Walt Disney Co - Annual Report: 2019 (Form 10-K)

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•	Disney, ESPN, Freeform, FX and National Geographic branded domestic cable networks

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

•	Television production and distribution

•	National Geographic magazines

•	A 50% equity investment in A+E Television Networks (A+E)

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

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Advertising - Sales of advertising time/space on our domestic networks and related platforms (“ratings-based ad sales”, which excludes advertising on digital platforms that is not ratings-based), and the sale of advertising time on our domestic television stations. Ratings-based ad sales are generally determined using viewership measured with Nielsen ratings. Non-ratings-based advertising on digital platforms is reported by DTCI.

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

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

•	Selling, general and administrative costs

•	Depreciation and amortization

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(1)	Estimates include traditional MVPD and the majority of digital OTT subscriber counts.

(2)	Because Nielsen Media Research does not measure this channel, estimated subscribers are according to SNL Kagan as of December 2018.

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•	ESPN.com - which delivers sports news, information and video on internet-connected devices, with approximately 20 editions in three languages globally. In the U.S., ESPN.com also features live video streams of ESPN channels to authenticated MVPD subscribers. Non-subscribers have limited access to certain content.

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ESPN App - which delivers scores, news, highlights, short form video, podcasts and live audio, with fourteen editions in three languages globally. In the U.S., the ESPN App also features live video streams of ESPN’s linear channels and exclusive events to authenticated MVPD subscribers. Non-subscribers have limited access to certain content. The ESPN App is available for download on various internet-connected devices.

•	ESPN+ - which is a multi-sports subscription offering available through ESPN.com and the ESPN App

•	ESPN Radio – which distributes talk and play-by-play programming in the U.S. ESPN Radio network programming is carried on approximately 400 terrestrial stations, including four ESPN owned stations in New York, Los Angeles, Chicago and Dallas, and on satellite and internet radio

•	ESPN owns and operates the following events: ESPYs (annual awards show); X Games (winter and summer action sports competitions); and a portfolio of collegiate sporting events including: bowl games, basketball games, softball games and post-season award shows.

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•	ABC Studios - nine returning and five new one-hour dramas, four returning and two new half-hour comedies, and three returning and two new non-scripted series

•	TCFTV and Fox21 - thirteen returning and ten new one-hour dramas, ten returning and ten new half-hour comedies, and one new non-scripted series

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(1)	Based on Nielsen Media Research, U.S. Television Household Estimates, January 1, 2019

•	A&E – which offers entertainment programming including original reality and scripted series

•	HISTORY – which offers original series and event-driven specials

•	Lifetime and Lifetime Real Women – which offer female-focused programming

•	Lifetime Movie Network (LMN) – which offers female-focused movies

•	FYI – which offers contemporary lifestyle programming

(1)	Estimates include traditional MVPD and the majority of digital OTT subscriber counts.

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Licensing of television and radio stations. Each of the television and radio stations we own must be licensed by the FCC. These licenses are granted for periods of up to eight years, and we must obtain renewal of licenses as they expire in order to continue operating the stations. We (and the acquiring entity in the case of a divestiture) must also obtain FCC approval whenever we seek to have a license transferred in connection with the acquisition or divestiture of a station. The FCC may decline to renew or approve the transfer of a license in certain circumstances and may delay renewals while permitting a licensee to continue operating. Although we have received such renewals and approvals in the past or have been permitted to continue operations when renewal is delayed, there can be no assurance that this will be the case in the future.

•	Television and radio station ownership limits. The FCC imposes limitations on the number of television stations and radio stations we can own in a specific market, on the combined number of television and radio stations we can own in a single market and on the aggregate percentage of the national audience that can be reached by television stations we own. Currently:

▪	FCC regulations may restrict our ability to own more than one television station in a market, depending on the size and nature of the market. We do not own more than one television station in any market.

▪	Federal statutes permit our television stations in the aggregate to reach a maximum of 39% of the national audience. Pursuant to the most recent decision by the FCC as to how to calculate compliance with this limit, our eight stations reach approximately 20% of the national audience.

▪	FCC regulations in some cases impose restrictions on our ability to acquire additional radio or television stations in the markets in which we own radio stations. We do not believe any such limitations are material to our current operating plans.

•	Dual networks. FCC rules currently prohibit any of the four major broadcast television networks — ABC, CBS, Fox and NBC — from being under common ownership or control.

