Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from                      to                     
Commission File Number 001-32686
 
 
 
 
VIACOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE
20-3515052
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
 
 
1515 Broadway
New York, NY 10036
(212) 258-6000
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨ (Do not check if a smaller reporting company)    Smaller reporting company ¨    Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No x
Class of Stock
 
Shares Outstanding
as of April 30, 2017
Class A common stock, par value $0.001 per share
 
49,431,379

Class B common stock, par value $0.001 per share
 
352,300,394

 


Table of Contents

VIACOM INC.
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended March 31, 2017 and 2016
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
VIACOM INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
  
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions, except per share amounts)
2017
 
2016
 
2017
 
2016
Revenues
$
3,256

 
$
3,001

 
$
6,580

 
$
6,155

Expenses:
 
 
 
 
 
 
 
Operating
1,944

 
1,654

 
3,763

 
3,247

Selling, general and administrative
748

 
705

 
1,449

 
1,372

Depreciation and amortization
58

 
56

 
114

 
111

Restructuring
174

 

 
216

 

Total expenses
2,924

 
2,415

 
5,542

 
4,730

Operating income
332

 
586

 
1,038

 
1,425

Interest expense, net
(158
)
 
(155
)
 
(314
)
 
(310
)
Equity in net earnings of investee companies
18

 
35

 
31

 
66

Loss on extinguishment of debt
(30
)
 

 
(36
)
 

Other items, net
(8
)
 
(6
)
 
1

 
(4
)
Earnings before provision for income taxes
154

 
460

 
720

 
1,177

Provision for income taxes
(26
)
 
(151
)
 
(184
)
 
(407
)
Net earnings (Viacom and noncontrolling interests)
128

 
309

 
536

 
770

Net earnings attributable to noncontrolling interests
(7
)
 
(6
)
 
(19
)
 
(18
)
Net earnings attributable to Viacom
$
121

 
$
303

 
$
517

 
$
752

 
 
 
 
 
 
 
 
Basic earnings per share attributable to Viacom
$
0.30

 
$
0.76

 
$
1.30

 
$
1.90

Diluted earnings per share attributable to Viacom
$
0.30

 
$
0.76

 
$
1.30

 
$
1.89

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
398.2

 
396.1

 
397.6

 
396.4

Diluted
399.5

 
397.4

 
398.7

 
397.9

Dividends declared per share of Class A and Class B common stock
$
0.20

 
$
0.40

 
$
0.40

 
$
0.80

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

1

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
  
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2017
 
2016
 
2017
 
2016
Net earnings (Viacom and noncontrolling interests)
$
128

 
$
309

 
$
536

 
$
770

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
63

 
22

 
(75
)
 
(18
)
Defined benefit pension plans
1

 
1

 
3

 
(4
)
Cash flow hedges
2

 
2

 
2

 
1

Other comprehensive income/(loss) (Viacom and noncontrolling interests)
66

 
25

 
(70
)
 
(21
)
Comprehensive income
194

 
334

 
466

 
749

Less: Comprehensive income attributable to noncontrolling interest
7

 
5

 
18

 
14

Comprehensive income attributable to Viacom
$
187

 
$
329

 
$
448

 
$
735

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

2

Table of Contents

VIACOM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value)
March 31,
2017
 
September 30,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
671

 
$
379

Receivables, net
3,031

 
2,712

Inventory, net
918

 
844

Prepaid and other assets
508

 
587

Total current assets
5,128

 
4,522

Property and equipment, net
964

 
932

Inventory, net
4,058

 
4,032

Goodwill
11,609

 
11,400

Intangibles, net
325

 
315

Other assets
1,258

 
1,307

Total assets
$
23,342

 
$
22,508

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
347

 
$
453

Accrued expenses
791

 
773

Participants’ share and residuals
838

 
801

Program obligations
716

 
692

Deferred revenue
382

 
419

Current portion of debt
18

 
17

Other liabilities
468

 
517

Total current liabilities
3,560

 
3,672

Noncurrent portion of debt
12,171

 
11,896

Participants’ share and residuals
354

 
358

Program obligations
548

 
311

Deferred tax liabilities, net
292

 
381

Other liabilities
1,434

 
1,349

Redeemable noncontrolling interest
200

 
211

Commitments and contingencies (Note 7)


 


Viacom stockholders’ equity:
 
 
 
Class A common stock, par value $0.001, 375.0 authorized; 49.4 and 49.4 outstanding, respectively

 

Class B common stock, par value $0.001, 5,000.0 authorized; 351.8 and 347.6 outstanding, respectively

 

Additional paid-in capital
10,143

 
10,139

Treasury stock, 395.0 and 399.4 common shares held in treasury, respectively
(20,635
)
 
(20,798
)
Retained earnings
15,987

 
15,628

Accumulated other comprehensive loss
(761
)
 
(692
)
Total Viacom stockholders’ equity
4,734

 
4,277

Noncontrolling interests
49

 
53

Total equity
4,783

 
4,330

Total liabilities and equity
$
23,342

 
$
22,508

 
 
 
 
 See accompanying notes to Consolidated Financial Statements

3

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  
Six Months Ended 
 March 31,
(in millions)
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net earnings (Viacom and noncontrolling interests)
$
536

 
$
770

Reconciling items:
 
 
 
Depreciation and amortization
114

 
111

Feature film and program amortization
2,312

 
2,106

Equity-based compensation
50

 
52

Equity in net earnings and distributions from investee companies
(5
)
 
(62
)
Deferred income taxes
(150
)
 
377

Operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(199
)
 
52

Production and programming
(2,048
)
 
(2,500
)
Accounts payable and other current liabilities
(258
)
 
(508
)
Other, net
53

 
(114
)
Net cash provided by operating activities
405

 
284

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Acquisitions and investments, net
(343
)
 
(44
)
Capital expenditures
(95
)
 
(54
)
Proceeds received from grantor trusts
49

 

Sale of marketable securities
108

 

Net cash flow used in investing activities
(281
)
 
