Walt Disney Co 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations SIGNIFICANT DEVELOPMENTS Leadership Change and Restructuring 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. Mr. Iger formed a committee to advise him on a new organizational structure and operational changes within the Company to address the goals of the Company’s Board of Directors. In February 2023, the Company announced that it will be reorganized into three business segments: Disney Entertainment, ESPN and Disney Parks, Experiences and Products. We will report under the new structure commencing with our annual fiscal 2023 reporting, at which time we will have implemented changes to our financial processes to reflect the reorganization. The new organizational structure and operational changes have resulted in restructuring and impairment charges (including the Content Impairment Charge discussed in Note 16 to the Condensed Consolidated Financial Statements) and may result in additional 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 • Current Nine-Month Period Results Compared to Prior-Year Nine-Month Period • Seasonality • Business Segment Results • Corporate and Unallocated Shared Expenses • Financial Condition • Supplemental Guarantor Financial Information • Commitments and Contingencies • Other Matters • Market Risk 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) CONSOLIDATED RESULTS Quarter Ended % Change Better (Worse) Nine Months Ended % Change Better (Worse) (in millions, except per share data) July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Revenues: Services $ 20,008 $ 19,461 3 % $ 60,591 $ 56,215 8 % Products 2,322 2,043 14 % 7,066 6,357 11 % Total revenues 22,330 21,504 4 % 67,657 62,572 8 % Costs and expenses: Cost of services (exclusive of depreciation and amortization) ( 12,974 ) ( 12,404 ) (5) % ( 40,915 ) ( 36,895 ) (11) % Cost of products (exclusive of depreciation and amortization) ( 1,497 ) ( 1,278 ) (17) % ( 4,558 ) ( 3,948 ) (15) % Selling, general, administrative and other ( 3,874 ) ( 4,100 ) 6 % ( 11,315 ) ( 11,655 ) 3 % Depreciation and amortization ( 1,344 ) ( 1,290 ) (4) % ( 3,960 ) ( 3,846 ) (3) % Total costs and expenses (19,689) (19,072) (3) % (60,748) (56,344) (8) % Restructuring and impairment charges ( 2,650 ) ( 42 ) >(100) % ( 2,871 ) ( 237 ) >(100) % Other income (expense), net ( 11 ) ( 136 ) 92 % 96 ( 730 ) nm Interest expense, net ( 305 ) ( 360 ) 15 % ( 927 ) ( 1,026 ) 10 % Equity in the income of investees 191 225 (15) % 555 674 (18) % Income (loss) from continuing operations before income taxes (134) 2,119 nm 3,762 4,909 (23) % Income taxes on continuing operations ( 19 ) ( 617 ) 97 % ( 1,066 ) ( 1,610 ) 34 % Net income (loss) from continuing operations (153) 1,502 nm 2,696 3,299 (18) % Loss from discontinued operations, net of income tax benefit of $0, $0, $0 and $14, respectively — — nm — ( 48 ) 100 % Net income (loss) (153) 1,502 nm 2,696 3,251 (17) % Net income from continuing operations attributable to noncontrolling interests ( 307 ) ( 93 ) >(100) % ( 606 ) ( 268 ) >(100) % Net income (loss) attributable to Disney $ (460) $ 1,409 nm $ 2,090 $ 2,983 (30) % Diluted earnings per share from continuing operations attributable to Disney $ ( 0.25 ) $ 0.77 nm $ 1.14 $ 1.66 (31) % CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER Revenues for the quarter increased 4%, or $0.8 billion, to $22.3 billion; net income (loss) attributable to Disney was a loss of $0.5 billion in the current quarter compared to income of $1.4 billion in the prior-year quarter; and diluted earnings per share from continuing operations attributable to Disney (EPS) was a loss of $0.25 in the current quarter compared to income of $0.77 in the prior-year quarter. The EPS decrease was due to the Content Impairment Charge in the current quarter. Revenues Service revenues for the quarter increased 3%, or $0.5 billion, to $20.0 billion due to higher DTC subscription revenue, increased revenues at our theme parks and resorts, and, to a lesser extent, an increase in theatrical distribution revenue. The increase in DTC subscription revenue was due to subscriber growth and higher rates. The increase at theme parks and resorts was due to higher volumes and guest spending growth. These increases were partially offset by lower advertising and TV/SVOD distribution revenues. Service revenues reflected an approximate 1 percentage point decrease due to an unfavorable 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 14%, or $0.3 billion, to $2.3 billion due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts. Product revenues reflected an approximate 1 percentage point decrease due to an unfavorable Foreign Exchange Impact. Costs and expenses Cost of services for the quarter increased 5%, or $0.6 billion, to $13.0 billion due to cost inflation and increased volumes at our theme parks and higher programming and production costs. The increase in programming and production costs was due 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) to higher costs at Direct-to-Consumer and increased production cost amortization resulting from higher theatrical revenue. These increases were partially offset by a decrease in production cost amortization due to lower TV/SVOD distribution sales. Costs of services reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact. Cost of products for the quarter increased 17%, or $0.2 billion, to $1.5 billion due to higher sales volumes of merchandise, food and beverage and cost inflation at our theme parks and resorts. Selling, general, administrative and other costs decreased 6% to $3.9 billion driven by lower compensation-related costs. Depreciation and amortization increased 4% 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 $2,650 million due to the Content Impairment Charge and severance. In the prior-year quarter, the Company recorded charges of $42 million primarily due to asset impairments related to exiting our businesses in Russia. Other income (expense), net Other expense, net in the current quarter includes a charge of $101 million related to a legal ruling, largely offset by a DraftKings gain of $90 million. Other expense in the prior-year quarter includes a DraftKings loss of $136 million. Interest expense, net Interest expense, net is as follows: Quarter Ended (in millions) July 1, 2023 July 2, 2022 % Change Better (Worse) Interest expense $ (503) $ (380) (32) % Interest income, investment income and other 198 20 >100 % Interest expense, net $ (305) $ (360) 15 % 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 higher interest income on cash balances and a favorable comparison of pension and postretirement benefit costs, other than service cost. Equity in the Income of Investees Income from equity investees decreased $34 million, to $191 million from $225 million, primarily due to lower income from A+E Television Networks. Effective Income Tax Rate Quarter Ended July 1, 2023 July 2, 2022 Income (loss) from continuing operations before income taxes $ (134) $ 2,119 Income tax on continuing operations 19 617 Effective income tax rate - continuing operations (14.2)% 29.1% The current quarter loss from continuing operations before income taxes included the $2,440 million Content Impairment Charge. Income tax on continuing operations included a benefit of $568 million from this charge using the Company’s marginal income tax rate of approximately 23%. Due to the significance of this charge on pre-tax income, our reported effective tax rate for the current quarter is negative 14.2%. Excluding the impact of this charge, the effective income tax rate on continuing operations would have been approximately 25.5% compared to 29.1% in the prior-year quarter. The decrease was due to the following: • Lower effective tax rates on foreign earnings in the current quarter compared to the prior-year quarter; and • A benefit from the comparison of adjustments related to prior years, which was favorable in the current quarter and unfavorable in the prior-year quarter. 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Noncontrolling Interests Quarter Ended (in millions) July 1, 2023 July 2, 2022 % Change Better (Worse) Net income from continuing operations attributable to noncontrolling interests $ (307) $ (93) >(100) % The increase in net income from continuing operations attributable to noncontrolling interests was due to improved results at Shanghai Disney Resort and, to a lesser extent, at Hong Kong Disneyland Resort. Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable. Certain Items Impacting Results in the Quarter Results for the quarter ended July 1, 2023 were impacted by the following: • Restructuring and impairment charges of $2,650 million • TFCF and Hulu acquisition amortization of $432 million • Other expense, net of $11 million reflects a charge of $101 million related to a legal ruling, partially offset by a DraftKings gain of $90 million Results for the quarter ended July 2, 2022 were impacted by the following: • TFCF and Hulu acquisition amortization of $585 million • Other expense of $136 million reflecting a DraftKings loss • Impairment charges of $42 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 July 1, 2023: Restructuring and impairment charges $ (2,650) $ 617 $ (2,033) $ (1.10) TFCF and Hulu acquisition amortization (432) 101 (331) (0.18) Other expense, net (11) 5 (6) — Total $ (3,093) $ 723 $ (2,370) $ (1.28) Quarter Ended July 2, 2022: TFCF and Hulu acquisition amortization $ (585) $ 136 $ (449) $ (0.24) Other expense (136) 32 (104) (0.06) Restructuring and impairment charges (42) 10 (32) (0.02) Total $ (763) $ 178 $ (585) $ (0.32) (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. CURRENT NINE-MONTH PERIOD RESULTS COMPARED TO PRIOR-YEAR NINE-MONTH PERIOD Revenues for the current period increased $5.1 billion, to $67.7 billion; net income attributable to Disney decreased $0.9 billion, to $2.1 billion; and EPS decreased to $1.14 from $1.66 in the prior-year period. The EPS decrease was due to the Content Impairment Charge and lower operating income at DMED. These decreases were partially offset by higher operating income at DPEP, the comparison to a revenue reduction for the Content License Early Termination in the prior-year period and investment gains in the current period compared to investment losses in the prior-year period. Revenues Service revenues for the current period increased 8%, or $4.4 billion, to $60.6 billion, due to growth at our theme parks and resorts, higher DTC subscription revenue, an increase in theatrical distribution revenue and the comparison to the revenue reduction for the Content License Early Termination in the prior-year period. These increases were partially offset by decreases 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) in advertising revenue, TV/SVOD distribution sales and, to a lesser extent, affiliate revenue. Growth at theme parks and resorts was due to higher volumes and guest spending. The increase in DTC subscription revenue was due to subscriber growth and higher rates. Service revenues reflected an approximate 1 percentage point decrease due to an unfavorable Foreign Exchange Impact. Product revenues for the current period increased 11%, or $0.7 billion, to $7.1 billion, due to higher volumes of merchandise, food and beverage at our theme parks and resorts, partially offset by lower home entertainment volumes. Product revenues reflected an approximate 2 percentage point decrease due to an unfavorable Foreign Exchange Impact. Costs and expenses Cost of services for the current period increased 11%, or $4.0 billion, to $40.9 billion, due to higher programming and production costs, cost inflation and increased volumes at our theme parks and resorts and, to a lesser extent, higher technology and distribution costs at Direct-to-Consumer. The increase in programming and production costs was due to higher costs at Direct-to-Consumer, increased production cost amortization resulting from higher theatrical revenue and, to a lesser extent, higher sports programming costs. These increases were partially offset by a decrease in production cost amortization due to lower TV/SVOD distribution sales. Costs of services reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact. Cost of products for the current period increased 15%, or $0.6 billion, to $4.6 billion, due to higher volumes of merchandise, food and beverage and cost inflation at our theme parks and resorts, partially offset by a decrease in home entertainment volumes. Costs of products reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact. Selling, general, administrative and other costs for the current period decreased 3%, or $0.3 billion, to $11.3 billion due to lower marketing costs at Direct-to-Consumer, partially offset by higher marketing costs at theatrical distribution, Parks and Experiences and Linear Networks. Selling, general, administrative and other costs reflected an approximate 1 percentage point decrease due to a favorable Foreign Exchange Impact. Depreciation and amortization increased 3% to $4.0 billion due to higher depreciation at our domestic theme parks and resorts. Restructuring and impairment charges In the current period, the Company recorded charges of $2,871 million due to the Content Impairment Charge, severance and costs related to exiting our businesses in Russia. In the prior-year period, the Company recorded charges of $237 million primarily due to the impairment of an intangible and other assets related to exiting our businesses in Russia. Other income (expense), net Other income, net in the current period includes a DraftKings gain of $169 million and a $28 million gain on the sale of a business, partially offset by a charge of $101 million related to a legal ruling. Other expense, net in the prior-year period includes a DraftKings loss of $726 million. Interest expense, net Interest expense, net is as follows: Nine Months Ended (in millions) July 1, 2023 July 2, 2022 % Change Better (Worse) Interest expense $ (1,472) $ (1,115) (32) % Interest income, investment income and other 545 89 >100 % Interest expense, net $ (927) $ (1,026) 10 % 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 $119 million, to $555 million from $674 million, due to lower income from A+E Television Networks. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Effective Income Tax Rate Nine Months Ended July 1, 2023 July 2, 2022 Income from continuing operations before income taxes $ 3,762 $ 4,909 Income tax on continuing operations 1,066 1,610 Effective income tax rate - continuing operations 28.3% 32.8% The decrease in the effective income tax rate was due to the following: • The benefit from the comparison of adjustments related to prior years, which was favorable in the current period and unfavorable in the prior-year period; • Lower effective tax rates on foreign earnings in the current period compared to the prior-year period; and • A favorable comparison to new tax regulations issued in the prior year that limited our ability to use certain accumulated foreign tax credits; and • An unfavorable impact in the current period compared to a favorable impact in the prior-year period for the tax effect of employee share-based awards. Noncontrolling Interests Nine Months Ended (in millions) July 1, 2023 July 2, 2022 % Change Better (Worse) Net income from continuing operations attributable to noncontrolling interests $ (606) $ (268) >(100) % The increase in net income from continuing operations attributable to noncontrolling interests was due to improved results at Shanghai Disney Resort, higher accretion of income related to BAMTech due to the MLB buy-out and lower losses at Hong Kong Disneyland Resort and at our domestic DTC sports business. These increases were partially offset by lower results at ESPN. Certain Items Impacting Results in the Nine-Month Period Results for the nine months ended July 1, 2023 were impacted by the following: • Restructuring and impairment charges of $2,871 million • TFCF and Hulu acquisition amortization of $1,569 million • Other income, net of $96 million reflecting a DraftKings gain of $169 million and a gain on the sale of a business of $28 million, partially offset by a charge of $101 million related to a legal ruling Results for the nine months ended July 2, 2022 were impacted by the following: • TFCF and Hulu acquisition amortization of $1,774 million • A $1.0 billion reduction in revenue for the Content License Early Termination • Other expense, net of $730 million reflecting a DraftKings loss • Impairment charges of $237 million 36 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) 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) Nine Months Ended July 1, 2023: Restructuring and impairment charges $ (2,871) $ 660 $ (2,211) $ (1.20) TFCF and Hulu acquisition amortization (1,569) 365 (1,204) (0.65) Other income, net 96 (13) 83 0.05 Total $ (4,344) $ 1,012 $ (3,332) $ (1.80) Nine Months Ended July 2, 2022: TFCF and Hulu acquisition amortization $ (1,774) $ 413 $ (1,361) $ (0.73) Content License Early Termination (1,023) 238 (785) (0.43) Other expense, net (730) 170 (560) (0.31) Restructuring and impairment charges (237) 55 (182) (0.10) Total $ (3,764) $ 876 $ (2,888) $ (1.57) (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 nine months ended July 1, 2023 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. 