•	Regulation of programming. The FCC regulates broadcast programming by, among other things, banning “indecent” programming, regulating political advertising and imposing commercial time limits during children’s programming. Penalties for broadcasting indecent programming can be over $400 thousand per indecent utterance or image per station.

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Cable and satellite carriage of broadcast television stations. With respect to cable systems operating within a television station’s Designated Market Area, FCC rules require that every three years each television station elect either “must carry” status, pursuant to which cable operators generally must carry a local television station in the station’s market, or “retransmission consent” status, pursuant to which the cable operator must negotiate with the television station to obtain the consent of the television station prior to carrying its signal. Under the Satellite Home Viewer Improvement Act and its successors, including most recently the STELA Reauthorization Act (STELAR), which also requires the “must carry” or “retransmission consent” election, satellite carriers are permitted to retransmit a local television station’s signal into its local market with the consent of the local television station. The ABC owned television stations have historically elected retransmission consent. Portions of these satellite laws are set to expire on December 31, 2019.

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Cable and satellite carriage of programming. The Communications Act and FCC rules regulate some aspects of negotiations regarding cable and satellite retransmission consent, and some cable and satellite companies have sought regulation of additional aspects of the carriage of programming on cable and satellite systems. New legislation, court action or regulation in this area could have an impact on the Company’s operations.

•	Parks & Experiences:

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

◦	Disney Cruise Line, Disney Vacation Club, National Geographic Expeditions (73% ownership interest), Adventures by Disney and Aulani, a Disney Resort & Spa in Hawaii

•	Consumer Products:

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

◦	Sale of branded merchandise through retail, online and wholesale businesses, and development and publishing of books, comic books and magazines (except National Geographic, which is reported in Media Networks).

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

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

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

•	Merchandise licensing and retail:

◦	Merchandise licensing - Royalties from intellectual property licensing

◦	Retail - Sales of merchandise at The Disney Stores and through branded internet shopping sites, as well as, to wholesalers

•	Parks licensing and other - Revenues from sponsorships and co-branding opportunities and real estate rent and sales. In addition, we earn royalties on Tokyo Disney Resort revenues.

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

•	Selling, general and administrative costs

•	Depreciation and amortization

•	In recent years, over 75% of the Company’s capital spend has been at our parks and experiences business, which is principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and systems infrastructure. The various investment plans discussed in the “Parks & Experiences” section are based on management’s current expectations. Actual investment may differ.

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•	Motion picture production and distribution under the Walt Disney Pictures, Twentieth Century Fox, Marvel, Lucasfilm, Pixar, Fox Searchlight Pictures and Blue Sky Studios banners

•	Development, production and licensing of live entertainment events on Broadway and around the world (stage plays)

•	Music production and distribution

•	Post-production services, which include visual and audio effects through Industrial Light & Magic and Skywalker Sound

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

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

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

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

•	Selling, general and administrative costs

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•	Depreciation and amortization

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•	Branded international television networks and channels, which include Disney, ESPN, Fox, National Geographic and Star (International Channels)

•	Direct-to-consumer (DTC) streaming services, which include Disney +, ESPN+, Hotstar and Hulu

•	Other digital content distribution platforms and services

•	Equity investments:

◦	A 50% ownership interest in Endemol Shine Group

◦	A 20% ownership interest (49% economic interest) in Seven TV

◦	A 30% effective ownership interest in Tata Sky

◦	A 21% effective ownership interest in Vice Group Holdings, Inc. (Vice). Vice operates Viceland, which is owned 50% by Vice and 50% by A+E.

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

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

•	Subscription fees - Fees charged to customers/subscribers for our streaming and technology services

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

•	Selling, general and administrative costs

•	Depreciation and amortization

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(1)	Reflects each unique subscriber that has access to one or more of these branded channels. If a subscriber to each ESPN branded channel was counted, the total estimated subscribers is 142 million as of September 2019. Subscribers for ESPN at September 2018 were counted on this basis.

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•	Hulu licenses content from the Company’s television studios through various arrangements including fixed and variable licensing fees and a percentage of addressable ad sales. Hulu also licenses the linear stream of our broadcast and cable channels.

•	Disney+ and our International Channels license content from the Company’s film and television studios.

•	Our broadcast and cable channels license content from the Company’s film studios.

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•	Our studio operations and media businesses compete to obtain creative, performing and business talent, sports and other programming, story properties, advertiser support and market share with other studio operations, broadcast and cable networks, SVOD providers and other new sources of broadband delivered content.