(98
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Borrowings
2,569

 

Debt repayments
(2,300
)
 

Commercial paper

 
250

Purchase of treasury stock

 
(100
)
Dividends paid
(159
)
 
(318
)
Exercise of stock options
115

 
3

Other, net
(34
)
 
(43
)
Net cash provided by/(used in) financing activities
191

 
(208
)
Effect of exchange rate changes on cash and cash equivalents
(23
)
 
(4
)
Net change in cash and cash equivalents
292

 
(26
)
Cash and cash equivalents at beginning of period
379

 
506

Cash and cash equivalents at end of period
$
671

 
$
480

 
 
 
 
 See accompanying notes to Consolidated Financial Statements

4

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1. BASIS OF PRESENTATION
Description of Business
Viacom is home to premier global media brands that create compelling television programs, motion pictures, short-form content, applications (“apps”), games, consumer products, social media experiences and other entertainment content for audiences in more than 180 countries. Viacom operates through two reporting segments: Media Networks and Filmed Entertainment. The Media Networks segment provides entertainment content and related branded products for consumers in targeted demographics attractive to advertisers, content distributors and retailers through three brand groups: the Global Entertainment Group, the Nickelodeon Group and BET Networks. The Filmed Entertainment segment produces, finances, acquires and distributes motion pictures, television programming and other entertainment content under the Paramount Pictures, Paramount Animation, Nickelodeon Movies, MTV Films and Paramount Television brands. References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries, unless the context requires otherwise.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated quarterly financial statements have been prepared on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of our results of operations, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results expected for the fiscal year ending September 30, 2017 (“fiscal 2017”) or any future period. These financial statements should be read in conjunction with our Form 10-K for the year ended September 30, 2016, as filed with the SEC on November 9, 2016 (the “2016 Form 10-K”).
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the periods presented. Significant estimates inherent in the preparation of the accompanying Consolidated Financial Statements include estimates of film ultimate revenues, product returns, potential outcome of uncertain tax positions, fair value of acquired assets and liabilities, fair value of equity-based compensation and pension benefit assumptions. Estimates are based on past experience and other considerations reasonable under the circumstances. Actual results may differ from these estimates.
Recent Accounting Pronouncements
Income Taxes
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted. We are currently evaluating the impact of the new standard.

Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15 - Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted. The new standard will impact our statement of cash flows by increasing cash flow from operating activities and decreasing cash flow from financing activities in periods when debt prepayment or debt extinguishment costs are paid.

Financial Instruments
In connection with its financial instruments project, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments in June 2016 and ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016.
ASU 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in

5

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.
ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities.
We are currently evaluating the impact of the new standards.

Equity-Based Compensation
In March 2016, the FASB issued ASU 2016-09 - Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, such as requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled and allowing a policy election to account for forfeitures as they occur. In addition, all related cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows. The guidance will be effective for the first interim period of our 2018 fiscal year, with early adoption permitted. The new standard will impact our financial statements by increasing or decreasing our income tax provision and increasing cash flow from operating activities.

Leases
In February 2016, the FASB issued ASU 2016-02 - Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for most leases. For income statement purposes, leases will be classified as either operating or finance, generally resulting in straight-line expense recognition for operating leases (similar to current operating leases) and accelerated expense recognition for financing leases (similar to current capital leases). The guidance will be effective for the first interim period of our 2020 fiscal year, with early adoption permitted. We are currently evaluating the impact of the new standard.

Revenue Recognition
In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers, a comprehensive revenue recognition model that supersedes the current revenue recognition requirements and most industry-specific guidance. Subsequent accounting standard updates have also been issued which amend and/or clarify the application of ASU 2014-09. The guidance provides a five step framework to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The guidance will be effective for the first interim period of our 2019 fiscal year (with early adoption permitted beginning with our 2018 fiscal year), and allows adoption either under a full retrospective or a modified retrospective approach. We are currently evaluating the impact of the new standard.

6

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 2. ACQUISITION
On November 15, 2016, we acquired Televisión Federal S.A. (“Telefe”), one of the main free-to-air channels and biggest content producers in Argentina, for $336 million, net of cash acquired. Telefe adds to our portfolio of international TV networks and accelerates our growth strategy in Argentina.
The following table summarizes our estimated allocation of the purchase price as of the acquisition date:
 
 
 
 
 
Purchase Price Allocation
(in millions)
 
 
   Current assets
 
$
88

 
   Goodwill
 
250

 
   Intangible assets
 
49

 
   Property and equipment
 
76

 
   Other assets
 
13

 
Assets acquired
 
476

 
   Accounts payable and accrued expenses
 
55

 
   Other liabilities
 
85

 
Liabilities assumed
 
140

 
 
 
$
336

 
 
 
 
The goodwill, which is not deductible for tax purposes, reflects the Company-specific synergies arising from the acquisition. Intangible assets primarily consist of trade names and broadcast licenses with a useful life of 15 years.
The operating results of Telefe in the current and prior year are not material.
NOTE 3. INVENTORY
Our total inventory consists of the following:
Inventory
(in millions)
March 31,
2017
 
September 30,
2016
Film inventory:
 
 
 
Released, net of amortization
$
687

 
$
632

Completed, not yet released
6

 
128

In process and other
909

 
993

 
1,602

 
1,753

Television productions:
 
 
 
Released, net of amortization
31

 
16

In process and other
57

 
102

 
88

 
118

Original programming:
 
 
 
Released, net of amortization
1,224

 
1,082

In process and other
524

 
706

 
1,748

 
1,788

Acquired program rights, net of amortization
1,445

 
1,127

Home entertainment inventory
93

 
90

Total inventory, net
4,976

 
4,876

Less current portion
918

 
844

Noncurrent portion
$
4,058

 
$
4,032

 
 
 
 

7

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 4. DEBT
Our total debt consists of the following:
Debt
(in millions)
March 31,
2017
 
September 30,
2016
Senior Notes and Debentures:
 
 
 
