FY2014_Q3_10Q_DOC


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
 
Commission File Number 1-11605
June 28, 2014
 
 
 
 
 
 
 
 
Incorporated in Delaware
 
I.R.S. Employer Identification
 
 
No. 95-4545390
500 South Buena Vista Street, Burbank, California 91521
(818) 560-1000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer (do not check if smaller reporting company)
 
¨
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
There were 1,716,544,546 shares of common stock outstanding as of July 30, 2014.




PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited; in millions, except per share data)
 
 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Revenues
$
12,466

 
$
11,578

 
$
36,424

 
$
33,473

Costs and expenses
(8,968
)
 
(8,574
)
 
(27,280
)
 
(26,182
)
Restructuring and impairment charges

 
(60
)
 
(67
)
 
(121
)
Other income/(expense), net

 

 
(31
)
 
(92
)
Interest income/(expense), net
(50
)
 
(83
)
 
61

 
(209
)
Equity in the income of investees
222

 
232

 
678

 
527

Income before income taxes
3,670

 
3,093

 
9,785

 
7,396

Income taxes
(1,251
)
 
(1,059
)
 
(3,406
)
 
(2,303
)
Net income
2,419

 
2,034

 
6,379

 
5,093

Less: Net income attributable to noncontrolling interests
(174
)
 
(187
)
 
(377
)
 
(351
)
Net income attributable to The Walt Disney Company (Disney)
$
2,245

 
$
1,847

 
$
6,002

 
$
4,742

 
 
 
 
 
 
 
 
Earnings per share attributable to Disney:
 
 
 
 
 
 
 
Diluted
$
1.28

 
$
1.01

 
$
3.40

 
$
2.61

Basic
$
1.30

 
$
1.02

 
$
3.43

 
$
2.64

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Diluted
1,748

 
1,821

 
1,767

 
1,816

Basic
1,732

 
1,802

 
1,748

 
1,794

 
 
 
 
 
 
 
 
Dividends declared per share
$

 
$

 
$
0.86

 
$
0.75

See Notes to Condensed Consolidated Financial Statements

2



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
 
 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net income
$
2,419

 
$
2,034

 
$
6,379

 
$
5,093

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Market value adjustments for investments
28

 
43

 
(27
)
 
65

Market value adjustments for hedges
(34
)
 
35

 
(67
)
 
205

Pension and postretirement medical plan adjustments
24

 
75

 
88

 
215

Foreign currency translation and other
(3
)
 
(58
)
 
(14
)
 
(77
)
Other comprehensive income/(loss)
15

 
95

 
(20
)
 
408

Comprehensive income
2,434

 
2,129

 
6,359

 
5,501

Less: Net income attributable to noncontrolling interests
(174
)
 
(187
)
 
(377
)
 
(351
)
Less: Other comprehensive (income)/loss attributable to noncontrolling interests
22

 
(11
)
 
38

 
(26
)
Comprehensive income attributable to Disney
$
2,282

 
$
1,931

 
$
6,020

 
$
5,124

See Notes to Condensed Consolidated Financial Statements





3


THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except per share data)
 
June 28,
2014
 
September 28,
2013
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
4,090

 
$
3,931

Receivables
7,543

 
6,967

Inventories
1,425

 
1,487

Television costs and advances
1,095

 
634

Deferred income taxes
480

 
485

Other current assets
572

 
605

Total current assets
15,205

 
14,109

Film and television costs
5,025

 
4,783

Investments
2,858

 
2,849

Parks, resorts and other property
 
 
 
Attractions, buildings and equipment
41,934

 
41,192

Accumulated depreciation
(23,615
)
 
(22,459
)
 
18,319

 
18,733

Projects in progress
3,441

 
2,476

Land
1,253

 
1,171

 
23,013

 
22,380

Intangible assets, net
7,268

 
7,370

Goodwill
27,924

 
27,324

Other assets
2,430

 
2,426

Total assets
$
83,723

 
$
81,241

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and other accrued liabilities
$
6,379

 
$
6,803

Current portion of borrowings
3,216

 
1,512

Unearned royalties and other advances
3,756

 
3,389

Total current liabilities
13,351

 
11,704

 
 
 
 
Borrowings
12,920

 
12,776

Deferred income taxes
4,360

 
4,050

Other long-term liabilities
4,480

 
4,561

Commitments and contingencies (Note 11)

 

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

 

Common stock, $.01 par value
    Authorized – 4.6 billion shares, Issued – 2.8 billion shares
34,123

 
33,440

Retained earnings
52,235

 
47,758

Accumulated other comprehensive loss
(1,169
)
 
(1,187
)
 
85,189

 
80,011

Treasury stock, at cost, 1.1 billion shares at June 28, 2014 and
    1.0 billion shares at September 28, 2013
(39,669
)
 
(34,582
)
Total Disney Shareholders' equity
45,520

 
45,429

Noncontrolling interests
3,092

 
2,721

Total equity
48,612

 
48,150

Total liabilities and equity
$
83,723

 
$
81,241


See Notes to Condensed Consolidated Financial Statements

4



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
 
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
6,379

 
$
5,093

Depreciation and amortization
1,698

 
1,633

Gains on sales of investments and dispositions
(285
)
 