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Our broadcast and cable networks and stations and direct-to-consumer offerings compete for the sale of advertising time with other broadcast, cable and satellite services, as well as with newspapers, magazines, billboards and radio stations. In addition, we increasingly face competition for advertising sales from internet and mobile delivered content, which offer advertising delivery technologies that are more targeted than can be achieved through traditional means.

•	Our cable networks compete for carriage of their programming with other programming providers.

•	Our theme parks and resorts compete for guests with all other forms of entertainment, lodging, tourism and recreation activities.

•	Our studio operations compete for customers with all other forms of entertainment.

•	Our interactive media operations compete with other licensors and publishers of console, online and mobile games and other types of home entertainment.

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Our direct-to-consumer businesses compete for customers with competitors’ direct-to-consumer offerings, all other forms of media and all other forms of entertainment, as well as for technology, creative, performing and business talent and for content. Competition in each of these areas may increase as a result of technological developments and changes in market structure, including consolidation of suppliers of resources and distribution channels. Increased competition may divert consumers from our creative or other products, or to other products or other forms of entertainment, which could reduce our revenue or increase our marketing costs. Competition for the acquisition of resources can increase the cost of producing our products and services or deprive us of talent necessary to produce high quality creative material. Such competition may also reduce, or limit growth in, prices for our products and services, including advertising rates and subscription fees at our media networks, parks and resorts admissions and room rates, and prices for consumer products from which we derive license revenues.

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•	U.S. FCC regulation of our television and radio networks, our national programming networks and our owned television stations. See Item 1 — Business — Media Networks, Federal Regulation.

•	Federal, state and foreign privacy and data protection laws and regulations.

•	Regulation of the safety and supply chain of consumer products and theme park operations.

•	Environmental protection regulations.

•	Imposition by foreign countries of trade restrictions, restrictions on the manner in which content is currently licensed and distributed, ownership restrictions, currency exchange controls or motion picture or television content requirements, investment obligations or quotas.

•	Domestic and international labor laws, tax laws or currency controls.

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Revenues in our Media Networks segment are subject to seasonal advertising patterns, changes in viewership levels and timing of program sales. In general, advertising revenues are somewhat higher during the fall and somewhat lower during the summer months. Affiliate fees are typically recognized ratably throughout the year. Effective at the beginning of fiscal 2019, the Company adopted ASC 606, which changed the timing of affiliate revenue recognition for certain contracts, which may result in higher revenue in our first fiscal quarter.

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Revenues in our Parks and Resorts segment fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities and seasonal consumer purchasing behavior, which generally results in increased revenues during the Company’s first and fourth fiscal quarters. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early-winter and spring-holiday periods. In addition, licensing revenues fluctuate with the timing and performance of our theatrical releases and cable programming broadcasts.

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

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Direct-to-Consumer & International revenues fluctuate based on: changes in subscriber levels; the timing and performance of releases of our digital media content; viewership levels on our cable channels and digital platforms; and the demand for sports and our content. Each of these may depend on the availability of content, which varies from time to time throughout the year based on, among other things, sports seasons and content production schedules.

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•	combining the companies’ corporate functions;

•	combining the businesses of the Company and TFCF in a manner that permits us to achieve the synergies anticipated to result from the TFCF acquisition, the failure of which would result in the anticipated benefits of the TFCF acquisition not being realized in the time frame currently anticipated or at all;

•	maintaining existing agreements with customers, distributors, providers, talent and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers, talent and vendors;

•	determining whether and how to address possible differences in corporate cultures and management philosophies;

•	integrating the companies’ administrative and information technology infrastructure; and

•	developing products and technology that allow value to be unlocked in the future.

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ITEM 1B.	Unresolved Staff Comments

ITEM 2.	Properties

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(1)	Mr. Iger was appointed Chairman of the Board and Chief Executive Officer effective March 13, 2012. He was President and Chief Executive Officer from October 2, 2005 through that date.

(2)	Ms. McCarthy was appointed Senior Executive Vice President and Chief Financial Officer effective June 30, 2015. She was previously Executive Vice President, Corporate Real Estate, Alliances and Treasurer of the Company from 2000 to 2015.

(3)	Ms. Parker was appointed Senior Executive Vice President and Chief Human Resources Officer effective August 20, 2017. She was previously Executive Vice President and Chief Human Resources Officer from 2009.

(4)	Ms. Mucha was appointed Senior Executive Vice President Corporate Communications effective August 2016. She was previously Executive Vice President Corporate Communications from March 2005.