Senior notes due December 2016, 2.500%
$

 
$
400

Senior notes due April 2017, 3.500%

 
499

Senior notes due October 2017, 6.125%

 
499

Senior notes due September 2018, 2.500%

 
498

Senior notes due April 2019, 2.200%

 
399

Senior notes due September 2019, 5.625%
550

 
550

Senior notes due December 2019, 2.750%
399

 
399

Senior notes due March 2021, 4.500%
495

 
495

Senior notes due December 2021, 3.875%
594

 
593

Senior notes due February 2022, 2.250%
396

 

Senior notes due June 2022, 3.125%
297

 
296

Senior notes due March 2023, 3.250%
297

 
297

Senior notes due September 2023, 4.250%
1,236

 
1,235

Senior notes due April 2024, 3.875%
545

 
544

Senior notes due October 2026, 3.450%
889

 

Senior debentures due December 2034, 4.850%
593

 
593

Senior debentures due April 2036, 6.875%
1,067

 
1,066

Senior debentures due October 2037, 6.750%
75

 
75

Senior debentures due February 2042, 4.500%
244

 
244

Senior debentures due March 2043, 4.375%
1,093

 
1,091

Senior debentures due June 2043, 4.875%
247

 
247

Senior debentures due September 2043, 5.850%
1,229

 
1,228

Senior debentures due April 2044, 5.250%
545

 
545

Junior Debentures:
 
 
 
Junior subordinated debentures due February 2057, 5.875%
642

 

Junior subordinated debentures due February 2057, 6.250%
642

 

Capital lease and other obligations
114

 
120

Total debt
12,189

 
11,913

Less current portion
18

 
17

Noncurrent portion
$
12,171

 
$
11,896

 
 
 
 
In the six months ended March 31, 2017, we issued $2.6 billion of junior debentures and senior notes and redeemed $2.3 billion of senior notes. Our issuances of debt were comprised of:
$650 million in aggregate principal amount of fixed-to-floating rate junior subordinated debentures due 2057 at par, callable in 5 years (the “5-year Hybrid debentures”); and
$650 million in aggregate principal amount of fixed-to-floating rate junior subordinated debentures due 2057 at par, callable in 10 years (the “10-year Hybrid debentures” and, together with the 5-year Hybrid debentures, the “Hybrid Debentures”).
$400 million in aggregate principal amount of 2.250% senior notes due 2022 at a price equal to 99.692% of the principal amount (the “2022 Senior Notes”); and
$900 million in aggregate principal amount of 3.450% senior notes due 2026 at a price equal to 99.481% of the principal amount (the “2026 Senior Notes” and, together with the 2022 Senior Notes, the “Senior Notes”).
The 5-year Hybrid debentures will accrue interest at a rate of 5.875% until February 28, 2022, on which date the rate will switch to a floating rate based on three-month LIBOR plus 3.895%, reset quarterly. The 10-year Hybrid debentures will accrue interest at a rate of 6.250% until February 28, 2027, on which date the rate will switch to a floating rate based on three-month LIBOR plus 3.899%, reset quarterly. The Hybrid Debentures can be called by us at any time after the expiration of the fixed-rate period.

8

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

The proceeds, net of issuance fees and expenses, from the issuance of the Hybrid Debentures and the Senior Notes were $2.569 billion, which were used to redeem the following senior notes:
$500 million of our outstanding 6.125% senior notes due October 2017
$500 million of our outstanding 2.500% senior notes due September 2018
$400 million of our outstanding 2.200% senior notes due April 2019
$400 million of our outstanding 2.500% senior notes due December 2016
$500 million of our outstanding 3.500% senior notes due April 2017
The aggregate redemption price was equal to the sum of the principal amounts and a make-whole amount, together totaling $2.333 billion, and accrued interest of $26 million. As a result of the redemptions, we recognized pre-tax extinguishment losses of $30 million, which included $3 million of unamortized debt discount and issuance fees, and $36 million in the quarter and six months ended March 31, 2017, respectively.
The total unamortized discount and issuance fees and expenses related to our senior notes and senior and junior debentures was $477 million as of March 31, 2017 and $459 million as of September 30, 2016. The fair value of our senior notes and senior and junior debentures was approximately $12.6 billion as of March 31, 2017. The valuation of our publicly traded debt is based on quoted prices in active markets.
Credit Facility
At March 31, 2017, there were no amounts outstanding under our $2.5 billion revolving credit facility due November 2019. The credit facility is used for general corporate purposes and to support commercial paper outstanding, if any. The credit facility has one principal financial covenant that requires our interest coverage for the most recent four consecutive fiscal quarters to be at least 3.0x, which we met as of March 31, 2017.
NOTE 5. PENSION BENEFITS
The components of net periodic benefit cost for our defined benefit pension plans, which are currently frozen to future benefit accruals, are set forth below.
Net Periodic Benefit Cost
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2017
 
2016
 
2017
 
2016
Interest cost
$
8

 
$
8

 
$
16

 
$
17

Expected return on plan assets
(9
)
 
(9
)
 
(18
)
 
(19
)
Recognized actuarial loss
2

 
2

 
4

 
3

Net periodic benefit cost
$
1

 
$
1

 
$
2

 
$
1

 
 
 
 
 
 
 
 
NOTE 6. REDEEMABLE NONCONTROLLING INTEREST
We are subject to a redeemable put option, payable in a foreign currency, with respect to an international subsidiary. The put option expires in December 2022 and is classified as Redeemable noncontrolling interest in the Consolidated Balance Sheets.