(245
)
Deferred income taxes
304

 
163

Equity in the income of investees
(678
)
 
(527
)
Cash distributions received from equity investees
538

 
526

Net change in film and television costs and advances
(993
)
 
(357
)
Equity-based compensation
308

 
305

Other
33

 
249

Changes in operating assets and liabilities:
 
 
 
Receivables
(543
)
 
(3
)
Inventories
61

 
78

Other assets
(73
)
 
(3
)
Accounts payable and other accrued liabilities
(288
)
 
(328
)
Income taxes
214

 
133

Cash provided by operations
6,675

 
6,717

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Investments in parks, resorts and other property
(2,248
)
 
(1,809
)
Sales of investments/proceeds from dispositions
382

 
367

Acquisitions
(402
)
 
(2,310
)
Other
(24
)
 
90

Cash used in investing activities
(2,292
)
 
(3,662
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Commercial paper borrowings/(repayments), net
1,253

 
(2,000
)
Borrowings
2,180

 
3,900

Reduction of borrowings
(1,549
)
 
(817
)
Dividends
(1,508
)
 
(1,324
)
Repurchases of common stock
(5,087
)
 
(2,694
)
Proceeds from exercise of stock options
348

 
518

Other
273

 
(19
)
Cash used in financing activities
(4,090
)
 
(2,436
)
 
 
 
 
Impact of exchange rates on cash and cash equivalents
(134
)
 
(74
)
 
 
 
 
Increase in cash and cash equivalents
159

 
545

Cash and cash equivalents, beginning of period
3,931

 
3,387

Cash and cash equivalents, end of period
$
4,090

 
$
3,932

See Notes to Condensed Consolidated Financial Statements

5



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Quarter Ended
 
June 28, 2014
 
June 29, 2013
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
44,889

 
$
2,751

 
$
47,640

 
$
42,089

 
$
2,055

 
$
44,144

Comprehensive income
2,282

 
152

 
2,434

 
1,931

 
198

 
2,129

Equity compensation activity
184

 

 
184

 
316

 

 
316

Common stock repurchases
(1,833
)
 

 
(1,833
)
 
(800
)
 

 
(800
)
Contributions

 
167

 
167

 

 
121

 
121

Distributions and other
(2
)
 
22

 
20

 

 
(3
)
 
(3
)
Ending balance
$
45,520

 
$
3,092

 
$
48,612

 
$
43,536

 
$
2,371

 
$
45,907

See Notes to Condensed Consolidated Financial Statements



6



THE WALT DISNEY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions)
 
 
Nine Months Ended
 
June 28, 2014
 
June 29, 2013
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
 
Disney
Shareholders
 
Non-
controlling
Interests
 
Total
Equity
Beginning balance
$
45,429

 
$
2,721

 
$
48,150

 
$
39,759

 
$
2,199

 
$
41,958

Comprehensive income
6,020

 
339

 
6,359

 
5,124

 
377

 
5,501

Equity compensation activity
668

 

 
668

 
816

 

 
816

Dividends
(1,508
)
 

 
(1,508
)
 
(1,324
)
 

 
(1,324
)
Common stock repurchases
(5,087
)
 

 
(5,087
)
 
(2,694
)
 

 
(2,694
)
Acquisition of Lucasfilm

 

 

 
1,855

 
6

 
1,861

Contributions

 
608

 
608

 

 
302

 
302

Distributions and other
(2
)
 
(576
)
 
(578
)
 

 
(513
)
 
(513
)
Ending balance
$
45,520

 
$
3,092

 
$
48,612

 
$
43,536

 
$
2,371

 
$
45,907

See Notes to Condensed Consolidated Financial Statements



7



THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
 
1.
Principles of Consolidation
These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. We believe that we have included all normal recurring adjustments necessary for a fair presentation of the results for the interim period. Operating results for the quarter and nine months ended June 28, 2014 are not necessarily indicative of the results that may be expected for the year ending September 27, 2014. Certain reclassifications have been made in the prior-year financial statements to conform to the current-year presentation.
These financial statements should be read in conjunction with the Company’s 2013 Annual Report on Form 10-K.
The Company enters into relationships or investments with other entities in which it does not have majority ownership. In certain instances, the entity in which the Company has a relationship or investment may be a variable interest entity (VIE). A VIE is consolidated in the financial statements if the Company has the power to direct activities that most significantly impact the economic performance of the VIE and has the obligation to absorb losses (as defined by ASC 810-10-25-38) or the right to receive benefits from the VIE that could potentially be significant to the VIE. Disneyland Paris, Hong Kong Disneyland Resort (HKDL) 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, although the Company has less than a 50% direct ownership interest in the International Theme Parks, the Company has consolidated the International Theme Parks in its financial statements.
The terms “Company,” “we,” “us,” and “our” are used in this report to refer collectively to the parent company and the subsidiaries through which our various businesses are actually conducted.
 