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(1)	231,641 shares were purchased on the open market to provide shares to participants in the Walt Disney Investment Plan (WDIP). These purchases were not made pursuant to a publicly announced repurchase plan or program.

(2)	Not applicable as the Company no longer has a stock repurchase plan or program.

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(1)

On March 20, 2019, the Company acquired TFCF for cash and Disney shares (see Note 4 to the Consolidated Financial Statements). TFCF and Hulu's financial results have been consolidated since the date of acquisition and had a number of adverse impacts on fiscal 2019 results, the most significant of which were amortization expense related to recognition of TFCF and Hulu intangible assets and fair value step-up on film and television costs ($0.74 per diluted share), an impact from shares issued upon the TFCF acquisition ($0.74 per diluted share), restructuring and impairment charges ($0.55 per diluted share) and TFCF and Hulu operating results ($0.27 per diluted share). Additional impacts included a non-cash gain from remeasuring our initial 30% interest in Hulu to fair value ($2.22 per diluted share), equity investment impairments ($0.25 per diluted share) and a charge for the extinguishment of a portion of the debt originally assumed in the TFCF acquisition ($0.24 per diluted share). Cash provided by continuing operating activities reflected payments for tax obligations that arose from the spin-off of Fox Corporation in connection with the TFCF acquisition and the sale of the RSNs acquired with TFCF and cash used in continuing investing activities reflected a cash payment of $35.7 billion paid to acquire TFCF, offset by the $25.7 billion in cash and cash equivalents assumed in the TFCF acquisition.

(2)

Fiscal 2018 results include a net benefit from the Tax Act ($1.11 per diluted share) and the benefit from a reduction in the Company’s fiscal 2018 U.S. federal statutory income tax rate ($0.75 per diluted share) (see Note 10 to the Consolidated Financial Statements). In addition, fiscal 2018 included gains on the sales of real estate and property rights ($0.28 per diluted share) and an adverse impact from equity investment impairments ($0.11 per diluted share).

(3)	Fiscal 2017 results include a non-cash net gain in connection with the acquisition of a controlling interest in BAMTech ($0.10 per diluted share) (see Note 4 to the Consolidated Financial Statements).

(4)	Fiscal 2016 results include the Company’s share of a net gain recognized by A+E in connection with an acquisition of an interest in Vice ($0.13 per diluted share).

(5)	Fiscal 2015 results include the write-off of a deferred tax asset as a result of a recapitalization at Disneyland Paris ($0.23 per diluted share).

(6)	In fiscal 2015, the Company began paying dividends on a semiannual basis. Accordingly, fiscal 2015 includes dividend payments related to fiscal 2014 and the first half of fiscal 2015.

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•	Consolidated Results and Non-Segment Items

•	Business Segment Results — 2019 vs. 2018

•	Business Segment Results — 2018 vs. 2017

•	Corporate and Unallocated Shared Expenses

•	Restructuring in Connection With the Acquisition of TFCF

•	Significant Developments

•	Liquidity and Capital Resources

•	Contractual Obligations, Commitments and Off Balance Sheet Arrangements

•	Critical Accounting Policies and Estimates

•	Forward-Looking Statements

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•	A net benefit of $1.7 billion, which reflected a $2.1 billion benefit from remeasuring our deferred tax balances to the new statutory rate (Deferred Remeasurement), partially offset by a charge of $0.4 billion for a one-time tax on certain accumulated foreign earnings (Deemed Repatriation Tax). This benefit had an impact of approximately 11.5 percentage points on the effective income tax rate.

•	A reduction in the Company’s fiscal 2018 U.S. statutory federal income tax rate to 24.5% from 35.0% in fiscal 2017. Net of state tax and other related effects, the reduction in the statutory rate had an impact of approximately 8.2 percentage points on the effective income tax rate.

