Walt Disney Co 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations SIGNIFICANT DEVELOPMENTS Leadership Change and Pending Restructuring As previously announced, on November 20, 2022, Robert A. Iger returned to the Company as Chief Executive Officer (“CEO”) and Director. Mr. Iger previously spent more than four decades at the Company, including 15 years as CEO. In announcing Mr. Iger’s appointment, the Company noted he has agreed to serve as CEO for two years, with a mandate from the Company’s Board of Directors “to set the strategic direction for renewed growth and to work closely with the Board in developing a successor to lead the Company at the completion of his term.” As contemplated by the leadership change announcement, Mr. Iger formed a committee to advise him on a new organizational structure and operational changes within the Company to address the Board’s goals. Upon implementation of these changes and related changes to our financial processes, we expect to report our operating segments differently than we do in this report. In addition, the new organizational structure and operational changes may result in material restructuring and impairment charges. ORGANIZATION OF INFORMATION Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections: • Consolidated Results • Current Quarter Results Compared to Prior-Year Quarter • Seasonality • Business Segment Results • Corporate and Unallocated Shared Expenses • Financial Condition • Supplemental Guarantor Financial Information • Commitments and Contingencies • Other Matters • Market Risk 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) CONSOLIDATED RESULTS Quarter Ended % Change Better (Worse) (in millions, except per share data) December 31, 2022 January 1, 2022 Revenues: Services $ 20,997 $ 19,542 7 % Products 2,515 2,277 10 % Total revenues 23,512 21,819 8 % Costs and expenses: Cost of services (exclusive of depreciation and amortization) ( 14,781 ) ( 13,161 ) (12) % Cost of products (exclusive of depreciation and amortization) ( 1,605 ) ( 1,406 ) (14) % Selling, general, administrative and other ( 3,827 ) ( 3,787 ) (1) % Depreciation and amortization ( 1,306 ) ( 1,269 ) (3) % Total costs and expenses (21,519) (19,623) (10) % Restructuring and impairment charges ( 69 ) — nm Other expense, net ( 42 ) ( 436 ) 90 % Interest expense, net ( 300 ) ( 311 ) 4 % Equity in the income of investees 191 239 (20) % Income from continuing operations before income taxes 1,773 1,688 5 % Income taxes on continuing operations ( 412 ) ( 488 ) 16 % Net income from continuing operations 1,361 1,200 13 % Loss from discontinued operations, net of income tax benefit of $0 and $14, respectively — ( 48 ) 100 % Net income 1,361 1,152 18 % Net income from continuing operations attributable to noncontrolling interests ( 82 ) ( 48 ) (71) % Net income attributable to Disney $ 1,279 $ 1,104 16 % Diluted earnings per share from continuing operations attributable to Disney $ 0.70 $ 0.63 11 % CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER Revenues for the quarter increased 8%, or $1.7 billion, to $23.5 billion; net income attributable to Disney increased to $1.3 billion from $1.1 billion; and diluted earnings per share from continuing operations attributable to Disney (EPS) increased to $0.70 from $0.63 in the prior-year quarter. The EPS increase for the quarter was due to growth in operating income at DPEP, lower investment losses and a lower effective income tax rate, partially offset by a decrease in operating income at DMED. Revenues Service revenues for the quarter increased 7%, or $1.5 billion, to $21.0 billion due to growth at our theme parks and resorts, higher DTC subscription revenue and an increase in theatrical distribution revenue. The increase at theme parks and resorts was due to higher volumes and guest spending growth. The increase in DTC subscription revenue was due to subscriber growth and higher rates. These increases were partially offset by decreased TV/SVOD distribution revenue and lower advertising revenue. Service revenues reflected an approximate 2 percentage point decrease due to the movement of the U.S. dollar against major currencies including the impact of our hedging program (Foreign Exchange Impact). Product revenues for the quarter increased 10%, or $0.2 billion, to $2.5 billion due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts, partially offset by lower home entertainment volumes. Product revenues reflected an approximate 3 percentage point decrease due to an unfavorable Foreign Exchange Impact. Costs and expenses Cost of services for the quarter increased 12%, or $1.6 billion, to $14.8 billion due to higher programming and production costs and, to a lesser extent, increased volumes at our theme parks and resorts and higher technical support costs at Direct-to-Consumer. The increase in programming and production costs was due to higher costs at Direct-to-Consumer and increased production cost amortization resulting from higher theatrical revenue, partially offset by decreased sports programming costs and lower production cost amortization resulting from lower TV/SVOD distribution revenue. Costs of services reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact. 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Cost of products for the quarter increased 14%, or $0.2 billion, to $1.6 billion due to higher merchandise, food and beverage sales at our theme parks and resorts, partially offset by a decrease in home entertainment volumes. Costs of products reflected an approximate 2 percentage point decrease due to a favorable Foreign Exchange Impact. Selling, general, administrative and other costs increased 1% to $3.8 billion. Depreciation and amortization increased 3% to $1.3 billion due to higher depreciation at our domestic theme parks and resorts. Restructuring and impairment charges In the current quarter, the Company recorded charges of $69 million related to exiting our businesses in Russia. Other expense, net The current quarter includes a DraftKings loss of $70 million, partially offset by a $28 million gain on the sale of a business. The prior-year quarter included a DraftKings loss of $432 million. Interest expense, net Interest expense, net is as follows: Quarter Ended (in millions) December 31, 2022 January 1, 2022 % Change Better (Worse) Interest expense $ (465) $ (361) (29) % Interest income, investment income and other 165 50 >100 % Interest expense, net $ (300) $ (311) 4 % The increase in interest expense was due to higher average rates, partially offset by lower average debt balances. The increase in interest income, investment income and other resulted from a favorable comparison of pension and postretirement benefit costs, other than service cost, and higher interest income on cash balances. Equity in the Income of Investees Income from equity investees decreased $48 million, to $191 million from $239 million, due to lower income from A+E Television Networks. Effective Income Tax Rate Quarter Ended December 31, 2022 January 1, 2022 Income from continuing operations before income taxes $ 1,773 $ 1,688 Income tax on continuing operations 412 488 Effective income tax rate - continuing operations 23.2% 28.9% The decrease in the effective income tax rate was due to the impact of adjustments related to prior years, which was favorable in the current quarter and unfavorable in the prior-year quarter. This impact was partially offset by the tax effect of employee share-based awards, which had an unfavorable impact in the current quarter and favorable impact in the prior-year quarter. Noncontrolling Interests Quarter Ended (in millions) December 31, 2022 January 1, 2022 % Change Better (Worse) Net income from continuing operations attributable to noncontrolling interests $ (82) $ (48) (71) % The increase in net income from continuing operations attributable to noncontrolling interests was primarily due to the purchase of MLB’s 15% interest in BAMTech and lower losses at our DTC sports business, partially offset by higher losses at Shanghai Disney Resort. Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable. 