37 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) BUSINESS SEGMENT RESULTS The Company evaluates the performance of its operating businesses based on segment revenue and segment operating income. The following table presents revenues from our operating segments and other components of revenues: Quarter Ended % Change Better (Worse) Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Disney Media and Entertainment Distribution $ 14,004 $ 14,110 (1) % $ 42,819 $ 42,315 1 % Disney Parks, Experiences and Products 8,326 7,394 13 % 24,838 21,280 17 % Content License Early Termination — — nm — (1,023) 100 % Revenues $ 22,330 $ 21,504 4 % $ 67,657 $ 62,572 8 % The following table presents income from our operating segments and other components of income (loss) from continuing operations before income taxes: Quarter Ended % Change Better (Worse) Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Disney Media and Entertainment Distribution operating income $ 1,134 $ 1,381 (18) % $ 2,243 $ 4,133 (46) % Disney Parks, Experiences and Products operating income 2,425 2,186 11 % 7,644 6,391 20 % Content License Early Termination — — nm — (1,023) 100 % Corporate and unallocated shared expenses (295) (325) 9 % (854) (825) (4) % Restructuring and impairment charges (2,650) (42) >(100) % (2,871) (237) >(100) % Other income (expense), net (11) (136) 92 % 96 (730) nm Interest expense, net (305) (360) 15 % (927) (1,026) 10 % TFCF and Hulu acquisition amortization (432) (585) 26 % (1,569) (1,774) 12 % Income (loss) from continuing operations before income taxes $ (134) $ 2,119 nm $ 3,762 $ 4,909 (23) % 38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Depreciation expense is as follows: Quarter Ended % Change Better (Worse) Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Disney Media and Entertainment Distribution $ 199 $ 163 (22) % $ 532 $ 485 (10) % Disney Parks, Experiences and Products Domestic 524 434 (21) % 1,431 1,236 (16) % International 170 161 (6) % 503 496 (1) % Total Disney Parks, Experiences and Products 694 595 (17) % 1,934 1,732 (12) % Corporate 53 47 (13) % 153 141 (9) % Total depreciation expense $ 946 $ 805 (18) % $ 2,619 $ 2,358 (11) % Amortization of intangible assets is as follows: Quarter Ended % Change Better (Worse) Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Disney Media and Entertainment Distribution $ 9 $ 36 75 % $ 73 $ 115 37 % Disney Parks, Experiences and Products 28 27 (4) % 82 81 (1) % TFCF and Hulu intangible assets 361 422 14 % 1,186 1,292 8 % Total amortization of intangible assets $ 398 $ 485 18 % $ 1,341 $ 1,488 10 % 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) July 1, 2023 July 2, 2022 Revenues: Linear Networks $ 6,690 $ 7,189 (7) % Direct-to-Consumer 5,525 5,058 9 % Content Sales/Licensing and Other 2,082 2,111 (1) % Elimination of Intrasegment Revenue (1) (293) (248) (18) % $ 14,004 $ 14,110 (1) % Segment operating income (loss): Linear Networks $ 1,889 $ 2,469 (23) % Direct-to-Consumer (512) (1,061) 52 % Content Sales/Licensing and Other (243) (27) >(100) % $ 1,134 $ 1,381 (18) % (1) Reflects fees received by the Linear Networks from other DMED businesses for the right to air our Linear Networks and related services. 39 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Linear Networks Operating results for Linear Networks are as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues Affiliate fees $ 4,466 $ 4,585 (3) % Advertising 2,124 2,470 (14) % Other 100 134 (25) % Total revenues 6,690 7,189 (7) % Operating expenses (4,052) (4,091) 1 % Selling, general, administrative and other (916) (823) (11) % Depreciation and amortization (29) (34) 15 % Equity in the income of investees 196 228 (14) % Operating Income $ 1,889 $ 2,469 (23) % Revenues Affiliate revenue is as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Domestic Channels $ 3,817 $ 3,884 (2) % International Channels 649 701 (7) % $ 4,466 $ 4,585 (3) % The decrease in affiliate revenue at the Domestic Channels was due to a decrease of 6% from fewer subscribers, partially offset by an increase of 4% from higher contractual rates. The decrease in affiliate revenue at the International Channels was due to decreases of 10% from an unfavorable Foreign Exchange Impact and 6% from fewer subscribers, including the impact of channel closures, partially offset by an increase of 9% from higher contractual rates. Advertising revenue is as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Cable $ 1,034 $ 1,027 1 % Broadcasting 612 755 (19) % Domestic Channels 1,646 1,782 (8) % International Channels 478 688 (31) % $ 2,124 $ 2,470 (14) % Cable advertising revenue reflected a modest increase as higher impressions and rates at ESPN were largely offset by lower impressions at our non-sports channels. Lower Broadcasting advertising revenue was due to decreases of 9% from fewer impressions at ABC, resulting from lower average viewership, and 7% from lower rates at the owned television stations. The decline in International Channels advertising revenue was due to decreases of 29% from lower rates attributable to Indian Premier League (IPL) cricket programming and 6% from an unfavorable Foreign Exchange Impact, partially offset by an increase of 4% from higher impressions. Other revenue decreased $34 million, to $100 million from $134 million, driven by the comparison to sub-licensing fees from IPL cricket matches in the prior-year quarter. 40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Costs and Expenses Operating expenses primarily consist of programming and production costs, which are as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Cable $ (2,146) $ (2,066) (4) % Broadcasting (611) (614) — % Domestic Channels (2,757) (2,680) (3) % International Channels (927) (1,000) 7 % $ (3,684) $ (3,680) — % Programming and production costs at Cable increased due to higher sports programming and production costs attributable to contractual rate increases for NBA programming and new motor sports programming. Programming and production costs at the International Channels decreased due to a favorable Foreign Exchange Impact. Selling, general administrative and other costs increased $93 million, to $916 million from $823 million, driven by higher marketing costs. Equity in the Income of Investees Income from equity investees decreased $32 million, to $196 million from $228 million, primarily due to lower income from A+E Television Networks driven by a decrease in advertising revenue. Operating Income from Linear Networks Operating income from Linear Networks decreased $580 million, to $1,889 million from $2,469 million, due to decreases at the International Channels, Broadcasting and Cable. The following table provides supplemental revenue and operating income detail for Linear Networks: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Supplemental revenue detail Domestic Channels $ 5,494 $ 5,700 (4) % International Channels 1,196 1,489 (20) % $ 6,690 $ 7,189 (7) % Supplemental operating income detail Domestic Channels $ 1,780 $ 2,075 (14) % International Channels (87) 166 nm Equity in the income of investees 196 228 (14) % $ 1,889 $ 2,469 (23) % 41 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) July 1, 2023 July 2, 2022 Revenues Subscription fees $ 4,537 $ 3,889 17 % Advertising 873 1,018 (14) % TV/SVOD distribution and other 115 151 (24) % Total revenues 5,525 5,058 9 % Operating expenses (4,898) (4,536) (8) % Selling, general, administrative and other (1,059) (1,494) 29 % Depreciation and amortization (80) (89) 10 % Operating Loss $ (512) $ (1,061) 52 % Revenues Growth in subscription fees reflected an increase of 10% from more subscribers due to growth at Disney+ Core and, to a lesser extent, Hulu and ESPN+. Higher subscription fees also reflected growth of 9% from higher rates, attributable to increases in retail pricing at Disney+ Core, Hulu and, to a lesser extent, at ESPN+. These increases were partially offset by a decrease of 2% from an unfavorable Foreign Exchange Impact. Lower advertising revenue reflected a decrease of 13% from fewer impressions due to declines at Disney+ and Hulu. The decrease at Disney+ was attributable to the comparison to IPL cricket programming in the prior-year quarter, as we did not renew the digital rights beginning with the 2023 season. This decrease was partially offset by the U.S. launch of ad-supported Disney+ in the first quarter of the current fiscal year. The decrease in TV/SVOD distribution and other revenue was attributable to lower Ultimate Fighting Championship (UFC) pay-per-view fees due to a decrease in average buys per event and the impact of airing one less event in the current quarter compared to the prior-year quarter. The following tables present additional information about our Disney+, ESPN+ and Hulu DTC product offerings (1) . Paid subscribers (2) at: % Change Better (Worse) (in millions) July 1, 2023 April 1, 2023 July 2, 2022 July 1, 2023 vs. April 1, 2023 July 1, 2023 vs. July 2, 2022 Disney+ Domestic (U.S. and Canada) 46.0 46.3 44.5 (1) % 3 % International (excluding Disney+ Hotstar) (3) 59.7 58.6 49.2 2 % 21 % Disney+ Core (4) 105.7 104.9 93.6 1 % 13 % Disney+ Hotstar 40.4 52.9 58.4 (24) % (31) % ESPN+ 25.2 25.3 22.8 — % 11 % Hulu SVOD Only 44.0 43.7 42.2 1 % 4 % Live TV + SVOD 4.3 4.4 4.0 (2) % 8 % Total Hulu (4) 48.3 48.2 46.2 — % 5 % 42 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Average Monthly Revenue Per Paid Subscriber (5) : Quarter Ended % Change Better (Worse) July 1, 2023 April 1, 2023 July 2, 2022 July 1, 2023 vs. April 1, 2023 July 1, 2023 vs. July 2, 2022 Disney+ Domestic (U.S. and Canada) $ 7.31 $ 7.14 $ 6.27 2 % 17 % International (excluding Disney+ Hotstar) (3) 6.01 5.93 6.31 1 % (5) % Disney+ Core 6.58 6.47 6.29 2 % 5 % Disney+ Hotstar 0.59 0.59 1.20 — % (51) % ESPN+ 5.45 5.64 4.55 (3) % 20 % Hulu SVOD Only 12.39 11.73 12.92 6 % (4) % Live TV + SVOD 91.80 92.32 87.92 (1) % 4 % (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. Supplemental information about paid subscribers: (in millions) July 1, 2023 April 1, 2023 July 2, 2022 Domestic (U.S. and Canada) standalone 55.6 57.0 60.6 Domestic (U.S. and Canada) multi-product (a) 21.9 21.4 17.8 77.5 78.4 78.4 International standalone (excluding Disney+ Hotstar) (b) 49.8 49.6 43.6 International multi-product (c) 9.9 9.0 5.6 59.7 58.6 49.2 Total (4) 137.2 137.0 127.6 (a) At July 1, 2023, there were 20.1 million and 1.8 million subscribers to three-service and two-service multi-product offerings, respectively. At April 1, 2023, there were 20.0 million and 1.4 million subscribers to three-service and two-service multi-product offerings, respectively. At July 2, 2022, there were 17.3 million and 0.5 million subscribers to three-service and two-service multi-product offerings, respectively. (b) Disney+ Hotstar is not included in any of the Company’s multi-product offerings. (c) Consists of subscribers to Combo+. 