•	The Hulu Gain of $4.8 billion

•	A benefit of $74 million consisting of $46 million from insurance recoveries related to a legal matter and a gain of $28 million recognized on the settlement of preexisting relationships with TFCF pursuant to acquisition accounting guidance

•	A benefit of $34 million from the Tax Act

•	Amortization of $1.6 billion related to TFCF and Hulu intangible assets and fair value step-up on film and television costs

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•	Restructuring and impairment charges of $1.2 billion

•	Impairments of $538 million on equity investments

•	A charge of $511 million for the extinguishment of a portion of debt originally assumed in the TFCF acquisition

•	A benefit of $1.7 billion from the Tax Act Deferred Remeasurement, net of the Deemed Repatriation Tax

•	A benefit of $601 million comprising $560 million in gains from the sales of real estate and property rights, $38 million from insurance recoveries in connection with the settlement of a fiscal 2017 litigation matter and $3 million from an adjustment related to a non-cash gain recognized in fiscal 2017 for the acquisition of a controlling interest in BAMTech

•	Impairments of $210 million for Vice and Villages Nature equity investments

•	Restructuring and impairment charges of $33 million

•	A non-cash net gain of $255 million in connection with the acquisition of a controlling interest in BAMTech

•	A charge, net of committed insurance recoveries, of $177 million in connection with the settlement of litigation

•	Restructuring and impairment charges of $98 million

(1)	Tax benefit/expense adjustments are determined using the tax rate applicable to the individual item affecting comparability.

(2)	EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.

(3)	Includes amortization of intangibles related to TFCF equity investees.

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(1)	Includes amortization of intangibles related to TFCF equity investees

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(1)	Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverage and merchandise at the hotels. Hotel statistics include rentals of Disney Vacation Club units.

(2)	Per capita guest spending growth rate is stated on a constant currency basis. Per room guest spending is stated at the fiscal 2018 average foreign exchange rate.

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(1)	Per room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverage and merchandise at the hotels. Resort statistics include rentals of Disney Vacation Club units.

(2)	Per capita guest spending growth rate is stated on a constant currency basis. Per room guest spending is stated at the fiscal 2017 average foreign exchange rate.

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(1)	Borrowings and reductions of borrowings are reported net.

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

(3)	The other activity is due to the sale of the RSNs in fiscal 2019.

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(1)	Excludes market value adjustments, which reduce recorded borrowings by $31 million. Includes interest payments based on contractual terms for fixed rate debt and on current interest rates for variable rate debt. In 2023, the Company has the ability to call a debt instrument prior to its scheduled maturity, which if exercised by the Company would reduce future interest payments by $1.0 billion.

(2)	Primarily contracts for the construction of three 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.

(3)	Contractual commitments include the following:

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(1)	Financial Statements and Schedules

(2)	Exhibits

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

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1	Description of the Business and Segment Information

•	Disney, ESPN, Freeform, FX and National Geographic branded domestic cable networks

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

•	Television production and distribution

•	National Geographic magazines

•	A 50% equity investment in A+E Television Networks (A+E)

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

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Advertising - Sales of advertising time/space on our domestic networks and related platforms (“ratings-based ad sales”, which excludes advertising on digital platforms that is not ratings-based) and the sale of advertising time on our domestic television stations. Ratings-based ad sales are generally determined using viewership measured with Nielsen ratings. Non-ratings-based advertising on digital platforms is reported by DTCI.

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

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

•	Selling, general and administrative costs

•	Depreciation and amortization

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•	Parks & Experiences:

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

◦	Disney Cruise Line, Disney Vacation Club, National Geographic Expeditions (73% ownership interest), Adventures by Disney and Aulani, a Disney Resort & Spa in Hawaii

•	Consumer Products:

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

◦	Sale of branded merchandise through retail, online and wholesale businesses, and development and publishing of books, comic books and magazines (except National Geographic, which is reported in Media Networks)

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

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

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

•	Merchandise licensing and retail:

◦	Merchandise licensing - Royalties from intellectual property licensing

◦	Retail - Sales of merchandise at The Disney Stores and through branded internet shopping sites, as well as, to wholesalers

•	Parks licensing and other - Revenues from sponsorships and co-branding opportunities and real estate rent and sales. In addition, we earn royalties on Tokyo Disney Resort revenues.

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

•	Selling, general and administrative costs

•	Depreciation and amortization

•	Motion picture production and distribution under the Walt Disney Pictures, Twentieth Century Fox, Marvel, Lucasfilm, Pixar, Fox Searchlight Pictures and Blue Sky Studios banners

•	Development, production and licensing of live entertainment events on Broadway and around the world (stage plays)

•	Music production and distribution

•	Post-production services, which include visual and audio effects through Industrial Light & Magic and Skywalker Sound

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

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

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

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

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•	Selling, general and administrative costs

•	Depreciation and amortization

•	Branded international television channels, which include Disney, ESPN, Fox, National Geographic and Star (International Channels)

•	Direct-to-consumer (DTC) streaming services, which include Disney+, ESPN+, Hotstar and Hulu. Disney+ launched in November 2019 in the U.S. and 4 other countries and further launches planned throughout 2020 and 2021.