The activity reflected within redeemable noncontrolling interest is as follows:
Redeemable Noncontrolling Interest
(in millions)
Six Months Ended 
 March 31,
2017
 
2016
Beginning balance
$
211

 
$
219

Net earnings
9

 
9

Distributions
(10
)
 
(12
)
Translation adjustment
(9
)
 
(16
)
Redemption value adjustment
(1
)
 
21

Ending Balance
$
200

 
$
221

 
 
 
 

9

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 7. COMMITMENTS AND CONTINGENCIES
Commitments
As more fully described in Note 11 of the 2016 Form 10-K, our commitments primarily consist of programming and talent commitments, operating and capital lease arrangements, and purchase obligations for goods and services. These arrangements result from our normal course of business and represent obligations that may be payable over several years.
Contingencies
We have certain indemnification obligations with respect to leases primarily associated with the previously discontinued operations of Famous Players Inc. (“Famous Players”). In addition, we have certain indemnities provided by the acquirer of Famous Players. These lease commitments amounted to approximately $204 million as of March 31, 2017. The amount of lease commitments varies over time depending on expiration or termination of individual underlying leases, or of the related indemnification obligation, and foreign exchange rates, among other things. We may also have exposure for certain other expenses related to the leases, such as property taxes and common area maintenance. We have recorded a liability of $190 million with respect to such obligations as of March 31, 2017. We believe our accrual is sufficient to meet any future obligations based on our consideration of available financial information, the lessees’ historical performance in meeting their lease obligations and the underlying economic factors impacting the lessees’ business models.
Legal Matters
Litigation is inherently uncertain and always difficult to predict. However, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the legal matters described below and other litigation to which we are a party are not likely, in the aggregate, to have a material adverse effect on our results of operations, financial position or operating cash flows.
Purported Class and Derivative Actions
Between June 17, 2016 and August 1, 2016, three substantially similar purported class action complaints were filed in the Delaware Chancery Court by purported Viacom stockholders, against Viacom and Viacom’s directors at the time (the “Incumbent Directors”), as well as National Amusements, Inc. (“National Amusements”) and NAI Entertainment Holdings LLC (together, “NAI”), and were subsequently consolidated into one action. The action - brought on behalf of the class of all holders of Viacom Class B common stock except the named defendants and any person or entity affiliated with any of the defendants - alleges claims for breaches of fiduciary duty against the incumbent director defendants and NAI, and alleges that the Viacom directors who joined the Board of Directors subsequent to the filing of the actions (the “New Directors”) aided and abetted these breaches. In addition to damages and attorneys’ fees, the action seeks “such relief as the Court deems just and proper.” All defendants, including Viacom and the Incumbent Directors, have moved to dismiss the action. The plaintiffs filed an amended consolidated complaint in November 2016, and we again moved to dismiss the action. In March 2017, plaintiffs and the New Directors petitioned the court to dismiss the New Directors from the lawsuit, and the court dismissed the New Directors from the lawsuit without prejudice.
On July 20, 2016, a purported derivative action was commenced in the Delaware Chancery Court by a purported Viacom stockholder against Viacom and its directors. The complaint alleges that Viacom’s directors breached their fiduciary duties to Viacom in connection with compensation paid to Mr. Redstone. These breaches, it is alleged, permitted a waste of corporate assets and the unjust enrichment of Mr. Redstone. We have moved to dismiss the action.

10

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 8. STOCKHOLDERS’ EQUITY
The components of stockholders’ equity are as follows:
  
Six Months Ended  
 March 31, 2017
 
Six Months Ended  
 March 31, 2016
Stockholders’ Equity
(in millions)
Total Viacom Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
Total Viacom Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
Beginning Balance
$
4,277

 
$
53

 
$
4,330

 
$
3,538

 
$
61

 
$
3,599

Net earnings
517

 
19

 
536

 
752

 
18

 
770

Other comprehensive loss (1)
(69
)
 
(1
)
 
(70
)
 
(17
)
 
(4
)
 
(21
)
Noncontrolling interests
1

 
(22
)
 
(21
)
 
(21
)
 
(17
)
 
(38
)
Dividends declared
(159
)
 

 
(159
)
 
(318
)
 

 
(318
)
Purchase of treasury stock

 

 

 
(100
)
 

 
(100
)
Equity-based compensation and other
167

 

 
167

 
55

 

 
55

Ending Balance
$
4,734

 
$
49

 
$
4,783

 
$
3,889

 
$
58

 
$
3,947

 
 
 
 
 
 
 
 
 
 
 
 
(1) The components of other comprehensive loss are net of tax expense of $3 million and $5 million for the six months ended March 31, 2017 and 2016, respectively.
NOTE 9. RESTRUCTURING AND PROGRAMMING CHARGES
In February 2017, following a comprehensive review of our operations and performance, we announced new strategic priorities that included, among other things, increased focus and commitment to six flagship brands: BET, Comedy Central, MTV, Nickelodeon, Nick Jr. and Paramount (our “flagship brand strategy”). In connection with strategic initiatives resulting from execution of the new strategic priorities, we recognized pre-tax restructuring and programming charges of $280 million and $322 million in the quarter and six months ended March 31, 2017, respectively. The charges, as detailed in the table below, include severance charges, a non-cash intangible asset impairment charge resulting from the decision to abandon an international trade name and a programming charge associated with management’s decision to cease use of certain original and acquired programming in connection with our flagship brand strategy. The programming charge is included within Operating expenses in the Consolidated Statement of Earnings.
The following table presents the restructuring and programming charges incurred in 2017 by reporting segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and
Programming Charges
(in millions)
Quarter Ended  
 March 31, 2017
 
Six Months Ended  
 March 31, 2017
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
 
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
    Severance (1)
$
97

 
$
47

 
$
12

 
$
156

 
$
130

 
$
48

 
$
20

 
$
198

    Asset impairment
18

 

 

 
18

 
18

 

 

 
18

Restructuring
115

 
47

 
12

 
174

 
148

 
48

 
20

 
216

Programming
106

 

 

 
106

 
106

 

 

 
106

Total
$
221

 
$
47

 
$
12

 
$
280

 
$
254

 
$
48

 
$
20

 
$
322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes equity-based compensation expense of $13 million in the quarter and $20 million in the six months ended March 31, 2017.
Our severance liability by reporting segment is as follows:
 
 
 
 
 
 
 
 
Severance Liability
(in millions)
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
September 30, 2016
$
36

 
$
12

 
$
94

 
$
142

Net accruals
124

 
39

 
15

 
178

Severance payments
(19
)
 
(8
)
 
(55
)
 
(82
)
March 31, 2017
$
141

 
$
43

 
$
54

 
$
238

 
 
 
 
 
 
 
 
Severance payments include $49 million paid from proceeds in grantor trusts established to facilitate the administration of payments to certain former senior executives. As of March 31, 2017, of the remaining $238 million liability, $140 million is classified as a current liability in the Consolidated Balance Sheets, with the remaining $98 million classified as a noncurrent liability. Amounts classified as noncurrent are expected to be paid through 2019, in accordance with applicable contractual terms.