2.
Segment Information
The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the Chief Executive Officer in deciding how to allocate resources and in assessing performance. The Company reports the performance of its operating segments including equity in the income of investees. Equity in the income of investees included in segment operating results is as follows:
 
 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Media Networks
 
 
 
 
 
 
 
Cable Networks
$
230

 
$
237

 
$
710

 
$
609

Broadcasting
(8
)
 
(5
)
 
(32
)
 
(28
)
Equity in the income of investees included in segment operating income
$
222

 
$
232

 
$
678

 
$
581


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

8

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


 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Revenues (1):
 
 
 
 
 
 
 
Media Networks
$
5,511

 
$
5,352

 
$
15,935

 
$
15,410

Parks and Resorts
3,980

 
3,678

 
11,139

 
10,371

Studio Entertainment
1,807

 
1,590

 
5,500

 
4,473

Consumer Products
902

 
775

 
2,913

 
2,551

Interactive
266

 
183

 
937

 
668

 
$
12,466

 
$
11,578

 
$
36,424

 
$
33,473

Segment operating income (loss) (1):
 
 
 
 
 
 
 
Media Networks
$
2,296

 
$
2,300

 
$
5,884

 
$
5,376

Parks and Resorts
848

 
689

 
1,976

 
1,649

Studio Entertainment
411

 
201

 
1,295

 
553

Consumer Products
273

 
219

 
977

 
765

Interactive
29

 
(58
)
 
98

 
(103
)
 
$
3,857

 
$
3,351

 
$
10,230

 
$
8,240


(1) Studio Entertainment segment revenues and operating income include an allocation of Consumer Products revenues, which is meant to reflect royalties on sales of merchandise based on certain film properties. The increase to Studio Entertainment revenues and operating income and corresponding decrease to Consumer Products revenues and operating income totaled $66 million and $62 million for the quarters ended June 28, 2014 and June 29, 2013, respectively, and $187 million and $165 million for the nine months ended June 28, 2014 and June 29, 2013, respectively.
A reconciliation of segment operating income to income before income taxes is as follows:
 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Segment operating income
$
3,857

 
$
3,351

 
$
10,230

 
$
8,240

Corporate and unallocated shared expenses
(137
)
 
(115
)
 
(408
)
 
(367
)
Restructuring and impairment charges

 
(60
)
 
(67
)
 
(121
)
Other income/(expense), net

 

 
(31
)
 
(92
)
Interest income/(expense), net
(50
)
 
(83
)
 
61

 
(209
)
Hulu Equity Redemption

 

 

 
(55
)
Income before income taxes
$
3,670

 
$
3,093

 
$
9,785

 
$
7,396


 
3.
Acquisitions
Maker Studios
On May 7, 2014, the Company acquired Maker Studios, Inc. (Maker), a leading network of online video content on YouTube, for approximately $500 million of cash consideration, subject to certain conditions and adjustments. Maker shareholders may also receive up to $450 million of additional cash if Maker achieves certain performance targets for calendar years 2014 and 2015.  The Company has recognized a $198 million liability for the fair value of the contingent consideration (determined by a probability weighting of potential payouts). Subsequent changes in the estimated fair value, if any, will be recognized in earnings. The Company is in the process of finalizing the valuation of the assets acquired, liabilities assumed and the fair value of the contingent consideration. The majority of the purchase price has initially been 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, which are included in the Company's Condensed Consolidated Statement of Income from the closing through June 28, 2014, are not material.

9

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


Lucasfilm
On December 21, 2012, the Company acquired Lucasfilm Ltd. LLC (Lucasfilm), a privately held entertainment company. This acquisition will allow Disney to utilize Lucasfilm's content across our multiple platforms, businesses and markets, which we believe will generate growth as well as significant long-term value.
Under the terms of the merger agreement, Disney issued 37.1 million shares and made a cash payment of $2.2 billion.  Based on the $50.00 per share closing price of Disney shares on December 21, 2012, the transaction had a value of $4.1 billion.
The following table summarizes our allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed. The excess of the purchase price over those fair values and the related deferred income tax liability was allocated to goodwill, which is not deductible for tax purposes.
(in billions)
Estimated 
Fair Value
Intangible assets
$
2.6

Goodwill
2.3

Deferred income tax liability
(0.8
)
 
$
4.1

Intangible assets primarily consist of intellectual property based on the Star Wars franchise with an estimated useful life of approximately 40 years. The goodwill reflects the value to Disney from leveraging Lucasfilm intellectual property across our distribution channels, taking advantage of Disney's established global reach.

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

Goodwill
The changes in the carrying amount of goodwill for the nine months ended June 28, 2014 are as follows:
 
Media
Networks
 
Parks and
Resorts
 
Studio
Entertainment
 
Consumer
Products
 
Interactive
 
Unallocated
 
Total
Balance at Sept. 28, 2013
$
16,071

 
$
253

 
$
6,591

 
$
2,942

 
$
1,467

 
$

 
$
27,324

Acquisitions (1)

 

 

 

 

 
572

 
572

Dispositions

 

 

 

 

 

 

Other, net (2)
45

 
23

 
53

 
21

 
(114
)
 

 
28

Balance at June 28, 2014
$
16,116

 
$
276

 
$
6,644

 
$
2,963

 
$
1,353

 
$
572

 
$
27,924

(1) Unallocated amount relates to Maker. The Company is in the process of determining the allocation of the goodwill from the Maker acquisition to its operating segments.
(2) Includes the reallocation of $120 million of goodwill from the Interactive segment to other operating segments as a result of restructuring the Interactive segment.
The carrying amount of goodwill at June 28, 2014 and September 28, 2013 includes accumulated impairments of $29 million at Interactive.