•	Other digital content distribution platforms and services including branded apps and websites, the Disney Movie Club and Disney Digital Network and streaming technology support services

•	Equity investments:

◦	A 50% ownership interest in Endemol Shine Group, which is a multi-platform content provider with creative operations across the world’s major markets

◦	A 20% ownership interest (49% economic interest) in Seven TV, which operates an advertising-supported, free-to-air Disney Channel in Russia

◦	A 30% effective ownership interest in Tata Sky, which owns and operates a direct-to-home satellite distribution platform in India

◦	An approximate 20% effective ownership interest in Vice Group Holdings, Inc. (Vice), which is a media company that targets millennial audiences. Vice operates Viceland, which is owned 50% by Vice and 50% by A+E.

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

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

•	Subscription fees - Fees charged to customers/subscribers for our DTC services

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

•	Selling, general and administrative costs

•	Depreciation and amortization

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(1)	Intersegment content transaction are as follows:

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

(3)	For fiscal 2019, amortization of intangible assets and fair value step-up on film and television costs were $1,043 million and $552 million, respectively.

(4)	Impairment of equity investments for fiscal 2019 primarily reflects the impairments of Vice Group Holding, Inc. and of an investment in a cable channel at A+E Television Networks ($353 million and $170 million, respectively). Impairment of equity investments for fiscal 2018 reflects impairments of Vice Group Holding, Inc. and Villages Nature ($157 million and $53 million, respectively).

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(5)	Equity method investments included in identifiable assets by segment are as follows:

(6)	Primarily fixed assets and cash and cash equivalents.

(7)	Long-lived assets are total assets less: current assets, long-term receivables, deferred taxes, financial investments and the fair value of derivative instruments.

2	Summary of Significant Accounting Policies

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•	Affiliate fees

•	Advertising revenues

•	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

•	Amortization of programming and production costs and participations and residuals costs

•	Distribution costs

•	Operating labor

•	Facilities and infrastructure costs

•	The sale of food, beverage and merchandise at our retail locations

•	The sale of DVDs and Blu-ray discs

•	The sale of books, comic books and magazines

•	Costs of goods sold

•	Amortization of programming and production costs and participations and residuals costs

•	Distribution costs

•	Operating labor

•	Retail occupancy costs

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

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

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Advertising - Sales of advertising time/space on our television networks, digital platforms and television stations are recognized as revenue, net of agency commissions, when commercials are aired. For contracts that contain a guaranteed number of impressions, revenues are recognized based on impressions delivered. When the guaranteed number of impressions is not met (“ratings shortfall”), revenues are not recognized for the ratings shortfall until the additional impressions are delivered.

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

•	Resorts and vacations - Sales of hotel room nights and cruise vacations and rentals of vacation club properties are recognized as revenue as the services are provided to the guest. Sales of vacation club properties are recognized as revenue upon the later of when title transfers to the customer or when construction activity is deemed complete.

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

•	TV/SVOD distribution licensing - Fixed license fees charged for the right to use our television and motion picture productions are recognized as revenue when the content is available for use by the licensee. License fees based on the underlying sales of the licensee are recognized as revenue as earned based on the contractual royalty rate applied to the licensee sales.

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

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

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

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

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

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3	Revenues

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

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

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

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

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4	Acquisitions

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(1)	As reported in our March 30, 2019 Form 10-Q.

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(1)	The impact of eliminations on revenues and net income as a result of consolidating TFCF was not material.

(2)	As a result of consolidating Hulu, the elimination of our legacy operations’ revenues for sales to Hulu was approximately $0.6 billion and the elimination of TFCF’s revenues for sales to Hulu was approximately $0.4 billion. The impact of the eliminations on net income was not material.

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(1)	Primarily represents the allocation of BAMTech goodwill to the segments based on the final purchase price allocation and also includes the impact of updates to our initial estimated fair value of intangible assets related to BAMTech.

(2)	Represents the reallocation of goodwill as a result of the Company recasting its segments as a result of a strategic reorganization during fiscal 2018.

(3)	Represents the acquisition of TFCF and consolidation of Hulu.