11

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 10. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing Net earnings attributable to Viacom by the weighted average number of common shares outstanding during the period. The determination of diluted earnings per common share includes the weighted average number of common shares plus the dilutive effect of equity awards based upon the application of the treasury stock method. Anti-dilutive common shares were excluded from the calculation of diluted earnings per common share.
The following table sets forth the weighted average number of common shares outstanding used in determining basic and diluted earnings per common share and anti-dilutive common shares:
Weighted Average Number of Common Shares Outstanding and Anti-dilutive Common Shares
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2017
 
2016
 
2017
 
2016
Weighted average number of common shares outstanding, basic
398.2

 
396.1

 
397.6

 
396.4

        Dilutive effect of equity awards
1.3

 
1.3

 
1.1

 
1.5

Weighted average number of common shares outstanding, diluted
399.5

 
397.4

 
398.7

 
397.9

 
 
 
 
 
 
 
 
Anti-dilutive common shares
11.8

 
13.2

 
13.7

 
13.0

 
 
 
 
 
 
 
 
 
NOTE 11. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Our supplemental cash flow information is as follows:
Supplemental Cash Flow Information
(in millions)
Six Months Ended 
 March 31,
2017

2016
Cash paid for interest
$
320

 
$
302

Cash paid for income taxes
$
315

 
$
204

Accounts Receivable
We had $482 million and $547 million of noncurrent trade receivables as of March 31, 2017 and September 30, 2016, respectively. Accounts receivables are principally related to long-term television license arrangements at Filmed Entertainment and subscription video-on-demand and other over-the-top arrangements at Media Networks. These amounts are included within Other assets - noncurrent in our Consolidated Balance Sheets. Such amounts are due in accordance with the underlying terms of the respective agreements with companies that are investment grade or with which we have historically done business under similar terms. We have determined that credit loss allowances are generally not considered necessary for these amounts.
Assets Held for Sale
Certain Media Networks assets included within Property and equipment, net and Intangibles, net in our Consolidated Balance Sheets, with a carrying value of approximately $60 million, are held for sale. We expect the sales of these assets to be completed within a year and plan to use the proceeds for the repayment of outstanding debt.
Variable Interest Entities
In the normal course of business, we enter into joint ventures or make investments with business partners that support our underlying business strategy and provide us the ability to enter new markets to expand the reach of our brands, develop new programming and/or distribute our existing content. In certain instances, an entity in which we make an investment may qualify as a variable interest entity (“VIE”). In determining whether we are the primary beneficiary of a VIE, we assess whether we have the power to direct matters that most significantly impact the activities of the VIE and have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Our Consolidated Balance Sheets include amounts related to consolidated VIEs totaling $199 million in assets and $61 million in liabilities as of March 31, 2017, and $190 million in assets and $57 million in liabilities as of September 30, 2016. The consolidated VIEs’ revenues, expenses and operating income were not significant for all periods presented.

12

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Income Taxes
Our effective income tax rate was 16.9% and 25.6% in the quarter and six months ended March 31, 2017, respectively. Net discrete tax benefit of $4 million in the quarter and $19 million in the six months, taken together with the discrete tax impact of the restructuring and programming charges and debt extinguishment loss, reduced the effective income tax rate by 13.3 and 4.9 percentage points, respectively. The net discrete tax benefit in the quarter was related to the release of tax reserves with respect to certain effectively settled tax positions. The net discrete tax benefit in the six months was principally related to the reversal of a valuation allowance on net operating losses upon receipt of a favorable tax authority ruling and the release of tax reserves with respect to certain effectively settled tax positions.
Our effective income tax rate was 32.8% and 34.6% in the quarter and six months ended March 31, 2016, respectively. Net discrete tax expense of $21 million contributed 1.8 percentage points to the effective income tax rate in the six months. The net discrete tax expense was principally related to a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation.
NOTE 12. FAIR VALUE MEASUREMENTS
The following table summarizes our financial assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2017 and September 30, 2016:
Financial Asset/(Liability)
(in millions)
  
 
Quoted Prices In
Active Markets for
Identical Assets
 
Significant Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Total        
 
Level 1
 
Level 2
 
Level 3
March 31, 2017
 
 
 
 
 
 
 
Marketable securities
$

 
$

 
$

 
$

Derivatives
(7
)
 

 
(7
)
 

Total
$
(7
)
 
$

 
$
(7
)
 
$

September 30, 2016
 
 
 
 
 
 
 
Marketable securities
$
114

 
$
114

 
$

 
$

Derivatives
(13
)
 

 
(13
)
 

Total
$
101

 
$
114

 
$
(13
)
 
$

 
 
 
 
 
 
 
 
During the quarter, we sold our investments in marketable securities. The fair value for marketable securities was determined utilizing a market approach based on quoted market prices in active markets at period end and the fair value for derivatives is determined utilizing a market-based approach.
The notional value of all foreign exchange contracts was $1.116 billion and $1.149 billion as of March 31, 2017 and September 30, 2016, respectively. At March 31, 2017, $648 million related to our foreign currency balances and $468 million related to future production costs. At September 30, 2016, $874 million related to our foreign currency balances and $275 million related to future production costs.
NOTE 13. REPORTING SEGMENTS
The following tables set forth our financial performance by reporting segment. Our reporting segments have been determined in accordance with our internal management structure. We manage our operations through two reporting segments: (i) Media Networks and (ii) Filmed Entertainment. Typical intersegment transactions include the purchase of advertising by the Filmed Entertainment segment on Media Networks’ properties and the licensing of Filmed Entertainment’s feature film and television content by Media Networks. The elimination of such intercompany transactions in the Consolidated Financial Statements is included within eliminations in the tables below.
 