10

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


4.
Dispositions and Other Income/(Expense)

There were no amounts recorded in other income/(expense) for the quarters ended June 28, 2014 and June 29, 2013. Other income/(expense) for the nine-month periods includes the following:
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
Venezuela foreign currency loss
$
(143
)
 
$

Gain on sale of property
77

 

Celador litigation charge

 
(321
)
Gain on sale of equity interest in ESPN STAR Sports

 
219

Other (1)
35

 
10

Other income/(expense), net
$
(31
)
 
$
(92
)

(1) Includes income of $29 million representing a portion of a settlement of an affiliate contract dispute in the current year.

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 centralize the purchase and sale of all foreign currency at an official rate determined by the Government, currently 6.3 BsF per U.S. dollar. Although the Company has historically been unable to repatriate its cash at the official rate, we translated our net monetary assets at the official rate through December 28, 2013. In January 2014, the Government announced that currency arising from certain transactions could be exchanged at an alternative rate (SICAD 1), which fluctuates based on Government-run auctions. The ability to convert currency in the SICAD 1 market is dependent on market factors and Government discretion, and the Company does not believe it can successfully convert material amounts of currency at this rate. In March 2014, the Government launched a new currency exchange market (SICAD 2), which allowed entities to submit a daily application to exchange foreign currency with financial institutions that are registered with the Venezuelan central bank. Foreign currency exchange rates under SICAD 2 fluctuate daily. The ability to convert in the SICAD 2 market is also dependent on market factors including the availability of U.S. dollars. Although a small portion of the Company's cash may be eligible to be exchanged at SICAD 1, the majority is only eligible for exchange at SICAD 2. Accordingly, as of March 29, 2014, the Company began translating its BsF denominated net monetary assets at the SICAD 2 rate resulting in a loss of $143 million in the second quarter of the current year based on the SICAD 2 rate at March 29, 2014, which was 50.9 BsF per U.S. dollar. The SICAD 2 rate on June 28, 2014 was 50.0 BsF per U.S. dollar and the Company had net monetary assets of approximately 1.2 billion BsF on June 28, 2014.

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

ESPN STAR Sports
On November 7, 2012, the Company sold its 50% equity interest in ESPN STAR Sports (ESS) to the joint venture partner of ESS for $335 million resulting in a gain of $219 million ($125 million after tax and allocation to noncontrolling interest).



11

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


5.
Borrowings
During the nine months ended June 28, 2014, the Company’s borrowing activity was as follows: 
 
September 28,
2013
 
Additions
 
Payments
 
Other
Activity(1)
 
June 28,
2014
Commercial paper borrowings
$

 
$
1,253

 
$

 
$

 
$
1,253

U.S. medium-term notes
13,155

 
1,997

 
(1,450
)
 
8

 
13,710

European medium-term notes and other foreign currency denominated borrowings
509

 
168

 
(93
)
 
(4
)
 
580

HKDL borrowings
275

 

 
(16
)
 
(5
)
 
254

Other
349

 
15

 
(12
)
 
(13
)
 
339

Total
$
14,288

 
$
3,433

 
$
(1,571
)
 
$
(14
)
 
$
16,136


(1) Primarily market value adjustments for debt with qualifying hedges and foreign currency translation adjustments.
The Company has bank facilities with a syndicate of lenders to support commercial paper borrowings. The following is a summary of the bank facilities at June 28, 2014:
 
Committed
Capacity
 
Capacity
Used
 
Unused
Capacity
Facility expiring March 2015
$
1,500

 
$

 
$
1,500

Facility expiring June 2017
2,250

 

 
2,250

Facility expiring March 2019
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. The facilities contain only one financial covenant, relating to interest coverage, which the Company met on June 28, 2014 by a significant margin, and specifically exclude certain entities, including the International Theme Parks, from any representations, covenants, or events of default.

Interest income/(expense)
Interest and investment income and interest expense are reported net in the Condensed Consolidated Statements of Income and consist of the following (net of capitalized interest):
 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Interest expense
$
(74
)
 
$
(93
)
 
$
(222
)
 
$
(268
)
Interest and investment income
24

 
10

 
283

 
59

Interest income/(expense), net
$
(50
)
 
$
(83
)
 
$
61

 
$
(209
)

Interest and investment income includes gains and losses on the sale of available-for-sale and non-publicly traded cost method investments, investment impairments and interest earned on cash and cash equivalents and certain receivables. During the nine months ended June 28, 2014, net gains on available-for-sale and cost method investments totaled $151 million and $53 million, respectively. Gains on investments in the current quarter and prior year were not material.


12

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


6.
International Theme Park Investments
The Company has a 51% effective ownership interest in the operations of Disneyland Paris, a 48% ownership interest in the operations of HKDL and a 43% ownership interest in the operations of Shanghai Disney Resort, all of which are VIEs consolidated in the Company’s financial statements. See Note 1 for the Company's policy on consolidating VIEs.
The following tables present summarized balance sheet information for the Company as of June 28, 2014 and September 28, 2013, reflecting the impact of consolidating the International Theme Parks balance sheets.
 