43 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) (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. Average Monthly Revenue Per Paid Subscriber - Third Quarter of Fiscal 2023 Comparison to Second Quarter of Fiscal 2023 Domestic Disney+ average monthly revenue per paid subscriber increased from $7.14 to $7.31 due to higher per-subscriber advertising revenue. International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber increased from $5.93 to $6.01 due to an increase in average retail pricing and a favorable Foreign Exchange Impact, partially offset by a higher mix of wholesale subscribers. ESPN+ average monthly revenue per paid subscriber decreased from $5.64 to $5.45 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product offerings. Hulu SVOD Only average monthly revenue per paid subscriber increased from $11.73 to $12.39 due to higher per-subscriber advertising revenue. Hulu Live TV + SVOD average monthly revenue per paid subscriber decreased from $92.32 to $91.80. The decrease included lower per-subscriber subscription revenue due to a mix shift of subscribers between bundled services. The decrease was partially offset by higher per-subscriber advertising revenue. Average Monthly Revenue Per Paid Subscriber - Third Quarter of Fiscal 2023 Comparison to Third Quarter of Fiscal 2022 Domestic Disney+ average monthly revenue per paid subscriber increased from $6.27 to $7.31 due to an increase in average retail pricing and advertising revenue from the launch of ad-supported Disney+, partially offset by a higher mix of subscribers to multi-product offerings. International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber decreased from $6.31 to $6.01 due to an unfavorable Foreign Exchange Impact and a decrease in average retail pricing, partially offset by a lower mix of wholesale subscribers. The decrease in average retail pricing reflected the impact of a higher mix of subscribers from lower-priced markets. Disney+ Hotstar average monthly revenue per paid subscriber decreased from $1.20 to $0.59 due to lower per-subscriber advertising revenue. ESPN+ average monthly revenue per paid subscriber increased from $4.55 to $5.45 due to an increase in retail pricing, partially offset by a higher mix of subscribers to multi-product offerings. Hulu SVOD Only average monthly revenue per paid subscriber decreased from $12.92 to $12.39 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product offerings, partially offset by an increase in average retail pricing. Hulu Live TV + SVOD average monthly revenue per paid subscriber increased from $87.92 to $91.80 due to an increase in average retail pricing, partially offset by lower per-subscriber advertising revenue. 44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Costs and Expenses Operating expenses are as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Programming and production costs Disney+ $ (1,632) $ (1,435) (14) % Hulu (2,066) (1,894) (9) % ESPN+ and other (345) (385) 10 % Total programming and production costs (4,043) (3,714) (9) % Other operating expense (855) (822) (4) % $ (4,898) $ (4,536) (8) % The increase in programming and production costs at Disney+ was due to higher costs for non-sports content, partially offset by a decrease in sports programming costs reflecting the comparison to IPL cricket programming in the prior-year quarter. Higher costs for non-sports content were due to more content provided on the service. Higher programming and production costs at Hulu were attributable to more content provided on the service and increased subscriber-based fees for programming the Live TV service, partially offset by a lower average cost mix of SVOD content. Higher subscriber-based fees for programming the Live TV service resulted from more subscribers and rate increases. The decrease in programming and production costs at ESPN+ and other was driven by lower costs for UFC programming due to one less event in the current quarter compared to the prior-year quarter. Selling, general, administrative and other costs decreased $435 million, to $1,059 million from $1,494 million, primarily due to a decrease in marketing and compensation-related costs at Disney+ and Hulu. Operating Loss from Direct-to-Consumer The operating loss from Direct-to-Consumer decreased $549 million, to $512 million from $1,061 million, due to a lower loss at Disney+, higher operating income at Hulu and a lower loss at ESPN+. Content Sales/Licensing and Other Operating results for Content Sales/Licensing and Other are as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues TV/SVOD distribution $ 605 $ 937 (35) % Theatrical distribution 838 620 35 % Home entertainment 209 149 40 % Other 430 405 6 % Total revenues 2,082 2,111 (1) % Operating expenses (1,467) (1,414) (4) % Selling, general, administrative and other (757) (650) (16) % Depreciation and amortization (99) (76) (30) % Equity in the income (loss) of investees (2) 2 nm Operating Loss $ (243) $ (27) >(100) % Revenues The decrease in TV/SVOD distribution revenue was due to lower sales volumes of episodic television and film content. The increase in theatrical distribution revenue was due to the release of more significant titles in the current quarter compared to the prior-year quarter. The current quarter included Guardians of the Galaxy Vol. 3 , The Little Mermaid, Elemental 45 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) and Indiana Jones and the Dial of Destiny , which was released in most territories in the last few days of June. The prior-year quarter included Doctor Strange In the Multiverse of Madness and Lightyear . The increase in home entertainment revenue was due to higher unit sales of new release titles driven by the performance of Avatar: The Way of Water . Other new releases in the current quarter included Ant-Man and the Wasp: Quantumania , whereas the prior-year quarter included Turning Red , Encanto and Death on the Nile . Costs and Expenses Operating expenses are as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Programming and production costs $ (1,135) $ (1,123) (1) % Cost of goods sold and distribution costs (332) (291) (14) % $ (1,467) $ (1,414) (4) % Programming and production costs were comparable to the prior-year quarter as higher production cost amortization from more theatrical releases and higher home entertainment distribution revenue was largely offset by a decrease due to lower TV/SVOD distribution sales. The increase in cost of goods sold and distribution costs was driven by increased theatrical distribution costs and higher home entertainment volumes. Selling, general, administrative and other costs increased $107 million, to $757 million from $650 million, due to higher theatrical marketing costs driven by more titles released in the current quarter compared to the prior-year quarter. Depreciation and amortization increased $23 million, to $99 million from $76 million, primarily due to asset write-offs in the current quarter and increased investment in technology assets. Operating Loss from Content Sales/Licensing and Other Operating loss from Content Sales/Licensing and Other increased $216 million to $243 million from $27 million due to lower TV/SVOD and theatrical distribution results. 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) July 1, 2023 July 2, 2022 Restructuring and impairment charges (1) $ (2,619) $ (34) >(100) % TFCF and Hulu acquisition amortization (2) (430) (583) 26 % (1) Charges for the current period were due to the Content Impairment Charge and, to a lesser extent, severance. Charges for the prior-year quarter were primarily due to asset impairments related to exiting our businesses in Russia. (2) In the current quarter, amortization of intangible assets was $359 million and amortization of step-up on film and television costs was $68 million. In the prior-year quarter, amortization of intangible assets was $420 million and amortization of step-up on film and television costs was $160 million. 