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Certain Items Impacting Results in the Quarter Results for the quarter ended December 31, 2022 were impacted by the following: • TFCF and Hulu acquisition amortization of $579 million • Restructuring and impairment charges of $69 million • Other expense, net of $42 million due to the DraftKings loss of $70 million, partially offset by a $28 million gain on the sale of a business Results for the quarter ended January 1, 2022 were impacted by the following: • TFCF and Hulu acquisition amortization of $595 million • Other expense, net of $436 million due to the DraftKings loss of $432 million A summary of the impact of these items on EPS is as follows: (in millions, except per share data) Pre-Tax Income (Loss) Tax Benefit (Expense) (1) After-Tax Income (Loss) EPS Favorable (Adverse) (2) Quarter Ended December 31, 2022: TFCF and Hulu acquisition amortization $ (579) $ 135 $ (444) $ (0.24) Restructuring and impairment charges (69) 8 (61) (0.03) Other expense, net (42) 16 (26) (0.01) Total $ (690) $ 159 $ (531) $ (0.29) Quarter Ended January 1, 2022: TFCF and Hulu acquisition amortization $ (595) $ 139 $ (456) $ (0.24) Other expense, net (436) 102 (334) (0.18) Total $ (1,031) $ 241 $ (790) $ (0.43) (1) Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item. (2) EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding. SEASONALITY The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 31, 2022 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year. DMED revenues are subject to seasonal advertising patterns, changes in viewership and subscriber levels, timing and performance of film releases in the theatrical and home entertainment markets, timing of and demand for film and television programs, and the availability of and demand for sports programming. In general, domestic advertising revenues are typically somewhat higher during the fall and somewhat lower during the summer months. In addition, advertising revenues generated from sports programming are impacted by the timing of sports seasons and events, which varies throughout the year or may take place periodically (e.g. biannually, quadrennially). Affiliate revenues vary with the subscriber trends of multi-channel video programming distributors (i.e. cable, satellite telecommunications and digital over-the-top service providers). Theatrical release dates are determined by several factors, including competition and the timing of vacation and holiday periods. DPEP revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities, which generally results in higher 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. Consumer products revenue fluctuates with consumer purchasing behavior, which generally results in higher revenues during the Company’s first fiscal quarter due to the winter holiday season and in the fourth quarter due to back-to-school. In addition, licensing revenues fluctuate with the timing and performance of our film and television content. BUSINESS SEGMENT RESULTS The Company evaluates the performance of its operating segments based on segment operating income, and management uses total segment operating income as a measure of the overall performance of the operating businesses separate from non-operating factors. Total segment operating income is not a financial measure defined by GAAP, should be reviewed in conjunction with the relevant GAAP financial measure and may not be comparable to similarly titled measures reported by 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) other companies. The Company believes that information about total segment operating income assists investors by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from factors other than business operations that affect net income, thus providing separate insight into both operations and other factors that affect reported results. The following table reconciles income from continuing operations before income taxes to total segment operating income: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Income from continuing operations before income taxes $ 1,773 $ 1,688 5 % Add: Corporate and unallocated shared expenses 280 228 (23) % Restructuring and impairment charges 69 — nm Other expense, net 42 436 90 % Interest expense, net 300 311 4 % TFCF and Hulu acquisition amortization 579 595 3 % Total segment operating income $ 3,043 $ 3,258 (7) % The following is a summary of segment revenue and operating income (loss): Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Segment Revenues: Disney Media and Entertainment Distribution $ 14,776 $ 14,585 1 % Disney Parks, Experiences and Products 8,736 7,234 21 % $ 23,512 $ 21,819 8 % Segment operating income (loss): Disney Media and Entertainment Distribution $ (10) $ 808 nm Disney Parks, Experiences and Products 3,053 2,450 25 % $ 3,043 $ 3,258 (7) % Depreciation expense is as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Disney Media and Entertainment Distribution $ 164 $ 153 (7) % Disney Parks, Experiences and Products Domestic 452 398 (14) % International 164 168 2 % Total Disney Parks, Experiences and Products 616 566 (9) % Corporate 48 48 — % Total depreciation expense $ 828 $ 767 (8) % 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Amortization of intangible assets is as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Disney Media and Entertainment Distribution $ 34 $ 40 15 % Disney Parks, Experiences and Products 27 27 — % TFCF and Hulu intangible assets 417 435 4 % Total amortization of intangible assets $ 478 $ 502 5 % BUSINESS SEGMENT RESULTS - Current Quarter Results Compared to Prior-Year Quarter Disney Media and Entertainment Distribution Revenue and operating results for the DMED segment are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Revenues: Linear Networks $ 7,293 $ 7,706 (5) % Direct-to-Consumer 5,307 4,690 13 % Content Sales/Licensing and Other 2,460 2,433 1 % Elimination of Intrasegment Revenue (1) (284) (244) (16) % $ 14,776 $ 14,585 1 % Segment operating income (loss): Linear Networks $ 1,255 $ 1,499 (16) % Direct-to-Consumer (1,053) (593) (78) % Content Sales/Licensing and Other (212) (98) >(100) % $ (10) $ 808 nm (1) Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services. Linear Networks Operating results for Linear Networks are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Revenues Affiliate fees $ 4,526 $ 4,615 (2) % Advertising 2,498 2,839 (12) % Other 269 252 7 % Total revenues 7,293 7,706 (5) % Operating expenses (5,409) (5,656) 4 % Selling, general, administrative and other (803) (755) (6) % Depreciation and amortization (22) (38) 42 % Equity in the income of investees 196 242 (19) % Operating Income $ 1,255 $ 1,499 (16) % 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Revenues Affiliate revenue is as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Domestic Channels $ 3,885 $ 3,862 1 % International Channels 641 753 (15) % $ 4,526 $ 4,615 (2) % The increase in affiliate revenue at the Domestic Channels reflected an increase of 6% from higher contractual rates, partially offset by a decrease of 5% from fewer subscribers. The decrease in affiliate revenue at the International Channels was due to decreases of 10% from an unfavorable Foreign Exchange Impact and 8% from fewer subscribers resulting from channel closures in Latin America and Europe. These decreases were partially offset by an increase of 3% from higher contractual rates. Advertising revenue is as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Cable $ 1,205 $ 1,293 (7) % Broadcasting 882 900 (2) % Domestic Channels 2,087 2,193 (5) % International Channels 411 646 (36) % $ 2,498 $ 2,839 (12) % The decrease in Cable advertising revenue was due to decreases of 5% from rates and 2% from impressions, which reflected lower average viewership. The decrease in Broadcasting advertising revenue was driven by a decrease of 10% from fewer impressions at ABC, partially offset by increases of 7% from the owned television stations and 2% from higher rates at ABC. Fewer impressions at ABC reflected lower average viewership and, to a lesser