Our measure of segment performance is adjusted operating income. Adjusted operating income is defined as operating income, before equity-based compensation and certain other items identified as affecting comparability, when applicable.

13

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Revenues by Segment
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2017
 
2016
 
2017
 
2016
Media Networks
$
2,394

 
$
2,381

 
$
4,983

 
$
4,946

Filmed Entertainment
895

 
655

 
1,653

 
1,267

Eliminations
(33
)
 
(35
)
 
(56
)
 
(58
)
Total revenues
$
3,256

 
$
3,001

 
$
6,580

 
$
6,155

 
 
 
 
 
 
 
 
 
Adjusted Operating Income/(Loss)
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2017
 
2016
 
2017
 
2016
Media Networks
$
747

 
$
805

 
$
1,734

 
$
1,862

Filmed Entertainment
(66
)
 
(136
)
 
(246
)
 
(282
)
Corporate expenses
(55
)
 
(53
)
 
(105
)
 
(103
)
Eliminations

 
(4
)
 
7

 

Equity-based compensation
(14
)
 
(26
)
 
(30
)
 
(52
)
Restructuring and programming charges
(280
)
 

 
(322
)
 

Operating income
332

 
586

 
1,038

 
1,425

Interest expense, net
(158
)
 
(155
)
 
(314
)
 
(310
)
Equity in net earnings of investee companies
18

 
35

 
31

 
66

Loss on extinguishment of debt
(30
)
 

 
(36
)
 

Other items, net
(8
)
 
(6
)
 
1

 
(4
)
Earnings before provision for income taxes
$
154

 
$
460

 
$
720

 
$
1,177

 
 
 
 
 
 
 
 
 
Total Assets
(in millions)
March 31,
2017
 
September 30,
2016
 
Media Networks
$
17,282

 
$
16,410

Filmed Entertainment
6,344

 
6,391

Corporate/Eliminations
(284
)
 
(293
)
Total assets
$
23,342

 
$
22,508

 
 
 
 

Revenues by Component
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2017
 
2016
 
2017
 
2016
Advertising
$
1,109

 
$
1,123

 
$
2,403

 
$
2,443

Affiliate
1,156

 
1,129

 
2,300

 
2,248

Feature film
783

 
610

 
1,463

 
1,180

Ancillary
241

 
174

 
470

 
342

Eliminations
(33
)
 
(35
)
 
(56
)
 
(58
)
Total revenues
$
3,256

 
$
3,001

 
$
6,580

 
$
6,155

 
 
 
 
 
 
 
 
NOTE 14. RELATED PARTY TRANSACTIONS
National Amusements, directly and indirectly, is the controlling stockholder of both Viacom and CBS Corporation (“CBS”). National Amusements owns shares in Viacom representing approximately 79.8% of the voting interest in Viacom and approximately 10% of Viacom’s combined common stock. National Amusements is controlled by Sumner M. Redstone, our Chairman Emeritus, who is the Chairman and Chief Executive Officer of National Amusements, through the Sumner M. Redstone National Amusements Trust (the “SMR Trust”), which owns shares in National Amusements representing 80% of the voting interest of National Amusements. The shares representing the other 20% of the voting interest of National Amusements are held through a trust controlled by Shari E. Redstone, who is Mr. Redstone’s daughter and the non-executive Vice Chair of Viacom’s Board of Directors and the President and a member of the Board of Directors of National Amusements. The shares of

14

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

National Amusements held by the SMR Trust are voted solely by Mr. Redstone until such time as his incapacity or death. Upon Mr. Redstone’s incapacity or death, (1) Ms. Redstone will also become a trustee of the SMR Trust and (2) the shares of National Amusements held by the SMR Trust will be voted by the trustees of the SMR Trust. The current trustees include Mr. Redstone and David R. Andelman, a member of the boards of directors of National Amusements and CBS. The current Board of Directors of National Amusements includes Mr. Redstone, Ms. Redstone and Mr. Andelman. In addition, Mr. Redstone serves as Chairman Emeritus of CBS and Ms. Redstone serves as non-executive Vice Chair of CBS.
Transactions between Viacom and related parties are overseen by our Governance and Nominating Committee.
Viacom and National Amusements Related Party Transactions
National Amusements licenses films in the ordinary course of business for its motion picture theaters from all major studios, including Paramount. During the six months ended March 31, 2017 and 2016, Paramount earned revenues from National Amusements in connection with these licenses in the aggregate amounts of approximately $4 million in each period.
Viacom and CBS Corporation Related Party Transactions
In the ordinary course of business, we are involved in transactions with CBS and its various businesses that result in the recognition of revenues and expenses by us. Transactions with CBS are settled in cash.
Our Filmed Entertainment segment earns revenues and recognizes expenses associated with its distribution of certain television products into the home entertainment market on behalf of CBS. Pursuant to its agreement with CBS, Paramount distributes CBS’s library of television and other content on DVD and Blu-ray disc on a worldwide basis. Under the terms of the agreement, Paramount is entitled to retain a fee based on a percentage of gross receipts and is generally responsible for all out-of-pocket costs, which are recoupable together with any advance amounts paid. Paramount made advance payments of $25 million to CBS during the current fiscal year. Paramount also earns revenues from CBS through leasing of studio space and licensing of certain film products.
Our Media Networks segment recognizes advertising revenues and purchases television programming from CBS. The cost of the programming purchases is initially recorded as acquired program rights inventory and amortized over the estimated period that revenues will be generated.
Both of our segments recognize advertising expenses related to the placement of advertisements with CBS.
The following table summarizes the transactions with CBS as included in our Consolidated Financial Statements:
CBS Related Party Transactions
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2017
 
2016
 
2017
 
2016
Consolidated Statements of Earnings
 
 
 