5	Other Income

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6	Investments

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7	International Theme Parks

(1)	The total assets of the Asia Theme Parks was $7 billion at September 28, 2019 and $8 billion at September 29, 2018 including parks, resorts and other property of $7 billion at both September 28, 2019 and September 29, 2018. The total liabilities of the Asia Theme Parks were $2 billion at both September 28, 2019 and September 29, 2018.

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8	Film and Television Costs and Advances

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9	Borrowings

(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 September 28, 2019; 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 September 28, 2019.

(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 discounts, costs and purchase accounting adjustments totaling a net premium of $2.5 billion and a net cost of $121 million at September 28, 2019 and September 29, 2018, respectively.

(5)	Includes market value adjustments for debt with qualifying hedges, which increase borrowings by $31 million and reduce borrowings by $304 million at September 28, 2019 and September 29, 2018, respectively.

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10	Income Taxes

•	Effective January 1, 2018, the U.S. corporate federal statutory income tax rate was reduced from 35.0% to 21.0%. Because of our fiscal year end, the Company’s fiscal 2018 statutory federal tax rate was 24.5% and is 21.0% in fiscal 2019 and thereafter.

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The Company remeasured its U.S. federal deferred tax assets and liabilities at the rate that the Company expects to be in effect when those deferred taxes will be realized (either 24.5% for fiscal 2018 or 21.0% thereafter) (Deferred Remeasurement). The Company recognized a benefit of approximately $2.2 billion from the Deferred Remeasurement, the majority of which was recognized in the first quarter of fiscal 2018.

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A one-time tax is due on certain accumulated foreign earnings (Deemed Repatriation Tax), which is payable over eight years. The effective tax rate is generally 15.5% on the portion of the earnings held in cash and cash equivalents and 8% on the remainder. The Company recognized a charge for the Deemed Repatriation Tax of approximately $0.4 billion, the majority of which was recognized in the first quarter of fiscal 2018. Generally there will no longer be a U.S. federal income tax cost arising from the repatriation of foreign earnings.

•	The Company will generally be eligible to claim an immediate deduction for investments in qualified fixed assets acquired and film and television productions commenced after September 27, 2017 and placed in service by the end of fiscal 2022. The immediate deduction phases out for assets placed in service in fiscal years 2023 through 2027.

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•	The domestic production activity deduction is eliminated in fiscal 2019 and thereafter.

•	Starting in fiscal 2019, certain foreign derived income is taxed in the U.S. at an effective rate of approximately 13% (which increases to approximately 16% in 2025) rather than the general statutory rate of 21%.

•	Starting in fiscal 2019, certain foreign earnings are taxed at a minimum effective rate of approximately 13%, which increases to approximately 16% in 2025. The Company’s policy is to expense the tax on these earnings in the period the earnings are taxable in the U.S.

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(1)	Reflects the impact from the Deferred Remeasurement, net of the Deemed Repatriation Tax

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11	Pension and Other Benefit Programs

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(1)	Includes 2.9 million shares of Company common stock valued at $373 million (2% of total plan assets) and 2.8 million shares valued at $332 million (2% of total plan assets) at September 28, 2019 and September 29, 2018, respectively.

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(1)	Estimated future benefit payments are net of expected Medicare subsidy receipts of $84 million.

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•	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 a participating employer chooses to stop participating in these multiemployer plans, the employer may be required to pay those plans an amount based on the underfunded status of the plan.

12	Equity

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(1)

At the beginning of fiscal 2019, the Company adopted new FASB accounting guidance, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, and reclassified $691 million from AOCI to retained earnings. In addition, at the beginning of fiscal 2019, the Company adopted new FASB accounting guidance, Recognition and Measurement of Financial Assets and Liabilities, and reclassified $24 million ($15 million after tax) of market value adjustments on investments previously recorded in AOCI to retained earnings.

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13	Equity-Based Compensation

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(1)	Includes TFCF Performance RSUs converted to Company RSUs in connection with the TFCF acquisition (see Note 4). In fiscal 2019, the Company recognized $307 million of equity based compensation in connection with the TFCF acquisition.

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

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(1)	Number of options expected to vest is total unvested options less estimated forfeitures.

(1)	Includes 0.4 million Performance RSUs.

(2)	Reflects TFCF Performance RSUs replaced with Company RSUs in connection with the TFCF acquisition that generally vest in three years.

(3)	Includes 1.5 million Performance RSUs.

(4)	Excludes Performance RSUs issued in September 2018, for which vesting is subject to service conditions and the number of units vesting is subject to the discretion of the CEO. At September 28, 2019, the maximum number of these Performance RSUs that could be issued upon vesting is 0.2 million.