extent, fewer units delivered. The increase at the owned television stations was due to higher political advertising. The decline in International Channels advertising revenue was due to decreases of 14% from fewer impressions, reflecting a decrease in average viewership, 13% from lower rates and 9% from an unfavorable Foreign Exchange Impact. The decrease in average viewership reflected no Indian Premier League (IPL) cricket matches aired in the current quarter compared to thirteen matches aired in the prior-year quarter as matches shifted from fiscal 2021 into fiscal 2022 due to COVID-19. IPL matches typically occur in the second and third quarters of our fiscal year. Other revenue increased $17 million, to $269 million from $252 million, due to a favorable Foreign Exchange Impact and higher sub-licensing fees from International Cricket Council (ICC) T20 World Cup cricket matches in the current quarter compared to the prior-year quarter. Costs and Expenses Operating expenses primarily consist of programming and production costs, which are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Cable $ (3,409) $ (3,583) 5 % Broadcasting (813) (800) (2) % Domestic Channels (4,222) (4,383) 4 % International Channels (781) (894) 13 % $ (5,003) $ (5,277) 5 % 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Programming and production costs at Cable decreased primarily due to lower NFL and College Football Playoff (CFP) rights costs, partially offset by an increase in sports production costs. The decline in NFL rights expense reflected the timing of costs under our new agreement compared to the prior NFL agreement. The decrease in costs for CFP programming was due to the timing of the CFP games relative to our fiscal periods, partially offset by contractual rate increases. The current quarter included two host games and two semi-final games compared to four host games and two semi-final games in the prior-year quarter. Programming and production costs at the International Channels decreased due to lower sports programming costs, a favorable Foreign Exchange Impact and the impact of channel closures. Lower sports programming costs were due to the comparison to thirteen IPL cricket matches in the prior-year quarter and lower costs for ICC cricket matches in the current quarter compared to the prior-year quarter, partially offset by an increase in sports production costs and costs for new soccer rights. Selling, general administrative and other costs increased $48 million, to $803 million from $755 million, primarily due to higher overhead costs and an unfavorable Foreign Exchange Impact, partially offset by a gain on the sale of an interest in our X Games business and lower marketing costs at ABC. Depreciation and amortization decreased $16 million, to $22 million from $38 million primarily due to lower depreciation at the International Channels and the transfer of technology assets and related depreciation between Linear Networks and Content Sales/Licensing and Other. Equity in the Income of Investees Income from equity investees decreased $46 million, to $196 million from $242 million, due to lower income from A+E Television Networks attributable to lower advertising revenues and higher programming costs. Operating Income from Linear Networks Operating income from Linear Networks decreased $244 million, to $1,255 million from $1,499 million, due to a decrease at the International Channels and lower income from our equity investees, partially offset by an increase at Cable. The following table provides supplemental revenue and operating income detail for Linear Networks: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Supplemental revenue detail Domestic Channels $ 6,066 $ 6,152 (1) % International Channels 1,227 1,554 (21) % $ 7,293 $ 7,706 (5) % Supplemental operating income detail Domestic Channels $ 928 $ 888 5 % International Channels 131 369 (64) % Equity in the income of investees 196 242 (19) % $ 1,255 $ 1,499 (16) % 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Direct-to-Consumer Operating results for Direct-to-Consumer are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Revenues Subscription fees $ 4,240 $ 3,598 18 % Advertising 897 980 (8) % TV/SVOD distribution and other 170 112 52 % Total revenues 5,307 4,690 13 % Operating expenses (5,108) (3,922) (30) % Selling, general, administrative and other (1,156) (1,275) 9 % Depreciation and amortization (96) (86) (12) % Operating Loss $ (1,053) $ (593) (78) % Revenues Growth in subscription fees reflected increases of 19% from higher subscribers and 3% from higher rates, partially offset by a decrease of 4% from an unfavorable Foreign Exchange Impact. The increase in subscribers was due to growth at Disney+ and, to a lesser extent, at Hulu and ESPN+. Higher rates were attributable to increases in retail pricing at Hulu and, to a lesser extent, at ESPN+. Lower advertising revenue reflected a decrease of 10% from fewer impressions due to decreases at Hulu and, to a lesser extent, Disney+, partially offset by an increase of 4% from higher rates due to an increase at Hulu. The increase in TV/SVOD distribution and other revenue was due to a favorable Foreign Exchange Impact. The following tables present additional information about our Disney+, ESPN+ and Hulu DTC product offerings (1) . Paid subscribers (2) as of: (in millions) December 31, 2022 January 1, 2022 % Change Better (Worse) Disney+ Domestic (U.S. and Canada) 46.6 42.9 9 % International (excluding Disney+ Hotstar) (3) 57.7 41.1 40 % Disney+ Core (4) 104.3 84.0 24 % Disney+ Hotstar 57.5 45.9 25 % Total Disney+ (4) 161.8 129.8 25 % ESPN+ 24.9 21.3 17 % Hulu SVOD Only 43.5 40.9 6 % Live TV + SVOD 4.5 4.3 5 % Total Hulu (4) 48.0 45.3 6 % 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Average Monthly Revenue Per Paid Subscriber (5) for the quarter ended: % Change Better (Worse) December 31, 2022 January 1, 2022 Disney+ Domestic (U.S. and Canada) $ 5.95 $ 6.68 (11) % International (excluding Disney+ Hotstar) (3) 5.62 5.96 (6) % Disney+ Core 5.77 6.33 (9) % Disney+ Hotstar 0.74 1.03 (28) % Global Disney+ 3.93 4.41 (11) % ESPN+ 5.53 5.16 7 % Hulu SVOD Only 12.46 12.96 (4) % Live TV + SVOD 87.90 87.01 1 % (1) In the U.S., Disney+, ESPN+ and Hulu SVOD Only are each offered as a standalone service or together as part of various multi-product offerings. Hulu Live TV + SVOD includes Disney+ and ESPN+. Disney+ is available in more than 150 countries and territories outside the U.S. and Canada. In India and certain other Southeast Asian countries, the service is branded Disney+ Hotstar. In certain Latin American countries, we offer Disney+ as well as Star+, a general entertainment SVOD service, which is available on a standalone basis or together with Disney+ (Combo+). Depending on the market, our services can be purchased on our websites or through third-party platforms/apps or are available via wholesale arrangements. (2) Reflects subscribers for which we recognized subscription revenue. Subscribers cease to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method. Subscribers to multi-product offerings in the U.S. are counted as a paid subscriber for each service included in the multi-product offering and subscribers to Hulu Live TV + SVOD are counted as one paid subscriber for each of the Hulu Live TV + SVOD, Disney+ and ESPN+ services. In Latin America, if a subscriber has either the standalone Disney+ or Star+ service or subscribes to Combo+, the subscriber is counted as one Disney+ paid subscriber. Subscribers include those who receive a service through wholesale arrangements including those for which we receive a fee for the distribution of the service to each subscriber of an existing content distribution tier. When we aggregate the total number of paid subscribers across our DTC streaming services, we refer to them as paid subscriptions. (3) Includes the Disney+ service outside the U.S. and Canada and the Star+ service in Latin America. (4) Total may not equal the sum of the column due to rounding. (5) Average monthly revenue per paid subscriber is calculated based on the average of