46 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Disney Parks, Experiences and Products Operating results for the DPEP segment are as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues Theme park admissions $ 2,731 $ 2,312 18 % Parks & Experiences merchandise, food and beverage 1,963 1,688 16 % Resorts and vacations 1,990 1,805 10 % Merchandise licensing and retail 1,138 1,175 (3) % Parks licensing and other 504 414 22 % Total revenues 8,326 7,394 13 % Operating expenses (4,279) (3,729) (15) % Selling, general, administrative and other (900) (855) (5) % Depreciation and amortization (722) (622) (16) % Equity in the loss of investees — (2) — % Operating Income $ 2,425 $ 2,186 11 % Revenues Higher theme park admissions revenue was due to increases of 13% from attendance growth and 5% from higher average per capita ticket revenue. Attendance growth reflected increases at Shanghai Disney Resort and, to a lesser extent, Disneyland Resort, partially offset by a decrease at Walt Disney World Resort. Parks & Experiences merchandise, food and beverage revenue growth reflected increases of 11% from higher volumes and 3% from higher average guest spending. Volume growth reflected increases at Shanghai Disney Resort and, to a lesser extent, Disneyland Resort and Hong Kong Disneyland Resort, partially offset by a decrease at Walt Disney World Resort. Higher resorts and vacations revenue was due to an increase of 13% from additional passenger cruise days, partially offset by a decrease of 3% from lower unit sales at Disney Vacation Club. Occupied room nights were comparable to the prior-year quarter as increases at Shanghai Disney Resort and Hong Kong Disneyland Resort, were largely offset by a decrease at Walt Disney World Resort. Merchandise licensing and retail revenue was lower primarily due to a decrease of 2% from merchandise licensing primarily attributable to a decrease in sales of merchandise based on Star Wars, Toy Story and Avengers, partially offset by higher minimum guarantee shortfall recognition and an increase in sales of merchandise based on Disney Princess and Spider-Man. The increase in parks licensing and other revenue was primarily due to increases in sponsorship revenue and royalties from Tokyo Disney Resort. 47 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) 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 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Parks Increase (decrease) Attendance (2) 1 % 93 % 88 % 17 % 20 % 69 % Per Capita Guest Spending (3) — % 10 % 16 % 28 % (2) % 18 % Hotels Occupancy (4) 84 % 90 % 74 % 61 % 82 % 83 % Available Hotel Room Nights (in thousands) (5) 2,527 2,501 793 793 3,320 3,294 Change in Per Room Guest Spending (6) (1) % 19 % 19 % 6 % 1 % 18 % (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. In the current quarter, the Company revised its method of allocating revenue on the sales of Disneyland Paris vacation packages between hotel room revenue and admissions revenue. The new method resulted in a decrease in the percentage of revenue allocated to hotel rooms. If we had applied the new method in the prior-year quarter, the impact would have been a decrease of approximately $20 million in the prior-year quarter. Costs and Expenses Operating expenses are as follows: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Operating labor $ (1,938) $ (1,693) (14) % Cost of goods sold and distribution costs (811) (679) (19) % Infrastructure costs (754) (731) (3) % Other operating expense (776) (626) (24) % $ (4,279) $ (3,729) (15) % Higher operating labor was primarily attributable to inflation and higher volumes. The increases in cost of goods sold and distribution costs and infrastructure costs reflected volume growth. Other operating expense increased due to higher volumes and inflation. 48 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Selling, general, administrative and other costs increased $45 million, to $900 million from $855 million, primarily due to higher marketing expense. Depreciation and amortization increased $100 million, to $722 million from $622 million, due to accelerated depreciation related to the planned closure of Star Wars: Galactic Starcruiser. Segment Operating Income Segment operating income increased from $2.2 billion to $2.4 billion due to growth at our international parks and resorts, partially offset by decreases at our domestic parks and experiences and, to a lesser extent, our consumer products business. The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Supplemental revenue detail Parks & Experiences Domestic $ 5,649 $ 5,423 4 % International 1,532 788 94 % Consumer Products 1,145 1,183 (3) % $ 8,326 $ 7,394 13 % Supplemental operating income (loss) detail Parks & Experiences Domestic $ 1,436 $ 1,651 (13) % International 428 (64) nm Consumer Products 561 599 (6) % $ 2,425 $ 2,186 11 % Items Excluded from Segment Operating Income Related to Disney Parks, Experiences and Products The following table presents supplemental information for items related to the DPEP segment that are excluded from segment operating income: Quarter Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Charge related to a legal ruling $ (101) $ — nm Restructuring and impairment charges (1) (16) — nm TFCF and Hulu acquisition amortization (2) (2) — % (1) Charges for the current period were due to severance at our consumer products and parks and resorts businesses. 49 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) BUSINESS SEGMENT RESULTS - Current Period Nine-Month Results Compared to the Prior-Year Nine-Month Period Disney Media and Entertainment Distribution Revenue and operating results for the DMED segment are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues: Linear Networks $ 20,608 $ 22,011 (6) % Direct-to-Consumer 16,346 14,651 12 % Content Sales/Licensing and Other 6,739 6,410 5 % Elimination of Intrasegment Revenue (1) (874) (757) (15) % $ 42,819 $ 42,315 1 % Segment operating income (loss): Linear Networks $ 4,972 $ 6,783 (27) % Direct-to-Consumer (2,224) (2,541) 12 % Content Sales/Licensing and Other (505) (109) >(100) % $ 2,243 $ 4,133 (46) % (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: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues Affiliate fees $ 13,683 $ 14,067 (3) % Advertising 6,390 7,392 (14) % Other 535 552 (3) % Total revenues 20,608 22,011 (6) % Operating expenses (13,460) (13,331) (1) % Selling, general, administrative and other (2,664) (2,480) (7) % Depreciation and amortization (79) (108) 27 % Equity in the income of investees 567 691 (18) % Operating Income $ 4,972 $ 6,783 (27) % Revenues Affiliate revenue is as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Domestic Channels $ 11,746 $ 11,869 (1) % International Channels 1,937 2,198 (12) % $ 13,683 $ 14,067 (3) % 50 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Affiliate revenue at the Domestic Channels was comparable to the prior-year period as a decrease of 6% from fewer subscribers was largely offset by an increase of 5% from higher contractual rates. The decrease in affiliate revenue at the International Channels was due to decreases of 10% from an unfavorable Foreign Exchange Impact and 7% from fewer subscribers, driven by channel closures. These decreases were partially offset by an increase of 5% from higher contractual rates. Advertising revenue is as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Cable $ 3,052 $ 3,153 (3) % Broadcasting 2,151 2,451 (12) % Domestic Channels 5,203 5,604 (7) % International Channels 1,187 1,788 (34) % $ 6,390 $ 7,392 (14) % Lower advertising revenue at Cable was driven by a decrease of 1% from fewer impressions as lower viewership at our non-sports channels was partially offset by higher viewership at ESPN. The decrease in Broadcasting advertising revenue was due to decreases of 10% from fewer impressions at ABC, 1% from lower rates at the owned television stations and 1% from lower rates at ABC. The decrease in ABC impressions was due to lower average viewership. The decrease in International Channels advertising revenue was due to decreases of 18% from lower rates, 8% from fewer impressions attributable to lower average viewership, and 7% from an unfavorable Foreign Exchange Impact. The decrease in average viewership reflected the timing of IPL matches. Fewer IPL matches aired in the current period compared to the prior-year period as matches from the 2021 season shifted into fiscal 2022 due to COVID-19. Costs and Expenses Operating expenses primarily consist of programming and production costs, which are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Cable $ (7,733) $ (7,423) (4) % Broadcasting (2,190) (2,152) (2) % Domestic Channels (9,923) (9,575) (4) % International Channels (2,347) (2,588) 9 % $ (12,270) $ (12,163) (1) % The increase in programming and production costs at Cable was due to higher sports programming costs attributable to contractual rate increases for NBA, College Football Playoffs and NFL programming, higher sports