As of June 28, 2014
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
3,114

 
$
976

 
$
4,090

Other current assets
10,812

 
303

 
11,115

Total current assets
13,926

 
1,279

 
15,205

Investments/Advances
6,926

 
(4,068
)
 
2,858

Parks, resorts and other property
16,966

 
6,047

 
23,013

Other assets
42,607

 
40

 
42,647

Total assets
$
80,425

 
$
3,298

 
$
83,723

 
 
 
 
 
 
Current portion of borrowings
$
3,216

 
$

 
$
3,216

Other current liabilities
9,421

 
714

 
10,135

Total current liabilities
12,637

 
714

 
13,351

Borrowings
12,666

 
254

 
12,920

Deferred income taxes and other long-term liabilities
8,664

 
176

 
8,840

Equity
46,458

 
2,154

 
48,612

Total liabilities and equity
$
80,425

 
$
3,298

 
$
83,723

 
 
As of September 28, 2013
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash and cash equivalents
$
3,325

 
$
606

 
$
3,931

Other current assets
9,896

 
282

 
10,178

Total current assets
13,221

 
888

 
14,109

Investments/Advances
6,415

 
(3,566
)
 
2,849

Parks, resorts and other property
17,117

 
5,263

 
22,380

Other assets
41,879

 
24

 
41,903

Total assets
$
78,632

 
$
2,609

 
$
81,241

 
 
 
 
 
 
Current portion of borrowings
$
1,512

 
$

 
$
1,512

Other current liabilities
9,622

 
570

 
10,192

Total current liabilities
11,134

 
570

 
11,704

Borrowings
12,501

 
275

 
12,776

Deferred income taxes and other long-term liabilities
8,466

 
145

 
8,611

Equity
46,531

 
1,619

 
48,150

Total liabilities and equity
$
78,632

 
$
2,609

 
$
81,241



13

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


The following table presents summarized income statement information of the Company for the nine months ended June 28, 2014, reflecting the impact of consolidating the International Theme Parks income statements.
 
Before 
International
Theme Parks
Consolidation(1)
 
International
Theme Parks
and Adjustments
 
Total
Revenues
$
34,785

 
$
1,639

 
$
36,424

Cost and expenses
(25,565
)
 
(1,715
)
 
(27,280
)
Restructuring and impairment charges
(67
)
 

 
(67
)
Other income/(expense), net
(31
)
 

 
(31
)
Interest income/(expense), net
94

 
(33
)
 
61

Equity in the income of investees
625

 
53

 
678

Income before income taxes
9,841

 
(56
)
 
9,785

Income taxes
(3,406
)
 

 
(3,406
)
Net income
$
6,435

 
$
(56
)
 
$
6,379

 
(1) 
These amounts include the International Theme Parks under the equity method of accounting. As such, royalty and management fee income from these operations is included in Revenues and our share of their net income/(loss) is included in Equity in the income of investees. There were $54 million of royalties and management fees recognized for the nine months ended June 28, 2014.
 
The following table presents summarized cash flow statement information of the Company for the nine months ended June 28, 2014, reflecting the impact of consolidating the International Theme Parks cash flow statements. 
 
Before 
International
Theme Parks
Consolidation
 
International
Theme Parks
and Adjustments
 
Total
Cash provided by operations
$
6,446

 
$
229

 
$
6,675

Investments in parks, resorts and other property
(1,192
)
 
(1,056
)
 
(2,248
)
Cash (used in)/provided by other investing activities
(636
)
 
592

 
(44
)
Cash (used in)/provided by financing activities
(4,698
)
 
608

 
(4,090
)
Impact of exchange rates on cash and cash equivalents
(131
)
 
(3
)
 
(134
)
Change in cash and cash equivalents
(211
)
 
370

 
159

Cash and cash equivalents, beginning of period
3,325

 
606

 
3,931

Cash and cash equivalents, end of period
$
3,114

 
$
976

 
$
4,090

 
Disneyland Paris
The Company has provided Disneyland Paris €1.7 billion ($2.3 billion) of intercompany loans and a line of credit totaling €250 million ($340 million). The balance outstanding under the line of credit was €100 million ($136 million) at June 28, 2014.
Hong Kong Disneyland Resort
In July 2009, the Company entered into a capital realignment and expansion plan for HKDL with the Government of the Hong Kong Special Administrative Region (HKSAR), HKDL’s majority shareholder. The expansion cost approximately $0.5 billion, was completed in 2013 and was financed equally by the Company and HKSAR. As a result the Company’s equity interest in HKDL increased from 43% to 48%.
In addition, HKSAR holds a right to receive additional shares over time if HKDL exceeds certain return on asset performance targets.  The amount of additional shares HKSAR can receive varies to the extent certain performance targets are exceeded but is capped on both an annual and cumulative basis. Based on the number of shares currently outstanding, these additional shares could decrease the Company’s equity interest to no less than 38% over a period no shorter than 18 years. HKDL may begin to exceed the performance targets in fiscal 2014, in which case HKSAR would be entitled to receive