the monthly average paid subscribers for each month in the period. The monthly average paid subscribers is calculated as the sum of the beginning of the month and end of the month paid subscriber count, divided by two. Disney+ average monthly revenue per paid subscriber is calculated using a daily average of paid subscribers for the period. Revenue includes subscription fees, advertising (excluding revenue earned from selling advertising spots to other Company businesses) and premium and feature add-on revenue but excludes Premier Access and Pay-Per-View revenue. The average revenue per paid subscriber is net of discounts on offerings that carry more than one service. Revenue is allocated to each service based on the relative retail price of each service on a standalone basis. Hulu Live TV + SVOD revenue is allocated to the SVOD services based on the wholesale price of the Hulu SVOD Only, Disney+ and ESPN+ multi-product offering. In general, wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third-party platforms. The average monthly revenue per paid subscriber for domestic Disney+ decreased from $6.68 to $5.95 due to a higher mix of subscribers to multi-product offerings, partially offset by an increase in retail pricing. The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) decreased from $5.96 to $5.62 primarily due to an unfavorable Foreign Exchange Impact and a higher mix of subscribers in lower-priced markets, partially offset by a lower mix of wholesale subscribers. The average monthly revenue per paid subscriber for Disney+ Hotstar decreased from $1.03 to $0.74 due to lower per-subscriber advertising revenue. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) The average monthly revenue per paid subscriber for ESPN+ increased from $5.16 to $5.53 due to an increase in retail pricing, partially offset by a higher mix of subscribers to multi-product offerings and lower per-subscriber advertising revenue. The average monthly revenue per paid subscriber for the Hulu SVOD Only service decreased from $12.96 to $12.46 primarily due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product offerings, partially offset by increases in retail pricing. The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $87.01 to $87.90 due to increases in retail pricing, partially offset by a higher mix of subscribers to multi-product offerings. Costs and Expenses Operating expenses are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Programming and production costs Disney+ $ (1,681) $ (920) (83) % Hulu (2,106) (1,832) (15) % ESPN+ and other (395) (427) 7 % Total programming and production costs (4,182) (3,179) (32) % Other operating expense (926) (743) (25) % $ (5,108) $ (3,922) (30) % The increase in programming and production costs at Disney+ was due to more content provided on the service and higher average costs per hour, which included an increased mix of original content. Higher programming and production costs at Hulu were attributable to increased subscriber-based fees for programming the Live TV service, more content provided on the service and higher average costs per hour. Higher subscriber-based fees for programming the Live TV service resulted from rate increases and an increase in the number of subscribers. The decrease in programming and production costs at ESPN+ and other was primarily due to fewer docuseries and lower costs for soccer and hockey programming, partially offset by higher costs for golf programming. A greater percentage of soccer and hockey games were aired or simulcast at Linear Networks compared to the prior-year quarter. Other operating expenses increased primarily due to higher technology and distribution costs at Disney+ reflecting growth in existing markets and, to a lesser extent, expansion to new markets. Selling, general, administrative and other costs decreased $119 million, to $1,156 million from $1,275 million, due to lower marketing costs at Disney+. Operating Loss from Direct-to-Consumer The operating loss from Direct-to-Consumer increased $460 million, to $1,053 million from $593 million, due to a higher loss at Disney+ and a decrease in results at Hulu, partially offset by improved results at ESPN+. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Content Sales/Licensing and Other Operating results for Content Sales/Licensing and Other are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Revenues TV/SVOD distribution $ 762 $ 1,195 (36) % Theatrical distribution 1,140 529 >100 % Home entertainment 135 294 (54) % Other 423 415 2 % Total revenues 2,460 2,433 1 % Operating expenses (1,855) (1,625) (14) % Selling, general, administrative and other (737) (840) 12 % Depreciation and amortization (80) (69) (16) % Equity in the income of investees — 3 (100) % Operating Loss $ (212) $ (98) >(100) % Revenues The decrease in TV/SVOD distribution revenue was from lower sales of both film and episodic television content driven by lower volumes reflecting the shift from licensing content to third parties to distributing it on our DTC services. Lower sales of episodic television content were also due to non-returning series sold in the prior-year quarter and a license of animated series in the prior-year quarter. The increase in theatrical distribution revenue was due to the performance of Avatar: The Way of Water and Black Panther: Wakanda Forever in the current quarter compared to Eternals, Encanto and the co-produced title Spider-Man: No Way Home in the prior-year quarter. Other titles released in the current quarter included The Menu and Strange World , while other titles released in the prior-year quarter included Ron’s Gone Wrong , West Side Story , The King’s Man and The French Dispatch. The decrease in home entertainment revenue was primarily due to lower unit sales of new release titles, reflecting fewer releases, and, to a lesser extent, catalog titles. Costs and Expenses Operating expenses are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Programming and production costs $ (1,486) $ (1,260) (18) % Cost of goods sold and distribution costs (369) (365) (1) % $ (1,855) $ (1,625) (14) % The increase in programming and production costs was primarily due to higher production cost amortization driven by an increase in theatrical revenue, partially offset by a decrease due to lower TV/SVOD distribution revenue. Selling, general, administrative and other costs decreased $103 million, to $737 million from $840 million, resulting from lower theatrical marketing costs reflecting fewer titles released, partially offset by higher overhead costs. Depreciation and amortization increased $11 million, to $80 million from $69 million, primarily due to increased investment in technology assets and the transfer of technology assets and related depreciation from Linear Networks. Operating Loss from Content Sales/Licensing and Other Operating loss from Content Sales/Licensing and Other increased $114 million, to $212 million from $98 million, due to lower TV/SVOD distribution results, higher overhead costs and a decrease in home entertainment distribution results, partially offset by higher theatrical distribution results. 