production costs, new motor sports programming and higher costs for NHL and MLB programming. These increases were partially offset by lower non-sports programming costs due to a lower cost mix of programming at FX Channels. Higher sports production costs were primarily due to programming additions in the current period and increased talent costs. The increase in NHL rights costs was due to more games aired in the current period. Higher MLB programming costs in the current period were a result of fewer games aired in the prior-year period, as the start of the 2022 season was delayed. The increase in programming and production costs at Broadcasting was due to a higher cost mix of programming at ABC. The decrease in programming and production costs at the International Channels was due to a favorable Foreign Exchange Impact, and to a lesser extent, lower sports programming costs and the impact of channel closures. The decrease in sports programming costs was due to lower costs for cricket programming driven by fewer IPL matches in the current period compared to the prior-year period, partially offset by higher soccer rights costs and increased production spending. Selling, general administrative and other costs increased $184 million, to $2,664 million from $2,480 million, primarily due to higher overhead and marketing costs, partially offset by a favorable Foreign Exchange Impact and a gain on the sale of an interest in our X Games business. 51 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Depreciation and amortization decreased $29 million, to $79 million from $108 million, driven by technology assets that were fully depreciated. Equity in the Income of Investees Income from equity investees decreased $124 million, to $567 million from $691 million, due to lower income from A+E Television Networks primarily due to a decrease in advertising revenue. Operating Income from Linear Networks Operating income from Linear Networks decreased $1,811 million, to $4,972 million from $6,783 million, due to decreases at the International Channels, Cable and Broadcasting, and to a lesser extent, lower income from our equity investees. The following table provides supplemental revenue and operating income detail for Linear Networks: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Supplemental revenue detail Domestic Channels $ 17,133 $ 17,678 (3) % International Channels 3,475 4,333 (20) % $ 20,608 $ 22,011 (6) % Supplemental operating income detail Domestic Channels $ 4,276 $ 5,312 (20) % International Channels 129 780 (83) % Equity in the income of investees 567 691 (18) % $ 4,972 $ 6,783 (27) % Direct-to-Consumer Operating results for Direct-to-Consumer are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues Subscription fees $ 13,382 $ 11,374 18 % Advertising 2,520 2,889 (13) % TV/SVOD distribution and other 444 388 14 % Total revenues 16,346 14,651 12 % Operating expenses (15,062) (12,860) (17) % Selling, general, administrative and other (3,244) (4,059) 20 % Depreciation and amortization (264) (273) 3 % Operating Loss $ (2,224) $ (2,541) 12 % Revenues Growth in subscription fees reflected an increase of 13% from more subscribers due to growth at Disney+ Core and, to a lesser extent, Hulu and ESPN+. Higher subscription fees also reflected growth of 7% from higher rates, attributable to increases in retail pricing at Hulu, Disney+ Core and ESPN+. These increases were partially offset by a decrease of 2% from an unfavorable Foreign Exchange Impact. Lower advertising revenue reflected a decrease of 13% from fewer impressions due to declines at Hulu and Disney+, partially offset by growth of 3% from higher rates due to an increase at Hulu. The decrease in impressions at Disney+ was due to the comparison to IPL cricket programming in the prior-year period, as we did not renew the digital rights beginning with the 2023 season. This decrease was partially offset by the U.S. launch of ad-supported Disney+ in the first quarter of the current fiscal year. 52 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) The increase in TV/SVOD distribution and other revenue was due to a favorable Foreign Exchange Impact and higher recognition of minimum guarantee shortfalls from wholesale distributors, partially offset by lower UFC pay-per-view fees. The decrease in UFC pay-per-view fees was attributable to a decrease in average buys per event, partially offset by the impact of airing one more event in the current period compared to the prior-year period and higher pricing. The following table presents Average Monthly Revenue Per Paid Subscriber: Nine Months Ended % Change Better (Worse) July 1, 2023 July 2, 2022 Disney+ Domestic (U.S. and Canada) $ 6.80 $ 6.42 6 % International (excluding Disney+ Hotstar) 5.82 6.22 (6) % Disney+ Core 6.26 6.32 (1) % Disney+ Hotstar 0.65 1.01 (36) % ESPN+ 5.54 4.79 16 % Hulu SVOD Only 12.19 12.88 (5) % Live TV + SVOD 90.66 87.90 3 % Domestic Disney+ average monthly revenue per paid subscriber increased from $6.42 to $6.80 due to increases in average retail pricing and per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings. International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber decreased from $6.22 to $5.82 due to an unfavorable Foreign Exchange Impact and a decrease in average retail pricing, partially offset by a lower mix of wholesale subscribers. The decrease in average retail pricing reflected the impact of a higher mix of subscribers from lower-priced markets. Disney+ Hotstar average monthly revenue per paid subscriber decreased from $1.01 to $0.65 due to lower per-subscriber advertising revenue, partially offset by a lower mix of wholesale subscribers. ESPN+ average monthly revenue per paid subscriber increased from $4.79 to $5.54 due to an increase in retail pricing, partially offset by a higher mix of subscribers to multi-product offerings. Hulu SVOD Only average monthly revenue per paid subscriber decreased from $12.88 to $12.19 due to lower per-subscriber advertising revenue and a higher mix of subscribers to multi-product offerings, partially offset by an increase in average retail pricing. Hulu Live TV + SVOD average monthly revenue per paid subscriber increased from $87.90 to $90.66 due to an increase in average retail pricing, partially offset by a higher mix of subscribers to multi-product offerings and, to a lesser extent, a decrease in per-subscriber advertising revenue and lower per-subscriber premium and feature add-on revenue. Costs and Expenses Operating expenses are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Programming and production costs Disney+ $ (4,880) $ (3,551) (37) % Hulu (6,300) (5,639) (12) % ESPN+ and other (1,190) (1,266) 6 % Total programming and production costs (12,370) (10,456) (18) % Other operating expense (2,692) (2,404) (12) % $ (15,062) $ (12,860) (17) % 53 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) The increase in programming and production costs at Disney+ was attributable to more content provided on the service. Higher programming and production costs at Hulu were due to more content provided on the service and increased subscriber-based fees for programming the Live TV service attributable to rate increases and more subscribers. The decrease in programming and production costs at ESPN+ and other was due to fewer new docuseries and lower costs for soccer and NHL programming, partially offset by higher costs for UFC programming. The decreases in soccer and NHL programming reflected the impact from a greater percentage of games aired or simulcast at Linear Networks in the current period compared to the prior-year period. The increase in costs for UFC programming was attributable to an increase in contractual rates. Other operating expenses increased primarily due to higher technology and distribution costs at Disney+. Selling, general, administrative and other costs decreased $815 million, to $3,244 million from $4,059 million, primarily attributable to lower marketing costs at Disney+ and, to a lesser extent, at Hulu. Operating Loss from Direct-to-Consumer The operating loss from Direct-to-Consumer decreased $317 million, to $2,224 million from $2,541 million, due to improved results at ESPN+ and Disney+, partially offset by lower operating income at Hulu. Content Sales/Licensing and Other Operating results for Content Sales/Licensing and Other are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues TV/SVOD distribution $ 2,212 $ 3,109 (29) % Theatrical distribution 2,745 1,373 100 % Home entertainment 492 673 (27) % Other 1,290 1,255 3 % Total revenues 6,739 6,410 5 % Operating expenses (4,927) (4,271) (15) % Selling, general, administrative and other (2,054) (2,031) (1) % Depreciation and amortization (262) (219) (20) % Equity in the income (loss) of investees (1) 2 nm Operating Loss $ (505) $ (109) >(100) % Revenues The decrease in TV/SVOD distribution revenue was due to lower sales of both episodic television and film content. The decrease in sales of episodic television content was due to non-returning series sold in the prior-year period. The decrease in sales of film content was due to lower sales volume including the impact of the shift from licensing content to third parties to distributing it on our DTC services. The increase in theatrical distribution revenue was due to the release of Avatar: The Way of Water , three Marvel titles and The Little Mermaid in the current period compared to the release of three Marvel titles , Death on the Nile and The King’s Man in the prior-year period. The Marvel titles released in the current period were Black Panther: Wakanda Forever , Guardians of the Galaxy Vol. 3 and Ant-Man and the Wasp: Quantumania , whereas the prior-year period included Doctor Strange In the Multiverse of Madness, Eternals and the co-produced title Spider-Man: No Way Home . The decrease in home entertainment revenue was primarily due to lower unit sales. The increase in other revenue was due to higher revenue from stage plays, resulting from improved performance, partially offset by lower music revenues. 