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14	Detail of Certain Balance Sheet Accounts

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15	Commitments and Contingencies

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16	Fair Value Measurement

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17	Derivative Instruments

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(1)	Includes $37 million and $41 million of gains on terminated interest rate swaps as of September 28, 2019 and September 29, 2018, respectively.

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(1)	Primarily recorded in revenue.

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18	Restructuring and Impairment Charges

19	Condensed Consolidating Financial Information

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20	New Accounting Pronouncements

•	Revenues from Contracts with Customers - See Note 3

•	Intra-Entity Transfers of Assets Other Than Inventory - See Note 10

•	Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost - See Note 11

•	Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income - See Note 12

•	Recognition and Measurement of Financial Assets and Liabilities - See Note 12

•	Targeted Improvements to Accounting for Hedging Activities - The adoption of the new guidance did not have a material impact on our consolidated financial statements

•	Arrangements contain a lease

•	The Company’s lease arrangements are operating or capital leases (financing)

•	Initial direct costs should be capitalized

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•	Existing land easements are leases

•	Eliminates the limitation on capitalization of production costs for episodic content, aligning the capitalization model with film content;

•	Requires production costs that are being amortized based on estimated usage to be reviewed and updated each reporting period, with any changes in estimated usage applied prospectively; and

•	Requires produced and acquired programming costs to be tested for impairment using the lowest level of identifiable cash flows based on the predominant monetization strategy for the content (i.e., monetized individually or in a group)

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(1)	Results for the first quarter of fiscal 2018 included an estimated net benefit from the Deferred Remeasurement, partially offset by the Deemed Repatriation Tax as a result of the Tax Act (Tax Act Estimate), which had a favorable impact of $1.00 on diluted earnings per share, and a gain from the sale of property rights, which had a favorable impact of $0.03 on diluted earnings per share.

(2)

Results for the second quarter of fiscal 2019 included a non-cash gain in connection with the acquisition of Hulu (Hulu Gain), which had a favorable impact of $2.46 on diluted earnings per share. This favorable impact was partially offset by restructuring and impairment charges, which had an adverse impact of $0.33 on diluted earnings per share, an impairment in our investment in Vice, which had an adverse impact of $0.18 on diluted earnings per share, and amortization related to TFCF and Hulu intangible assets and fair value step-up on film and television costs, which had an adverse impact of $0.05 on diluted earnings per share.

(3)	Results for the second quarter of fiscal 2018 included a net benefit from updating the Tax Act Estimate, which had a favorable impact of $0.09 on diluted earnings per share.

(4)

Results for the third quarter of fiscal 2019 included amortization related to TFCF and Hulu intangible assets and fair value step-up on film and television costs, which had an adverse impact of $0.34 on diluted earnings per share, restructuring and impairment charges, which had a net adverse impact of $0.09 on diluted earnings per share, equity investment impairments, which had an adverse impact of $0.08 on diluted earnings per share, and an adjustment to the Hulu Gain, which had an adverse impact of $0.05 on diluted earnings per share.

(5)	Results for the third quarter of fiscal 2018 included a net benefit from updating the Tax Act Estimate, which had a favorable impact of $0.07 on diluted earnings per share.

(6)

Results for the fourth quarter of fiscal 2019 included amortization related to TFCF and Hulu intangible assets and fair value step-up on film and television costs, which had an adverse impact of $0.30 on diluted earnings per share, a charge for the settlement of a portion of the debt originally assumed in the TFCF acquisition, which had an adverse impact of $0.22 on diluted earnings per share, and restructuring and impairment charges, which had an adverse impact of $0.13 on diluted earnings per share.

(7)

Results for the fourth quarter of fiscal 2018 included a gain in connection with the sale of real estate, which had a favorable impact of $0.25 on diluted earnings per share, partially offset by equity investment impairments, which had an adverse impact of $0.11 on diluted earnings per share, and the impact of updating the Tax Act Estimate, which had an adverse impact of $0.06 on diluted earnings per share.

(8)	On March 20, 2019, the Company began consolidating the results of TFCF and Hulu (see Note 4 to the Consolidated Financial Statements). As a result, revenues and operating results in the third and fourth quarter of fiscal 2019 reflected the impact of this transaction.

(9)	Segment operating results reflect earnings before the corporate and unallocated shared expenses, restructuring and impairment charges, other income, net, interest expense, net, income taxes and noncontrolling interests.