36 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Items Excluded from Segment Operating Income Related to Disney Media and Entertainment Distribution The following table presents supplemental information for items related to the DMED segment that are excluded from segment operating income: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 TFCF and Hulu acquisition amortization (1) $ (577) $ (593) 3 % Restructuring and impairment charges (2) (69) — nm Gain on sale of a business 28 — nm (1) In the current quarter, amortization of step-up on film and television costs was $159 million and amortization of intangible assets was $415 million. In the prior-year quarter, amortization of step-up on film and television costs was $157 million and amortization of intangible assets was $433 million. (2) Charges for the current quarter related to exiting our businesses in Russia. Disney Parks, Experiences and Products Operating results for the DPEP segment are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Revenues Theme park admissions $ 2,641 $ 2,152 23 % Parks & Experiences merchandise, food and beverage 1,980 1,626 22 % Resorts and vacations 1,980 1,445 37 % Merchandise licensing and retail 1,546 1,563 (1) % Parks licensing and other 589 448 31 % Total revenues 8,736 7,234 21 % Operating expenses (4,139) (3,451) (20) % Selling, general, administrative and other (899) (737) (22) % Depreciation and amortization (643) (593) (8) % Equity in the loss of investees (2) (3) 33 % Operating Income $ 3,053 $ 2,450 25 % COVID-19 Shanghai Disney Resort was closed for 33 days and 2 days, in the current and prior-year quarters, respectively, as a result of COVID-19-related restrictions. In the prior-year quarter, our cruise line business was impacted by COVID-19-related capacity restrictions, which were lifted in April 2022. In general, our other businesses were not significantly impacted by COVID-19 in the current and prior-year quarters. Revenues Higher theme park admissions revenue was due to increases of 12% from higher average per capita ticket revenue and 12% from attendance growth. The increase in average per capita ticket revenue was driven by Genie+ and Lightning Lane, which were introduced at our domestic parks in the prior-year quarter. Parks & Experiences merchandise, food and beverage revenue growth reflected increases of 13% from higher volumes and 6% from higher average guest spending. Higher resorts and vacations revenue was primarily due to increases of 18% from additional passenger cruise days and 10% from higher occupied hotel room nights. Merchandise licensing and retail revenue was comparable to the prior-year quarter as decreases of 2% from retail and 1% from an unfavorable Foreign Exchange Impact were largely offset by an increase of 2% from merchandise licensing. The decrease in retail revenue was driven by lower online sales. Growth at merchandise licensing was driven by an increase in sales 37 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) of merchandise based on Black Panther, Spider-Man and Avengers, partially offset by a decrease in revenues from merchandise based on Frozen and Star Wars. The increase in parks licensing and other revenue was driven by an increase in royalties from Tokyo Disney Resort and higher sponsorship revenues. In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business: Domestic International (1) Total Quarter Ended Quarter Ended Quarter Ended Dec 31, 2022 Jan 1, 2022 Dec 31, 2022 Jan 1, 2022 Dec 31, 2022 Jan 1, 2022 Parks Increase (decrease) Attendance (2) 11 % >100 % 13 % >100 % 12 % >100 % Per Capita Guest Spending (3) 8 % 30 % 21 % 14 % 10 % 32 % Hotels Occupancy (4) 88 % 73 % 67 % 52 % 83 % 68 % Available Hotel Room Nights (in thousands) (5) 2,520 2,542 799 799 3,319 3,341 Per Room Guest Spending (6) 1 % 32 % 13 % 2 % 3 % 27 % (1) Per capita guest spending growth rate and per room guest spending growth rate exclude the impact of changes in foreign exchange rates. (2) Attendance is used to analyze volume trends at our theme parks and is based on the number of unique daily entries, i.e. a person visiting multiple theme parks in a single day is counted only once. Our attendance count includes complimentary entries but excludes entries by children under the age of three. (3) Per capita guest spending is used to analyze guest spending trends and is defined as total revenue from ticket sales and sales of food, beverage and merchandise in our theme parks, divided by total theme park attendance. (4) Occupancy is used to analyze the usage of available capacity at hotels and is defined as the number of room nights occupied by guests as a percentage of available hotel room nights. (5) Available hotel room nights is defined as the total number of room nights that are available at our hotels and at Disney Vacation Club (DVC) properties located at our theme parks and resorts that are not utilized by DVC members. Available hotel room nights include rooms temporarily taken out of service. (6) Per room guest spending is used to analyze guest spending at our hotels and is defined as total revenue from room rentals and sales of food, beverage and merchandise at our hotels, divided by total occupied hotel room nights. Costs and Expenses Operating expenses are as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Operating labor $ (1,789) $ (1,515) (18) % Cost of goods sold and distribution costs (912) (798) (14) % Infrastructure costs (722) (576) (25) % Other operating expense (716) (562) (27) % $ (4,139) $ (3,451) (20) % The increase in operating labor was attributable to higher volumes, inflation and increased costs for new guest offerings. Higher cost of goods sold and distribution costs were due to higher volumes and inflation, partially offset by a favorable Foreign Exchange Impact. The increase in infrastructure costs was primarily attributable to higher operations support costs and increased technology spending. Other operating expense increased primarily due to higher volumes and operations support costs. 38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Selling, general, administrative and other costs increased $162 million, to $899 million from $737 million, driven by a loss on the disposal of our ownership interest in Villages Nature, inflation and higher marketing spend. Depreciation and amortization increased $50 million, to $643 million from $593 million, due to higher depreciation at our domestic parks and experiences. Segment Operating Income Segment operating income increased from $2.5 billion to $3.1 billion due to growth at our domestic parks and experiences and, to a lesser extent, our international parks and resorts. The following table presents supplemental revenue and operating income detail for the DPEP segment: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Supplemental revenue detail Parks & Experiences Domestic $ 6,072 $ 4,800 27 % International 1,094 861 27 % Consumer Products 1,570 1,573 — % $ 8,736 $ 7,234 21 % Supplemental operating income detail Parks & Experiences Domestic $ 2,113 $ 1,555 36 % International 79 21 >100 % Consumer Products 861 874 (1) % $ 3,053 $ 2,450 25 % CORPORATE AND UNALLOCATED SHARED EXPENSES Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Corporate and unallocated shared expenses $ (280) $ (228) (23) % Corporate and unallocated shared expenses increased $52 million, from $228 million to $280 million in the current quarter driven by higher compensation and human resource-related costs, marketing spend on the Disney100 celebration and timing of allocations to operating segments. FINANCIAL CONDITION The change in cash and cash equivalents is as follows: Quarter Ended % Change Better (Worse) (in millions) December 31, 2022 January 1, 2022 Cash used in operations - continuing operations $ (974) $ (209) >(100) % Cash used in investing activities - continuing operations (1,292) (987) (31) % Cash used in financing activities - continuing operations (1,043) (280) >(100) % Cash used in discontinued operations — (4) — % Impact of exchange rates on cash, cash equivalents and restricted cash 164 (35) nm Change in cash, cash equivalents and restricted cash $ (3,145) $ (1,515) >(100) % Operating Activities Cash used in operations increased $765 million to $974 million for the current quarter compared to $209 million in the prior-year quarter. The increase was due to collateral payments related to our hedging program, partially offset by higher 39 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) operating cash flow at DPEP. The increase in operating cash flow at DPEP was due to higher operating cash receipts driven by higher revenue, partially offset by an increase in operating cash disbursements due to higher operating expenses. Operating cash flows at DMED were comparable to the prior-year quarter as higher operating cash receipts and lower operating cash disbursements were largely offset by higher spending on film and television content. Higher operating cash receipts at DMED were due to higher revenue, while lower operating cash disbursements were driven by the timing of operating cash disbursements, partially offset higher operating expenses. Produced and licensed programming costs The DMED segment incurs costs to produce and license feature film and television content. Film and television production costs include all internally produced content such as live-action and animated feature films, television series, television specials and theatrical stage plays. Programming costs include film or television content rights licensed from third parties for use on the Company’s Linear Networks and DTC services. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities. The Company’s film and television production and programming activity for the quarters ended December 31, 2022 and January 1, 2022 are as follows: Quarter Ended (in millions) December 31, 2022 January 1, 2022 Beginning balances: Produced and licensed programming assets $ 37,667 $ 31,732 Programming liabilities (3,940) (4,113) 33,727 27,619 Spending: Programming licenses and rights 3,547 3,357 Produced film and television content 3,751 3,598 7,298 6,955 Amortization: Programming licenses and rights (4,539) (4,811) Produced film and television content (3,317) (2,651) (7,856) (7,462) Change in internally produced and licensed content costs (558) (507) Other non-cash activity (178) 205 Ending balances: Produced and licensed programming assets 37,566 31,794 Programming liabilities (4,575) (4,477) $ 32,991 $ 27,317 The Company currently expects its fiscal 2023 spend on produced and licensed content, including sports rights, to be in the low $30 billion range. Fiscal 2022 spend was $30 billion. 40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Investing Activities Investing activities consist principally of investments in parks, resorts and other property and acquisition and divestiture activity. The Company’s investments in parks, resorts and other property for the quarter ended December 31, 2022 and January 1, 2022 are as follows: (in millions) December 31, 2022 January 1, 2022 Disney Media and Entertainment Distribution $ 279 $ 169 Disney Parks, Experiences and Products Domestic 519 457 International 219 202 Total Disney Parks, Experiences and Products 738 659 Corporate 164 153 $ 1,181 $ 981 Capital expenditures at the DMED segment primarily reflect investments in technology and in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities. The increase in the current period compared to the prior-year period was due to higher technology spending to support our streaming services. Capital expenditures for the DPEP segment are principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and technology. The increase in the current period compared to the prior-year period was primarily due to spending on cruise ship fleet expansion. Capital expenditures at Corporate primarily reflect investments in corporate facilities, technology and equipment. The Company currently expects its fiscal 2023 capital expenditures to be approximately $6 billion. Fiscal 2022 spend was $5 billion. The expected increase in capital expenditures is due to higher spending across the enterprise. Financing Activities Cash used in financing activities was $1.0 billion in the current quarter compared to $0.3 billion in the prior-year quarter. Cash used in financing activities in the current quarter was due to the purchase of a redeemable non-controlling interest, partially offset by the sale of a non-controlling interest. See Note 5 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the quarter ended December 31, 2022 and information regarding the Company’s bank facilities. The Company may use operating cash flows, commercial paper borrowings up to the amount of its unused $12.25 billion bank facilities and incremental term debt issuances to retire or refinance other borrowings before or as they come due. The Company’s operating cash flow and access to the capital markets can be impacted by factors outside of its control. We believe that the Company’s financial condition is strong and that its cash balances, other liquid assets, operating cash flows, access to debt and equity capital markets and borrowing capacity under current bank facilities, taken together, provide adequate resources to fund ongoing operating requirements, contractual obligations, upcoming debt maturities as well as future capital expenditures related to the expansion of existing businesses and development of new projects. In addition, the Company could undertake other measures to ensure sufficient liquidity, such as continuing to not declare dividends (the Company did not pay a dividend with respect to fiscal 2022 operations and has not declared or paid a dividend with respect to fiscal 2023 operations); raising financing; suspending or reducing capital spending; reducing film and television content investments; or implementing furloughs or reductions in force. The Company’s borrowing costs can also be impacted by short- and long-term debt ratings assigned by nationally recognized rating agencies, which are based, in significant part, on the Company’s performance as measured by certain credit metrics such as leverage and interest coverage ratios. As of December 31, 2022, Moody’s Investors Service’s long- and short-term debt ratings for the Company were A2 and P-1 (Stable), respectively, Standard and Poor’s long- and short-term debt ratings for the Company were BBB+ and A-2 (Positive), respectively, and Fitch’s long- and short-term debt ratings for the Company were A- and F2 (Stable), respectively. The Company’s bank facilities contain only one financial covenant, relating to interest coverage of three times earnings before interest, taxes, depreciation and amortization, including both intangible amortization and amortization of our film and television production and programming costs. On December 31, 2022, the Company met this covenant by a significant margin. The Company’s bank facilities also specifically exclude certain entities, including the Asia Theme Parks, from any representations, covenants or events of default. 41 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION On March 20, 2019 as part of the acquisition of TFCF, The Walt Disney Company (“TWDC”) became the ultimate parent of TWDC Enterprises 18 Corp. (formerly known as The Walt Disney Company) (“Legacy Disney”). Legacy Disney and TWDC are collectively referred to as “Obligor Group”, and individually, as a “Guarantor”. Concurrent with the close of the TFCF acquisition, $16.8 billion of TFCF’s assumed public debt (which then constituted 96% of such debt) was exchanged for senior notes of TWDC (the “exchange notes”) issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an Indenture, dated as of March 20, 2019, between TWDC, Legacy Disney, as guarantor, and Citibank, N.A., as trustee (the “TWDC Indenture”) and guaranteed by Legacy Disney. On November 26, 2019, $14.0 billion of the outstanding exchange notes were exchanged for new senior notes of TWDC registered under the Securities Act, issued pursuant to the TWDC Indenture and guaranteed by Legacy Disney. In addition, contemporaneously with the closing of the March 20, 2019 exchange offer, TWDC entered into a guarantee of the registered debt securities issued by Legacy Disney under the Indenture dated as of September 24, 2001 between Legacy Disney and Wells Fargo Bank, National Association, as trustee (the “2001 Trustee”) (as amended by the first supplemental indenture among Legacy Disney, as issuer, TWDC, as guarantor, and the 2001 Trustee, as trustee). Other subsidiaries of the Company do not guarantee the registered debt securities of either TWDC or Legacy Disney (such subsidiaries are referred to as the “non-Guarantors”). The par value and carrying value of total outstanding and guaranteed registered debt securities of the Obligor Group at December 31, 2022 was as follows: TWDC Legacy Disney (in millions) Par Value Carrying Value Par Value Carrying Value Registered debt with unconditional guarantee $ 35,361 $ 35,778 $ 8,123 $ 7,881 The guarantees by TWDC and Legacy Disney are full and unconditional and cover all payment obligations arising under