54 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Costs and Expenses Operating expenses are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Programming and production costs $ (3,889) $ (3,292) (18) % Cost of goods sold and distribution costs (1,038) (979) (6) % $ (4,927) $ (4,271) (15) % The increase in programming and production costs was due to higher production cost amortization attributable to the increase in theatrical revenue, partially offset by decreases due to lower TV/SVOD and, to a lesser extent, home entertainment distribution revenues. Higher cost of goods sold and distribution costs were attributable to the realignment of certain costs previously reported in general and administrative costs and increased theatrical distribution costs. Selling, general, administrative and other costs increased $23 million, to $2,054 million from $2,031 million, due to higher theatrical marketing costs, partially offset by the realignment of certain costs to cost of goods sold and distribution costs. Depreciation and amortization increased $43 million, to $262 million from $219 million, due to increased investment in technology assets and asset write-offs in the current period. Operating Loss from Content Sales/Licensing and Other The operating loss from Content Sales/Licensing and Other increased $396 million, to $505 million from $109 million, due to lower TV/SVOD distribution results, partially offset by higher theatrical distribution results. 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: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Restructuring and impairment charges (1) $ (2,810) $ (229) >(100) % TFCF and Hulu acquisition amortization (2) (1,563) (1,768) 12 % Content License Early Termination — (1,023) 100 % Gain on sale of a business 28 — nm (1) Charges for the current period were due to the Content Impairment Charge and, to a lesser extent, severance and exiting our businesses in Russia. Charges for the prior-year period were due to the impairment of an intangible and other assets related to exiting our businesses in Russia. (2) In the current period, amortization of intangible assets was $1,180 million and amortization of step-up on film and television costs was $374 million. In the prior-year period, amortization of intangible assets was $1,286 million and amortization of step-up on film and television costs was $473 million. 55 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) Disney Parks, Experiences and Products Operating results for the DPEP segment are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Revenues Theme park admissions $ 7,800 $ 6,437 21 % Parks & Experiences merchandise, food and beverage 5,846 4,829 21 % Resorts and vacations 5,919 4,701 26 % Merchandise licensing and retail 3,695 3,902 (5) % Parks licensing and other 1,578 1,411 12 % Total revenues 24,838 21,280 17 % Operating expenses (12,524) (10,665) (17) % Selling, general, administrative and other (2,652) (2,401) (10) % Depreciation and amortization (2,016) (1,813) (11) % Equity in the loss of investees (2) (10) 80 % Operating Income $ 7,644 $ 6,391 20 % Revenues The increase in theme park admissions revenue was due to increases of 14% from attendance growth and 8% from higher average per capita ticket revenue. Parks & Experiences merchandise, food and beverage revenue growth reflected increases of 14% from higher volumes and 4% from higher average guest spending. Higher resorts and vacations revenue was attributable to increases of 18% from additional passenger cruise days and 5% from higher occupied hotel room nights. The decrease in merchandise licensing and retail revenue was due to decreases of 2% from merchandise licensing, 1% from retail and 1% from an unfavorable Foreign Exchange Impact. The decrease in merchandise licensing revenue was primarily due to lower sales of merchandise based on Star Wars, Frozen and Mickey and Friends, partially offset by higher minimum guarantee shortfall recognition. Lower retail revenue was primarily due to a decrease in online sales. The increase in parks licensing and other revenue was primarily due to higher royalties from Tokyo Disney Resort and increases in sponsorship and co-branding revenues, partially offset by lower real estate sales. 56 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) 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 Total Nine Months Ended Nine Months Ended Nine Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Parks Increase (decrease) Attendance 6 % nm 64 % 64 % 19 % nm Per Capita Guest Spending 4 % 17 % 20 % 21 % 2 % 23 % Hotels Occupancy 87 % 82 % 71 % 53 % 83 % 75 % Available Hotel Room Nights (in thousands) 7,565 7,564 2,380 2,380 9,945 9,944 Change in Per Room Guest Spending (1) 1 % 26 % 14 % (3) % 1 % 21 % (1) In the current quarter, the Company revised its method of allocating revenue on the sales of Disneyland Paris vacation packages between hotel room revenue and admissions revenue. The new method resulted in a decrease in the percentage of revenue allocated to hotel rooms. If we had applied the new method in the prior-year period and the first six months of the current year, the impact would have been a decrease of approximately $30 million in both periods. Costs and Expenses Operating expenses are as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Operating labor $ (5,553) $ (4,818) (15) % Cost of goods sold and distribution costs (2,490) (2,119) (18) % Infrastructure costs (2,226) (1,958) (14) % Other operating expense (2,255) (1,770) (27) % $ (12,524) $ (10,665) (17) % The increase in operating labor was attributable to inflation, higher volumes and increased costs for new guest offerings. Cost of goods sold and distribution costs increased due to higher volumes, while the increase in infrastructure costs was attributable to higher volumes and increased technology spending. Other operating expense increased due to volume growth, inflation and higher operations support costs. Selling, general, administrative and other costs increased $251 million, to $2,652 million from $2,401 million, driven by higher marketing spend and a loss on the disposal of our ownership interest in Villages Nature. Depreciation and amortization increased $203 million, to $2,016 million from $1,813 million, primarily due to accelerated depreciation related to the planned closure of Star Wars: Galactic Starcruiser and depreciation for the Disney Wish , which launched in the fourth quarter of the prior year. Segment Operating Income Segment operating income increased from $6.4 billion to $7.6 billion due to growth at our international and domestic parks and experiences, partially offset by a decrease at our consumer products business. 57 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) The following table presents supplemental revenue and operating income (loss) detail for the DPEP segment: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Supplemental revenue detail Parks & Experiences Domestic $ 17,293 $ 15,121 14 % International 3,810 2,223 71 % Consumer Products 3,735 3,936 (5) % $ 24,838 $ 21,280 17 % Supplemental operating income (loss) detail Parks & Experiences Domestic $ 5,068 $ 4,591 10 % International 663 (311) nm Consumer Products 1,913 2,111 (9) % $ 7,644 $ 6,391 20 % Items Excluded from Segment Operating Income Related to Disney Parks, Experiences and Products The following table presents supplemental information for items related to the DPEP segment that are excluded from segment operating income: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Charge related to a legal ruling $ (101) $ — nm Restructuring and impairment charges (1) (27) — nm TFCF and Hulu acquisition amortization (6) (6) — % (1) Charges for the current period were due to severance at our consumer products and parks and resorts businesses. CORPORATE AND UNALLOCATED SHARED EXPENSES Quarter Ended % Change Better (Worse) Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Corporate and unallocated shared expenses $ (295) $ (325) 9 % $ (854) $ (825) (4) % Corporate and unallocated shared expenses decreased $30 million for the quarter, from $325 million to $295 million, primarily due to lower compensation and human resource-related costs, partially offset by an expense associated with an abandoned project and higher rent expense. Corporate and unallocated shared expenses for the current nine-month period increased $29 million, from $825 million to $854 million, primarily due to increases in rent expense and technology costs, an expense associated with an abandoned project and higher marketing spend on the Disney100 celebration. These increases were partially offset by lower compensation and human resource-related costs. 