14

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


additional equity interests beginning in 2015. The maximum additional interest which HKSAR can receive in 2015 would reduce the Company's equity interest by approximately 1 percentage point.
In February 2014, HKDL announced a plan to build a third hotel at the resort expected to open in 2017 at a cost of approximately $550 million. In July 2014, HKSAR Legislative Council approved the financing of the hotel construction, in which the Company will provide approximately $219 million of equity contributions and HKSAR will convert an equal amount of its outstanding loan to HKDL into equity. Additionally, the Company and HKSAR will provide shareholder loans of up to approximately $149 million and $104 million, respectively. The loans will mature on dates from fiscal 2022 through fiscal 2025 and bear interest at a rate of three month HIBOR plus 2%.
Shanghai Disney Resort
In fiscal 2011, the Company and Shanghai Shendi (Group) Co., Ltd. (Shendi) received Chinese central government approval of an agreement to build and operate a Disney Resort (Shanghai Disney Resort) in the Pudong district of Shanghai for a planned investment of approximately 29 billion yuan ($4.7 billion). Shanghai Disney Resort is owned by a joint venture, in which Shendi owns 57% and the Company owns 43%. An additional joint venture, in which the Company has a 70% interest and Shendi a 30% interest, is responsible for creating, constructing and operating Shanghai Disney Resort. Construction on the project, which includes a theme park, two hotels and a retail, dining and entertainment area, began in April 2011, and the resort opening date is expected to be announced in early calendar 2015.
In March 2014, the Company and Shendi received Chinese central government approval of an agreement to increase the planned investment by approximately 5 billion yuan ($0.8 billion), primarily to fund additional attractions, entertainment and other offerings to increase capacity at the theme park. The total investment in Shanghai Disney Resort will be funded in accordance with each partner’s ownership percentage, with approximately 67% from equity contributions and 33% from shareholder loans.

7.
Pension and Other Benefit Programs
The components of net periodic benefit cost are as follows: 
 
Pension Plans
 
Postretirement Medical Plans
 
Quarter Ended
 
Nine Months Ended
 
Quarter Ended
 
Nine Months Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Service costs
$
71

 
$
86

 
$
213

 
$
258

 
$
3

 
$
4

 
$
8

 
$
13

Interest costs
121

 
109

 
365

 
326

 
16

 
17

 
49

 
50

Expected return on plan assets
(161
)
 
(151
)
 
(484
)
 
(452
)
 
(9
)
 
(8
)
 
(27
)
 
(23
)
Amortization of prior-year service costs
4

 
2

 
11

 
7

 

 
(1
)
 
(1
)
 
(2
)
Recognized net actuarial loss/(gain)
37

 
105

 
110

 
313

 
(2
)
 
10

 
(6
)
 
30

Net periodic benefit cost
$
72

 
$
151

 
$
215

 
$
452

 
$
8

 
$
22

 
$
23

 
$
68

During the nine months ended June 28, 2014, the Company made contributions to its pension and postretirement medical plans totaling $263 million. The Company does not anticipate making any material contributions to its pension and postretirement medical plans during the remainder of fiscal 2014. Final minimum pension plan funding requirements for fiscal 2014 will be determined based on our January 1, 2014 funding actuarial valuation, which will be available by the end of the fourth quarter of fiscal 2014.


15

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


8.
Earnings Per Share
Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period and are calculated using the treasury stock method for equity-based compensation awards (Awards). A reconciliation of the weighted average number of common and common equivalent shares outstanding and Awards excluded from the diluted earnings per share calculation, as they were anti-dilutive, are as follows: 
 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Shares (in millions):
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding (basic)
1,732

 
1,802

 
1,748

 
1,794

Weighted average dilutive impact of Awards
16

 
19

 
19

 
22

Weighted average number of common and common equivalent shares outstanding (diluted)
1,748

 
1,821

 
1,767

 
1,816

Awards excluded from diluted earnings per share
6

 

 
7

 
3

 
9.
Equity
On December 4, 2013, the Company declared a $0.86 per share dividend ($1.5 billion) related to fiscal 2013 for shareholders of record on December 16, 2013, which was paid on January 16, 2014. The Company paid a $0.75 per share dividend ($1.3 billion) during the first quarter of fiscal 2013 related to fiscal 2012.
During the nine months ended June 28, 2014, the Company repurchased 68 million shares of its common stock for $5.1 billion. As of June 28, 2014, the Company had remaining authorization in place to repurchase 93 million additional shares. The repurchase program does not have an expiration date.


16

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


The following table summarizes the changes in each component of accumulated other comprehensive income (loss) (AOCI) including our proportional share of equity method investee amounts, net of 37% estimated tax:
 
 
 
 
 
Unrecognized
Pension and 
Postretirement
Medical 
Expense
 
Foreign
Currency
Translation
and Other
 
AOCI
 
Market Value Adjustments
 
 
Investments, net
 
Cash Flow Hedges
 
Balance at March 29, 2014
$
40

 
$
50

 
$
(1,207
)
 
$
(89
)
 
$
(1,206
)
Quarter Ended June 28, 2014:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
29

 
(24
)
 

 
19

 
24

Reclassifications of net (gains) losses to net income
(1
)
 
(10
)
 
24

 

 
13

Balance at June 28, 2014
$
68

 
$
16

 
$
(1,183
)
 