 
 
 
 
Revenues
$
30

 
$
22

 
$
74

 
$
65

Operating expenses
$
40

 
$
29

 
$
90

 
$
88

 
 
 
 
 
 
 
 
  
 
 
 
 
March 31,
2017
 
September 30,
2016
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
3

 
$
3

 
 
 
 
 
 
 
 
Participants’ share and residuals, current
 
 
 
 
$
73

 
$
66

Program obligations, current
 
 
 
 
59

 
61

Program obligations, noncurrent
 
 
 
 
63

 
32

Other liabilities
 
 
 
 
1

 
2

Total due to CBS
 
 
 
 
$
196

 
$
161

 
 
 
 
 
 
 
 


15

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Other Related Party Transactions
In the ordinary course of business, we are involved in related party transactions with equity investees. These related party transactions primarily relate to the provision of advertising services, licensing of film and programming content, distribution of films and provision of certain administrative support services, for which the impact on our Consolidated Financial Statements is as follows:
Other Related Party Transactions
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2017
 
2016
 
2017
 
2016
Consolidated Statements of Earnings
 
 
 
 
 
 
 
Revenues
$
44

 
$
25

 
$
95

 
$
30

Operating expenses
$
25

 
$
14

 
$
57

 
$
16

Selling, general and administrative
$
(3
)
 
$
(4
)
 
$
(6
)
 
$
(6
)
 
 
 
 
 
 
 
 
  
 
 
 
 
March 31,
2017
 
September 30,
2016
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
81

 
$
67

Other assets
 
 
 
 
2

 
1

Total due from other related parties
 
 
 
 
$
83

 
$
68

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
7

 
$
8

Other liabilities
 
 
 
 
41

 
69

Total due to other related parties
 
 
 
 
$
48

 
$
77

 
 
 
 
 
 
 
 
All other related party transactions are not material in the periods presented.
NOTE 15. SUBSEQUENT EVENTS
On April 5, 2017, we announced an agreement for Metro-Goldwyn-Mayer to acquire our 49.76% interest in EPIX, a premium entertainment network, for approximately $597 million. The transaction is subject to regulatory approval and is expected to close during our fiscal third quarter. We expect to recognize a gain of approximately $290 million from the sale. In addition, prior to the closing of the sale, EPIX will pay a dividend, of which our pro rata share is approximately $37 million.

16


Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
Management’s discussion and analysis of results of operations and financial condition is provided as a supplement to and should be read in conjunction with the unaudited consolidated financial statements and related notes to enhance the understanding of our results of operations, financial condition and cash flows. Additional context can also be found in our Form 10-K for the fiscal year ended September 30, 2016, as filed with the Securities and Exchange Commission (“SEC”) on November 9, 2016 (the “2016 Form 10-K”). References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries, unless the context requires otherwise.
Significant components of management’s discussion and analysis of results of operations and financial condition include:
Overview: The overview section provides a summary of our business.
Results of Operations: The results of operations section provides an analysis of our results on a consolidated and reportable segment basis for the quarter and six months ended March 31, 2017, compared with the quarter and six months ended March 31, 2016. In addition, we provide a discussion of items that affect the comparability of our results of operations.
Liquidity and Capital Resources: The liquidity and capital resources section provides a discussion of our cash flows for the six months ended March 31, 2017, compared with the six months ended March 31, 2016, and of our outstanding debt, commitments and contingencies existing as of March 31, 2017.
OVERVIEW
Summary
We are home to premier global media brands that create compelling television programs, motion pictures, short-form content, applications (“apps”), games, consumer products, social media experiences and other entertainment content for audiences in more than 180 countries. Our media networks, including Nickelodeon®, COMEDY CENTRAL®, MTV®, VH1®, SPIKE®, BET®, CMT®, TV Land®, Nick at Nite®, Nick Jr.®, Logo®, Nicktoons®, TeenNick®, Channel 5® (United Kingdom), Telefe™ (Argentina) and Paramount Channel™, reach 510 million households worldwide. Viacom Media Networks also operates branded experiences including channels on streaming services and social media platforms such as DIRECTV NOW and Snapchat Discover. Paramount Pictures® is a major global producer and distributor of filmed entertainment. Paramount Television™ develops, finances and produces programming for television and other platforms.
We operate through two reporting segments: Media Networks and Filmed Entertainment. Our measure of segment performance is adjusted operating income. We define adjusted operating income for our segments as operating income, before equity-based compensation and certain other items identified as affecting comparability, when applicable. Equity-based compensation is excluded from our segment measure of performance since it is set and approved by the Compensation Committee of Viacom’s Board of Directors in consultation with corporate executive management, and is included as a component of consolidated adjusted operating income.
Media Networks
Our Media Networks segment generates revenues in three categories: (i) the sale of advertising and marketing services, (ii) affiliate fees from distributors of our programming and program services, such as cable television operators, direct-to-home satellite television operators, Internet distributors, mobile networks and subscription video-on-demand (“SVOD”) and other over-the-top (“OTT”) services, and (iii) ancillary revenues. Ancillary revenues are principally derived from consumer products, which includes licensing our brands and intellectual property, creation and publishing of interactive games across various platforms (including mobile, PC, and console) and recreation experiences, viewing of our programming through download-to-own and download-to-rent services and the sale of DVDs and Blu-ray discs, and television syndication.
Media Networks segment expenses consist of operating expenses, selling, general and administrative (“SG&A”) expenses and depreciation and amortization. Operating expenses are comprised of costs related to original and acquired programming, including programming amortization, expenses associated with the distribution of home entertainment products and consumer products licensing, participations and residuals, integrated marketing expenses and other costs of sales. SG&A expenses consist primarily of employee compensation, marketing, research and professional service fees and facility and occupancy costs. Depreciation and amortization expenses reflect depreciation of fixed assets, including transponders financed under capital leases, and amortization of finite-lived intangible assets.
Filmed Entertainment
Our Filmed Entertainment segment generates revenues principally from: (i) the worldwide theatrical release and/or distribution of motion pictures, (ii) home entertainment, which includes the worldwide sales and distribution of DVDs and Blu-ray discs relating to the motion pictures released theatrically by Paramount and programming of other Viacom brands such as