the guaranteed registered debt securities. The guarantees may be released and discharged upon (i) as a general matter, the indebtedness for borrowed money of the consolidated subsidiaries of TWDC in aggregate constituting no more than 10% of all consolidated indebtedness for borrowed money of TWDC and its subsidiaries (subject to certain exclusions), (ii) upon the sale, transfer or disposition of all or substantially all of the equity interests or all or substantially all, or substantially as an entirety, the assets of Legacy Disney to a third party, and (iii) other customary events constituting a discharge of a guarantor’s obligations. In addition, in the case of Legacy Disney’s guarantee of registered debt securities issued by TWDC, Legacy Disney may be released and discharged from its guarantee at any time Legacy Disney is not a borrower, issuer or guarantor under certain material bank facilities or any debt securities. Operations are conducted almost entirely through the Company’s subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service its debt, including the public debt, are dependent upon the earnings of the Company’s subsidiaries and the distribution of those earnings to the Obligor Group, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities have a direct claim only against the Obligor Group. 42 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Set forth below is summarized financial information for the Obligor Group on a combined basis after elimination of (i) intercompany transactions and balances between TWDC and Legacy Disney and (ii) equity in the earnings from and investments in any subsidiary that is a non-Guarantor. This summarized financial information has been prepared and presented pursuant to the Securities and Exchange Commission Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with GAAP. Results of operations (in millions) Quarter Ended December 31, 2022 Revenues $ — Costs and expenses — Net income (loss) from continuing operations (430) Net income (loss) (430) Net income (loss) attributable to TWDC shareholders (430) Balance Sheet (in millions) December 31, 2022 October 1, 2022 Current assets $ 1,368 $ 5,665 Noncurrent assets 2,223 1,948 Current liabilities 3,729 3,741 Noncurrent liabilities (excluding intercompany to non-Guarantors) 46,039 46,218 Intercompany payables to non-Guarantors 145,902 148,958 COMMITMENTS AND CONTINGENCIES Legal Matters As disclosed in Note 13 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters. Guarantees See Note 14 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K. Tax Matters As disclosed in Note 9 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K, the Company has exposure for certain tax matters. Contractual Commitments See Note 14 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K. OTHER MATTERS Accounting Policies and Estimates We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K. Produced and Acquired/Licensed Content Costs We amortize and test for impairment of capitalized film and television production costs based on whether the content is predominantly monetized individually or as a group. See Note 7 to the Condensed Consolidated Financial Statements for further discussion. Production costs that are classified as individual are amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues). With respect to produced films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues is theatrical performance. Revenues derived from other markets subsequent to the theatrical release are generally highly correlated with theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort. Upon a film’s release and determination of the theatrical performance, the Company’s estimates of revenues from succeeding windows 43 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) and markets, which may include imputed license fees for content that is used on our DTC streaming services, are revised based on historical relationships and an analysis of current market trends. With respect to capitalized television production costs that are classified as individual, the most sensitive factor affecting estimates of Ultimate Revenues is program ratings of the content on our licensees’ platforms. Program ratings, which are an indication of market acceptance, directly affect the program’s ability to generate advertising and subscriber revenues and are correlated with the license fees we can charge for the content in subsequent windows and for subsequent seasons. Ultimate Revenues are reassessed each reporting period and the impact of any changes on amortization of production cost is accounted for as if the change occurred at the beginning of the current fiscal year. If our estimate of Ultimate Revenues decreases, amortization of costs may be accelerated or result in an impairment. Conversely, if our estimate of Ultimate Revenues increases, cost amortization may be slowed. Production costs classified as individual are tested for impairment at the individual title level by comparing that title’s unamortized costs to the present value of discounted cash flows directly attributable to the title. To the extent the title’s unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess. Produced content costs that are part of a group and acquired/licensed content costs are amortized based on projected usage, typically resulting in an accelerated or straight-line amortization pattern. The determination of projected usage requires judgment and is reviewed on a regular basis for changes. Adjustments to projected usage are applied prospectively in the period of the change. The most sensitive factors affecting projected usage are historical and estimated viewing patterns. If projected usage changes we may need to accelerate or slow the recognition of amortization expense. Cost of content that is predominantly monetized as a group is tested for impairment by comparing the present value of the discounted cash flows of the group to the aggregate unamortized costs of the group. The group is established by identifying the lowest level for which cash flows are independent of the cash flows of other produced and licensed content. If the unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess and allocated to individual titles based on the relative carrying value of each title in the group. If there are no plans to continue to use an individual film or television program that is part of a group, the unamortized cost of the individual title is written-off immediately. Licensed content is included as part of the group within which it is monetized for purposes of impairment testing. The amortization of multi-year sports rights is based on projections of revenues for each season relative to projections of total revenues over the contract period (estimated relative value). Projected revenues include advertising revenue and an allocation of affiliate revenue. If the annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season. If estimated relative values by year were to change significantly, amortization of our sports rights costs may be accelerated or slowed. Revenue Recognition The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. Refer to Note 2 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K for our revenue recognition policies. Pension and Postretirement Medical Plan Actuarial Assumptions The Company’s pension and postretirement medical benefit obligations and related costs are calculated using a number of actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement, which we evaluate annually. See Note 10 to the Consolidated Financial Statements in the 2022 Annual Report on Form 10-K for estimated impacts of changes in these assumptions. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase. The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension and postretirement medical expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. The Company’s discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans’ liability cash flows to the yield curves. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension and postretirement medical expense. 