$
(70
)
 
$
(1,169
)
 
 
 
 
 
 
 
 
 
 
Balance at March 30, 2013
$
25

 
$
118

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

 
60

 

 
(69
)
 
34

Reclassifications of net (gains) losses to net income

 
(25
)
 
75

 

 
50

Balance at June 29, 2013
$
68

 
$
153

 
$
(3,019
)
 
$
(86
)
 
$
(2,884
)
 
 
 
 
 
 
 
 
 
 
Balance at September 28, 2013
$
95

 
$
83

 
$
(1,271
)
 
$
(94
)
 
$
(1,187
)
Nine Months Ended June 28, 2014:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
69

 
(26
)
 
15

 
24

 
82

Reclassifications of net (gains) losses to net income
(96
)
 
(41
)
 
73

 

 
(64
)
Balance at June 28, 2014
$
68

 
$
16

 
$
(1,183
)
 
$
(70
)
 
$
(1,169
)
 
 
 
 
 
 
 
 
 
 
Balance at September 29, 2012
$
3

 
$
(52
)
 
$
(3,234
)
 
$
17

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

 
245

 
(6
)
 
(109
)
 
202

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

 
6

 
180

Balance at June 29, 2013
$
68

 
$
153

 
$
(3,019
)
 
$
(86
)
 
$
(2,884
)


17

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


Details about AOCI components reclassified to net income are as follows:
Gains/(losses) in net income:
 
Affected line item in the Condensed Consolidated Statements of Income:
 
Quarter Ended
 
Nine Months Ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Investments, net
 
Interest income/(expense), net
 
$
2

 
$

 
$
153

 
$
11

Estimated tax
 
Income taxes
 
(1
)
 

 
(57
)
 
(4
)
 
 
 
 
1

 

 
96

 
7

 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
Primarily revenue
 
16

 
40

 
65

 
64

Estimated tax
 
Income taxes
 
(6
)
 
(15
)
 
(24
)
 
(24
)
 
 
 
 
10

 
25

 
41

 
40

 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement medical expense
 
Primarily included in the computation of net periodic benefit cost (see Note 7)
 
(38
)
 
(119
)
 
(116
)
 
(350
)
Estimated tax
 
Income taxes
 
14

 
44

 
43

 
129

 
 
 
 
(24
)
 
(75
)
 
(73
)
 
(221
)
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation and other
 
Other income/(expense), net
 

 

 

 
(10
)
Estimated tax
 
Income taxes
 

 

 

 
4

 
 
 
 

 

 

 
(6
)
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
 
 
$
(13
)
 
$
(50
)
 
$
64

 
$
(180
)
At June 28, 2014, the Company held available-for-sale investments in net unrecognized gain positions totaling $66 million and no investments in significant unrecognized loss positions. At September 28, 2013, the Company held available-for-sale investments in net unrecognized gain positions totaling $156 million and no investments in significant unrecognized loss positions.

10.
Equity-Based Compensation
Compensation expense related to stock options, stock appreciation rights and restricted stock units (RSUs) is as follows:
 
Quarter Ended
 
Nine Months Ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Stock options/rights (1)
$
25

 
$
25

 
$
76

 
$
78

RSUs
77

 
76

 
237

 
236

Total equity-based compensation expense (2)
$
102

 
$
101

 
$
313

 
$
314

Equity-based compensation expense capitalized during the period
$
10

 
$
14

 
$
39

 
$
43

 
(1) 
Includes stock appreciation rights.

(2) 
Equity-based compensation expense is net of capitalized equity-based compensation and excludes amortization of previously capitalized equity-based compensation costs. During the quarter and nine months ended June 28, 2014, amortization of previously capitalized equity-based compensation totaled $10 million and $37 million, respectively. During the quarter and nine months ended June 29, 2013, amortization of previously capitalized equity-based compensation totaled $14 million and $51 million, respectively.
Unrecognized compensation cost related to unvested stock options/rights and RSUs totaled approximately $184 million and $569 million, respectively, as of June 28, 2014.

18

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


The weighted average grant date fair values of options issued during the nine months ended June 28, 2014 and June 29, 2013 were $19.21 and $12.38, respectively.
During the nine months ended June 28, 2014, the Company made equity compensation grants consisting of 5.7 million stock options and 5.1 million RSUs, of which 0.3 million RSUs included market and/or performance conditions.

