracts as cash flow hedges of firmly committed and forecasted foreign currency transactions. As of
October 1, 2016
and
October 3, 2015
, the notional amounts of the Company’s net foreign exchange cash flow hedges were
$5.6 billion
and
$6.5 billion
, respectively. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of the foreign currency transactions. Gains and losses recognized related to ineffectiveness for fiscal years
2016
,
2015
and
2014
were not material. Net deferred gains recorded in AOCI that will be reclassified to earnings in the next twelve months totaled
$67 million
.
Foreign exchange risk management contracts with respect to foreign currency denominated assets and liabilities are not designated as hedges and do not qualify for hedge accounting. The notional amounts of these foreign exchange contracts at
October 1, 2016
and
October 3, 2015
were
$3.3 billion
and
$3.3 billion
, respectively. The following table summarizes the net foreign exchange gains or losses recognized on foreign currency denominated assets and liabilities and the net foreign exchange gains or losses on the foreign exchange contracts we entered into to mitigate our exposure with respect to foreign currency denominated assets and liabilities for fiscal years
2016
,
2015
and
2014
by corresponding line item in which they are recorded in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
Interest Income/
(Expense), net
|
|
Income Tax Expense
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Net gains (losses) on foreign currency denominated assets and liabilities
|
$
|
2
|
|
|
$
|
(574
|
)
|
|
$
|
(269
|
)
|
|
$
|
(2
|
)
|
|
$
|
42
|
|
|
$
|
24
|
|
|
$
|
49
|
|
|
$
|
40
|
|
|
$
|
34
|
|
Net gains (losses) on foreign exchange risk management contracts not designated as hedges
|
(65
|
)
|
|
558
|
|
|
216
|
|
|
—
|
|
|
(43
|
)
|
|
(24
|
)
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
Net gains (losses)
|
$
|
(63
|
)
|
|
$
|
(16
|
)
|
|
$
|
(53
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
40
|
|
|
$
|
34
|
|
In addition to the amounts in this table, the Company recorded a
$143 million
foreign currency translation loss on net monetary assets denominated in Venezuelan BsF in fiscal 2014 that was reported in “Other expense, net” (see Note 4).
Commodity Price Risk Management
The Company is subject to the volatility of commodities prices, and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The notional amount and fair value of these commodity forward contracts at
October 1, 2016
and
October 3, 2015
were not material. The related gains and losses recognized in earnings were not material for fiscal years
2016
,
2015
and
2014
.
Risk Management – Other Derivatives Not Designated as Hedges
The Company enters into certain other risk management contracts that are not designated as hedges and do not qualify for hedge accounting. These contracts, which include certain swap contracts, are intended to offset economic exposures of the Company and are carried at market value with any changes in value recorded in earnings. The notional amount and fair value of these contracts at
October 1, 2016
and
October 3, 2015
were not material. The related gains and losses recognized in earnings were not material for fiscal years
2016
,
2015
and
2014
.
Contingent Features and Cash Collateral
The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were
$86 million
and
$7 million
at
October 1, 2016
and
October 3, 2015
, respectively.
17
Restructuring and Impairment Charges
The Company recorded
$156 million
,
$53 million
and
$140 million
of restructuring and impairment charges in fiscal years
2016
,
2015
and
2014
, respectively. Charges in fiscal 2016 were primarily due to an investment impairment, asset impairments associated with shutting down certain international film production operations and severance and contract termination costs. Charges in fiscal 2015 were primarily due to a contract termination and severance. Charges in fiscal 2014 were primarily due to severance and radio FCC license impairments.
18
New Accounting Pronouncements
Restricted Cash
In November 2016, the Financial Accounting Standards Board (FASB) issued guidance that requires restricted cash to be presented with cash and cash equivalents in the statement of cash flows. The guidance is required to be adopted retrospectively, and is effective beginning in the first quarter of the Company’s 2019 fiscal year (with early adoption permitted). At October 1, 2016 and October 3, 2015, the Company held restricted cash of
$150 million
and
$456 million
, respectively, primarily associated with collateral received from counterparties to its derivative contracts. The Company’s restricted cash balances are presented in the Consolidated Balance Sheets as Other current assets and Other assets based on the maturity dates of the related derivatives. Under the new guidance, changes in the Company’s restricted cash will continue to be classified as either operating activities or investing activities in the Consolidated Statements of Cash Flows, depending on the nature of the activities that gave rise to the restriction.
Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued guidance that requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs instead of when the asset is sold to an outside party. The new guidance is effective beginning with the first quarter of the Company’s 2019 fiscal year (with early adoption permitted as of the beginning of an annual period). The guidance is required to be adopted retrospectively by recording a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. The Company is assessing the potential impact this guidance will have on its financial statements.