58 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) FINANCIAL CONDITION The change in cash and cash equivalents is as follows: Nine Months Ended % Change Better (Worse) (in millions) July 1, 2023 July 2, 2022 Cash provided by operations - continuing operations $ 5,064 $ 3,478 46 % Cash used in investing activities - continuing operations (3,259) (3,872) 16 % Cash used in financing activities - continuing operations (2,127) (2,247) 5 % Cash used in discontinued operations — (4) 100 % Impact of exchange rates on cash, cash equivalents and restricted cash 174 (354) nm Change in cash, cash equivalents and restricted cash $ (148) $ (2,999) 95 % Operating Activities Cash provided by operations increased $1,586 million to $5,064 million for the current period compared to $3,478 million in the prior-year period. The increase was due to higher operating cash receipts at DPEP and, to a lesser extent, lower spending on film and television content and higher operating cash receipts at DMED. These increases were partially offset by higher operating cash disbursements at DPEP. 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 nine months ended July 1, 2023 and July 2, 2022 are as follows: Nine Months Ended (in millions) July 1, 2023 July 2, 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 11,518 10,850 Produced film and television content 10,441 11,908 21,959 22,758 Amortization: Programming licenses and rights (10,871) (10,908) Produced film and television content (9,227) (7,544) (20,098) (18,452) Change in produced and licensed content costs 1,861 4,306 Content impairment (2,266) — Other non-cash activity (191) 209 Ending balances: Produced and licensed programming assets 36,976 35,979 Programming liabilities (3,845) (3,845) $ 33,131 $ 32,134 59 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) The Company currently expects its fiscal 2023 spend on produced and licensed content, including sports rights, to be approximately $27 billion compared to fiscal 2022 spend of $30 billion. The expected decrease is due to lower spending on produced content, including the estimated impact of the recent WGA and SAG-AFTRA work stoppages, partially offset by higher spending for sports content. Investing Activities Investing activities for the nine months ended July 1, 2023 and July 2, 2022 are as follows: Nine Months Ended (in millions) July 1, 2023 July 2, 2022 Investments in parks, resorts and other property: Disney Media and Entertainment Distribution $ 755 $ 543 Disney Parks, Experiences and Products Domestic 1,544 2,226 International 609 584 Total Disney Parks, Experiences and Products 2,153 2,810 Corporate 687 442 Total investments in parks, resorts and other property 3,595 3,795 Cash used in (provided by) other investing activities, net (1) (336) 77 Cash used in investing activities - continuing operations $ 3,259 $ 3,872 (1) The current period reflects proceeds from sales of investments. 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 driven by higher technology spending to support our streaming services. Capital expenditures at the DPEP segment are principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and technology. The decrease in the current period compared to the prior-year period was due to lower spending on cruise ship fleet expansion. Capital expenditures at Corporate primarily reflect investments in corporate facilities, technology and equipment. The increase in the current period compared to the prior-year period was driven by higher spending on facilities. The Company currently expects its fiscal 2023 capital expenditures to be comparable to fiscal 2022 at approximately $5.0 billion as increases at DMED and on Corporate facilities are offset by lower spending at DPEP. Financing Activities Financing activities for the nine months ended July 1, 2023 and July 2, 2022 are as follows: Nine Months Ended (in millions) July 1, 2023 July 2, 2022 Change in borrowings $ (1,209) $ (1,523) Activities related to noncontrolling and redeemable noncontrolling interest (1) (181) 48 Cash used in other financing activities, net (2) (737) (772) Cash used in financing activities - continuing operations $ (2,127) $ (2,247) (1) Activities related to noncontrolling and redeemable noncontrolling interests in the current period were due to the purchase of a redeemable noncontrolling interest, partially offset by contributions from noncontrolling interest holders. (2) Primarily consists of dividends to noncontrolling interest holders and equity award activity. See Note 5 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the nine months ended July 1, 2023 and information regarding the Company’s bank facilities. The Company may use cash balances, 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. 60 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) 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; raising financing; 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 July 1, 2023, 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 A- 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 July 1, 2023, 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. 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 July 1, 2023 was as follows: TWDC Legacy Disney (in millions) Par Value Carrying Value Par Value Carrying Value Registered debt with unconditional guarantee $ 35,187 $ 35,564 $ 8,144 $ 7,902 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. 61 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) Nine Months Ended July 1, 2023 Revenues $ — Costs and expenses — Net income (loss) from continuing operations (1,168) Net income (loss) (1,168) Net income (loss) attributable to TWDC shareholders (1,168) Balance Sheet (in millions) July 1, 2023 October 1, 2022 Current assets $ 3,924 $ 5,665 Noncurrent assets 2,009 1,948 Current liabilities 3,634 3,741 Noncurrent liabilities (excluding intercompany to non-Guarantors) 45,870 46,218 Intercompany payables to non-Guarantors 148,775 148,958 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 62 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. Historical viewing patterns are the most significant input into determining the projected usage, and significant judgment is required in using historical viewing patterns to derive projected usage. 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 down to its estimated fair value. 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. 63 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. We believe our estimates are consistent with how a marketplace participant would value our reporting units. In February 2023, the Company initiated a reorganization of its businesses that will result in a new segment reporting structure in the fourth quarter of fiscal 2023. The Company will perform its annual goodwill impairment assessment in the fourth quarter under both the current reporting structure and the new reporting structure. The change in reporting structure will require us to identify new reporting units, allocate goodwill to these reporting units (generally based on relative fair values) and assign other recorded assets and liabilities to these reporting units. Since our prior annual impairment assessment performed in the fourth quarter of fiscal 2022, discount rates have generally increased and certain projected revenue streams at our media and entertainment businesses have declined, which declines we expect will continue. Both of these impacts, all else being equal, have the effect of reducing the fair value of these businesses and consequently reducing the excess of fair value over book value of our reporting units. As we finalize our impairment assessment in the fourth quarter, the assumptions we make about future cash flows and discount rates as well as the identification of new reporting units and the results of reallocating goodwill and other net assets to the new reporting units, could result in an impairment of goodwill and intangible assets. 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 64 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) 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 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- 65 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued) 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. 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. 66 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.