11.
Commitments and Contingencies
Legal Matters
Beef Products, Inc. v. American Broadcasting Companies, Inc. On September 13, 2012, plaintiffs filed an action in South Dakota state court against certain subsidiaries and employees of the Company and others, asserting claims for defamation arising from alleged false statements and implications, statutory and common law product disparagement, and tortious interference with existing and prospective business relationships. The claims arise out of ABC News reports published in March and April 2012 that discussed the subject of labeling requirements for production processes related to a product one plaintiff produces that is added to ground beef before sale to consumers. Plaintiffs seek actual and consequential damages in excess of $400 million, statutory damages (including treble damages) pursuant to South Dakota's Agricultural Food Products Disparagement Act, and punitive damages. On July 9, 2013, the Company moved in state court to dismiss all claims and on March 27, 2014, the state court dismissed certain common law disparagement counts as preempted by South Dakota’s produce disparagement statute, but denied the motion on the remaining claims. On April 23, 2014, the Company petitioned the South Dakota Supreme Court to allow a discretionary appeal seeking reversal of the state court's order permitting the remaining common law disparagement claims to proceed and also seeking reversal of its decision to allow certain claims to proceed as defamation claims. On May 22, 2014, the South Dakota Supreme Court denied the Company’s petition. On May 23, 2014, the Company answered the Complaint. 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.
Contractual Guarantees
The Company has guaranteed bond issuances by the Anaheim Public Authority that were used by the City of Anaheim to finance construction of infrastructure and a public parking facility adjacent to the Disneyland Resort. Revenues from sales, occupancy and property taxes from the Disneyland Resort and non-Disney hotels are used by the City of Anaheim to repay the bonds. In the event of a debt service shortfall, the Company will be responsible to fund the shortfall. As of June 28, 2014, the remaining debt service obligation guaranteed by the Company was $339 million, of which $72 million was principal. To the extent that tax revenues exceed the debt service payments in subsequent periods, the Company would be reimbursed for any previously funded shortfalls. To date, tax revenues have exceeded the debt service payments for these bonds.
Long-Term Receivables and the Allowance for Credit Losses
The Company has accounts receivable with original maturities greater than one year related to the sale of television program rights within the Media Networks segment and vacation ownership units within the Parks and Resorts segment. Allowances for credit losses are established against these receivables as necessary.
The Company estimates the allowance for credit losses related to receivables from the sale of television programs based upon a number of factors, including historical experience and the financial condition of individual companies with which we do business. The balance of television program sales receivables recorded in other non-current assets, net of an immaterial allowance for credit losses, was $0.8 billion as of June 28, 2014. The activity in the current period related to the allowance for credit losses was not material.
The Company estimates the allowance for credit losses related to receivables from sales of its vacation ownership units based primarily on historical collection experience. Estimates of uncollectible amounts also consider the economic environment and the age of receivables. The balance of mortgage receivables recorded in other non-current assets, net of a related allowance for credit losses of approximately 5%, was approximately $0.7 billion as of June 28, 2014. The activity in the current period related to the allowance for credit losses was not material.

19

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


 Income Taxes
During the nine months ended June 28, 2014, the Company decreased its gross unrecognized tax benefits by $365 million to $755 million with a resulting $19 million reduction to income tax expense.
In the next twelve months, it is reasonably possible that our unrecognized tax benefits could change due to resolutions of open tax matters.  These resolutions would reduce our unrecognized tax benefits by approximately $58 million, of which $42 million would reduce our income tax expense and effective tax rate if recognized.
 
12. Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and is classified in 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 Company’s assets and liabilities measured at fair value are summarized in the following tables by fair value measurement Level: 
 
Fair Value Measurement at June 28, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
108

 
$

 
$

 
$
108

Derivatives
 
 
 
 
 
 
 
Interest rate

 
144

 

 
144

Foreign exchange

 
218

 

 
218

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(75
)
 

 
(75
)
Foreign exchange

 
(248
)
 

 
(248
)
Other

 

 
(198
)
 
(198
)
Total recorded at fair value
$
108

 
$
39

 
$
(198
)
 
$
(51
)
Fair value of borrowings
$

 
$
15,620

 
$
966

 
$
16,586

 

20

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


 
Fair Value Measurement at September 28, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 Investments
$
305

 
$

 
$

 
$
305

Derivatives
 
 
 
 
 
 
 
Interest rate

 
170

 

 
170

Foreign exchange

 
267

 

 
267

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate

 
(94
)
 

 
(94
)
Foreign exchange

 
(201
)
 

 
(201
)
Total recorded at fair value
$
305

 
$
142

 
$

 
$
447

Fair value of borrowings
$

 
$
13,630

 
$
914

 
$
14,544

 
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 represents the fair value of the contingent consideration for Maker and is determined by a probability weighting of potential payouts.
Level 3 borrowings, which include HKDL borrowings and other foreign currency denominated borrowings, are generally valued based on historical market transactions, prevailing market interest rates and the Company's current borrowing cost and credit risk.
The Company’s financial instruments also include cash, cash equivalents, receivables and accounts payable. The carrying values of these financial instruments approximate the fair values.

13. Derivative Instruments
The Company manages its exposure to various risks relating to its ongoing business operations according to a risk management policy. The primary risks managed with derivative instruments are interest rate risk and foreign exchange risk.
The Company’s derivative positions measured at fair value are summarized in the following tables: 
 
As of June 28, 2014
 
Current
Assets
 
Other Assets
 
Other
Accrued
Liabilities
 
Other Long-
Term
Liabilities
Derivatives designated as hedges
 
 
 
 
 
 
 
Foreign exchange
$
95

 
$
97

 
$
(98
)
 
$
(43
)
Interest rate

 
144

 
(75
)
 

Derivatives not designated as hedges
 
 
 
 
 
 
 
Foreign exchange
26

 

 
(67
)
 
(40
)
Gross fair value of derivatives
121

 
241

 
(240
)
 
(83
)
Counterparty netting
(112
)
 
(60
)
 
145

 
27

Cash collateral (received)/posted