Stock Compensation - Employee Share-based Payments
In March 2016, the FASB issued guidance to amend certain aspects of accounting for employee share-based awards, including accounting for income taxes related to those transactions. This guidance will require recognizing excess tax benefits and deficiencies (that result from an increase or decrease in the fair value of an award from grant date to the vesting date or exercise date) on share-based compensation arrangements in the tax provision, instead of in equity as under the current guidance. In addition, these amounts will be classified as an operating activity in the statement of cash flows, instead of as a financing activity. The Company reported excess tax benefits of approximately
$0.2 billion
,
$0.3 billion
and
$0.3 billion
in fiscal 2016, 2015 and 2014, respectively. In addition, cash paid for shares withheld to satisfy employee taxes will be classified as a financing activity, instead of as an operating activity. Cash paid for employee taxes was approximately
$0.2 billion
,
$0.3 billion
and
$0.3 billion
in fiscal 2016, 2015 and 2014, respectively. The fiscal 2016, 2015 and 2014 amounts of excess tax benefits and cash paid for employee taxes are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement. The guidance is effective beginning in the first quarter of the Company’s 2018 fiscal year (with early adoption permitted) and is required to be adopted as follows:
|
|
•
|
Prospectively for the recognition of excess tax benefits and deficiencies in the tax provision
|
|
|
•
|
Retrospectively or prospectively for the classification of excess tax benefits and deficiencies in the statement of cash flows
|
|
|
•
|
Retrospectively for the classification of cash paid for shares withheld to satisfy employee taxes in the statement of cash flows
|
Leases
In February 2016, the FASB issued a new lease accounting standard, which requires the present value of committed operating lease payments to be recorded as right-of-use lease assets and lease liabilities on the balance sheet. As of October 1, 2016, the Company had an estimated
$3.1 billion
in undiscounted future minimum lease commitments. The Company is currently assessing the impact of the new guidance on its financial statements. The guidance is required to be adopted retrospectively, and is effective beginning in the first quarter of the Company’s 2020 fiscal year (with early adoption permitted).
Income Taxes
In November 2015, the FASB issued guidance to simplify the presentation of deferred income taxes by reporting the net amount of deferred tax assets and liabilities on a jurisdiction by jurisdiction basis as non-current on the balance sheet. The
Company adopted the provisions of this guidance on a prospective basis in the first quarter of fiscal 2016 by reclassifying
$0.8 billion
in current assets and reporting them as a reduction to non-current liabilities.
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance that replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model. The core principle is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received. Since its issuance, the FASB has amended several aspects of the new guidance, including provisions that address revenue recognition associated with the licensing of intellectual property. The new guidance, including the amendments, is effective beginning with the first quarter of the Company’s 2019 fiscal year (with early adoption permitted beginning fiscal year 2018). The guidance may be adopted either by restating all years presented in the Company’s financial statements or by recording the impact of adoption as an adjustment to retained earnings at the beginning of the year of adoption. The Company is assessing the potential impact this guidance will have on its financial statements.
QUARTERLY FINANCIAL SUMMARY
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Q1
(1)
|
|
Q2
(2)
|
|
Q3
(3)
|
|
Q4
(4)
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,244
|
|
|
$
|
12,969
|
|
|
$
|
14,277
|
|
|
$
|
13,142
|
|
Segment operating income
(5)
|
|
4,267
|
|
|
3,822
|
|
|
4,456
|
|
|
3,176
|
|
Net income
|
|
2,910
|
|
|
2,276
|
|
|
2,712
|
|
|
1,892
|
|
Net income attributable to Disney
|
|
2,880
|
|
|
2,143
|
|
|
2,597
|
|
|
1,771
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.73
|
|
|
$
|
1.30
|
|
|
$
|
1.59
|
|
|
$
|
1.10
|
|
Basic
|
|
1.74
|
|
|
1.31
|
|
|
1.60
|
|
|
1.10
|
|
2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,391
|
|
|
$
|
12,461
|
|
|
$
|
13,101
|
|
|
$
|
13,512
|
|
Segment operating income
(5)
|
|
3,545
|
|
|
3,482
|
|
|
4,120
|
|
|
3,534
|
|
Net income
|
|
2,244
|
|
|
2,228
|
|
|
2,639
|
|
|
1,741
|
|
Net income attributable to Disney
|
|
2,182
|
|
|
2,108
|
|
|
2,483
|
|
|
1,609
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.27
|
|
|
$
|
1.23
|
|
|
$
|
1.45
|
|
|
$
|
0.95
|
|
Basic
|
|
1.28
|
|
|
1.24
|
|
|
1.46
|
|
|
0.96
|
|
|
|
(1)
|
Results for the first quarter of fiscal 2016 included the Vice Gain, which had a favorable impact of
$0.13
on earnings per diluted share, partially offset by restructuring and impairment charges (
$0.03
per diluted share). These items resulted in a net positive benefit of
$0.10
on diluted earnings per share.
|
|
|
(2)
|
Results for the second quarter of fiscal 2016 included an adverse impact of
$0.06
on diluted earnings per share due to the Infinity Charge.
|
|
|
(3)
|
Results for the third quarter of fiscal 2016 included restructuring and impairment charges, which had an adverse impact of
$0.03
on diluted earnings per share.
|
|
|
(4)
|
Results for the fourth quarter of fiscal 2016 included a favorable adjustment to the Infinity Charge taken in the second quarter (
$0.01
per diluted share), partially offset by restructuring and impairment charges (
$0.01
per diluted share). Results for the fourth quarter of fiscal 2015 included a non-cash charge in connection with the write-off of a deferred tax asset as a result of the Disneyland Paris recapitalization (
$0.24
per diluted share) and restructuring and impairment charges (
$0.02
per diluted share), which collectively resulted in a net adverse impact of
$0.25
per diluted share.
|
|
|
(5)
|
Segment operating results reflect earnings before the Infinity Charge, corporate and unallocated shared expenses, restructuring and impairment charges, other expense, interest income/(expense), income taxes and noncontrolling interests. Segment operating income includes equity in the income of investees except for the Vice Gain.
|