44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Goodwill, Other Intangible Assets, Long-Lived Assets and Investments The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis. The Company performs its annual test of goodwill and indefinite-lived intangible assets for impairment in its fiscal fourth quarter. Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. To test goodwill for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of a reporting unit exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test. The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows of the reporting unit. The quantitative assessment compares the fair value of each goodwill reporting unit to its carrying amount, and to the extent the carrying amount exceeds the fair value, an impairment of goodwill is recognized for the excess up to the amount of goodwill allocated to the reporting unit. The impairment test for goodwill requires judgment related to the identification of reporting units, the assignment of assets and liabilities to reporting units including goodwill, and the determination of fair value of the reporting units. To determine the fair value of our reporting units, we apply what we believe to be the most appropriate valuation methodology for each of our reporting units. We generally use a present value technique (discounted cash flows) corroborated by market multiples when available and as appropriate. The discounted cash flow analyses are sensitive to our estimates of future revenue growth and margins for these businesses as well as the discount rates used to calculate the present value of future cash flows. In times of adverse economic conditions in the global economy, the Company’s long-term cash flow projections are subject to a greater degree of uncertainty than usual. We believe our estimates are consistent with how a marketplace participant would value our reporting units. If we had established different reporting units or utilized different valuation methodologies or assumptions, the impairment test results could differ, and we could be required to record impairment charges. To test its other indefinite-lived intangible assets for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of each of its indefinite-lived intangible assets exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test. The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions, and changes in projected future cash flows. The quantitative assessment compares the fair value of an indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized for the excess. Fair values of indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate. The Company tests long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of the estimated undiscounted future cash flows expected to be generated over the useful life of the significant assets of an asset group to the carrying amount of the asset group. An asset group is generally established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the asset group and the carrying amount of the asset group. For assets held for sale, to the extent the carrying amount is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of asset groups, estimates of future cash flows and the discount rate used to determine fair values. The Company has investments in equity securities. For equity securities that do not have a readily determinable fair value, we consider forecasted financial performance of the investee companies, as well as volatility inherent in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded. Allowance for Credit Losses We evaluate our allowance for credit losses and estimate collectability of accounts receivable based on historical bad debt experience, our assessment of the financial condition of individual companies with which we do business, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, including 45 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, costs and expenses may increase in future periods, and if it is too high, costs and expenses may decrease in future periods. See Note 3 to the Condensed Consolidated Financial Statements for additional discussion. Contingencies and Litigation We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for the resolution of these proceedings. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and have been developed in consultation with outside counsel as appropriate. From time to time, we are also involved in other contingent matters for which we accrue estimates for a probable and estimable loss. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to legal proceedings or our assumptions regarding other contingent matters. See Note 13 to the Condensed Consolidated Financial Statements for more detailed information on litigation exposure. Income Tax As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in proposed assessments. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized by the Company may differ from those recognized in our future financial statements based on a number of factors, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and the Company’s success in supporting its filing positions with taxing authorities. New Accounting Pronouncements See Note 17 to the Condensed Consolidated Financial Statements for information regarding new accounting pronouncements. MARKET RISK The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, commodity fluctuations and changes in the market values of its investments. Policies and Procedures In the normal course of business, we employ established policies and procedures to manage the Company’s exposure to changes in interest rates, foreign currencies and commodities using a variety of financial instruments. Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to the Company’s portfolio of borrowings. By policy, the Company targets fixed-rate debt as a percentage of its net debt between minimum and maximum percentages. Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow in order to allow management to focus on core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the U.S. dollar equivalent value of its existing foreign currency assets, liabilities, commitments and forecasted foreign currency revenues and expenses. The Company utilizes option strategies and forward contracts that provide for the purchase or sale of foreign currencies to hedge probable, but not firmly committed, transactions. The Company also uses forward and option contracts to hedge foreign currency assets and liabilities. The principal foreign currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings to U.S. dollar denominated borrowings. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its forecasted foreign exchange exposures generally for periods not to exceed four years. The gains and losses on these contracts are intended to offset changes in the U.S. dollar equivalent value of the related exposures. The economic or political conditions in a country have reduced and in the future could reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country. Our objectives in managing exposure to commodity fluctuations are to use commodity derivatives to reduce volatility of earnings and cash flows arising from commodity price changes. The amounts hedged using commodity swap contracts are based on forecasted levels of consumption of certain commodities, such as fuel oil and gasoline. 46 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Our objectives in managing exposures to market-based fluctuations in certain retirement liabilities are to use total return swap contracts to reduce the volatility of earnings arising from changes in these retirement liabilities. The amounts hedged using total return swap contracts are based on estimated liability balances. It is the Company’s policy to enter into foreign currency and interest rate derivative transactions and other financial instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes. 47 Item 3. Quantitative and Qualitative Disclosures about Market Risk. See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 15 to the Condensed Consolidated Financial Statements.