17

Table of Contents
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)


Nickelodeon, MTV, Comedy Central and BET, as well as certain acquired films and content distributed on behalf of third parties such as CBS, the viewing of our films through transactional video-on-demand and download-to-own services, for a fee and/or on a revenue sharing basis, (iii) licensing of film and television programs produced, acquired and/or distributed by Paramount that are licensed on a territory by territory basis, for a fee or on a revenue sharing basis, to SVOD, pay and basic cable television, free television and free video-on-demand services and (iv) ancillary revenues from providing production and facilities services to third parties, primarily at Paramount’s studio lot, licensing its brands for consumer products, themed restaurants, hotels and resorts, live stage plays, film clips and theme parks, and sale of film rights.
Filmed Entertainment segment expenses consist of operating expenses, SG&A expenses and depreciation and amortization. Operating expenses principally include the amortization of costs of our released feature films and television programming (including participations and residuals), print and advertising expenses and other distribution costs. We incur marketing costs before and throughout the theatrical release of a film and, to a lesser extent, other distribution windows. Such costs are incurred to generate public interest in our films and are expensed as incurred; therefore, we typically incur losses with respect to a particular film prior to and during the film’s theatrical exhibition and profitability may not be realized until well after a film’s theatrical release. Therefore, the results of the Filmed Entertainment segment can be volatile as films work their way through the various distribution windows. SG&A expenses include employee compensation, facility and occupancy costs, professional service fees and other overhead costs. Depreciation and amortization expense principally consists of depreciation of fixed assets. 
RESULTS OF OPERATIONS
Consolidated Results of Operations
Our summary consolidated results of operations are presented below for the quarter and six months ended March 31, 2017 and 2016.
  
Quarter Ended  
 March 31,
 
Better/(Worse)
 
Six Months Ended 
 March 31,
 
Better/(Worse)
(in millions, except per share amounts)
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
GAAP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
3,256

 
$
3,001

 
$
255

 
8
 %
 
$
6,580

 
$
6,155

 
$
425

 
7
 %
Operating income
332

 
586

 
(254
)
 
(43
)
 
1,038

 
1,425

 
(387
)
 
(27
)
Net earnings attributable to Viacom
121

 
303

 
(182
)
 
(60
)
 
517

 
752

 
(235
)
 
(31
)
Diluted earnings per share
0.30

 
0.76

 
(0.46
)
 
(61
)
 
1.30

 
1.89

 
(0.59
)
 
(31
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating income
$
612

 
$
586

 
$
26

 
4
 %
 
$
1,360

 
$
1,425

 
$
(65
)
 
(5
)%
Adjusted net earnings attributable to Viacom
317

 
303

 
14

 
5

 
730

 
773

 
(43
)
 
(6
)
Adjusted diluted earnings per share
0.79

 
0.76

 
0.03

 
4

 
1.83

 
1.94

 
(0.11
)
 
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* See “Factors Affecting Comparability” section below for a reconciliation of our reported results to our adjusted results, which are calculated on a non-GAAP basis.
Factors Affecting Comparability
The Consolidated Financial Statements reflect our results of operations, financial position and cash flows reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our results have been affected by certain items identified as affecting comparability. Accordingly, when applicable, we use non-GAAP measures such as consolidated adjusted operating income, adjusted earnings before provision for income taxes, adjusted provision for income taxes, adjusted net earnings attributable to Viacom and adjusted diluted earnings per share (“EPS”), among other measures, to evaluate our actual operating performance and for planning and forecasting of future periods. We believe that the adjusted results provide relevant and useful information for investors because they clarify our actual operating performance, make it easier to compare our results with those of other companies and allow investors to review performance in the same way as our management. Since these are not measures of performance calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, operating income, earnings before provision for income taxes, provision for income taxes, net earnings attributable to Viacom and diluted EPS as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies.

18

Table of Contents
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)


The following tables reconcile our reported results (GAAP) to our adjusted results (non-GAAP) for the quarter and six months ended March 31, 2017 and the six months ended March 31, 2016. There were no adjustments to our results for the quarter ended March 31, 2016. The tax impacts included in the tables below have been calculated using the rates applicable to the adjustments presented.
(in millions, except per share amounts)
 
Quarter Ended  
 March 31, 2017
 
Operating Income
 
Earnings Before Provision for Income Taxes
 
Provision for Income Taxes
 
Net Earnings
Attributable to 
Viacom
 
Diluted EPS
Reported results (GAAP)
$
332

 
$
154

 
$
26

 
$
121

 
$
0.30

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Restructuring and programming charges
280

 
280

 
100

 
180

 
0.45

Loss on extinguishment of debt

 
30

 
10

 
20

 
0.05

Discrete tax benefit

 

 
4

 
(4
)
 
(0.01
)
Adjusted results (Non-GAAP)
$
612


$
464


$
140


$
317


$
0.79

 
 
 
 
 
 
 
 
 
 
(in millions, except per share amounts)
 
Six Months Ended  
 March 31, 2017
 
Operating Income
 
Earnings Before Provision for Income Taxes
 
Provision for Income Taxes
 
Net Earnings
Attributable to 
Viacom
 
Diluted EPS
Reported results (GAAP)
$
1,038

 
$
720

 
$
184

 
$
517

 
$
1.30

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Restructuring and programming charges
322

 
322

 
114

 
208

 
0.52

Loss on extinguishment of debt

 
36

 
12

 
24

 
0.06

Discrete tax benefit

 

 
19

 
(19
)
 
(0.05
)
Adjusted results (Non-GAAP)
$
1,360

 
$
1,078

 
$
329

 
$
730

 
$
1.83

 
 
 
 
 
 
 
 
 
 
(in millions, except per share amounts)
 
Six Months Ended  
 March 31, 2016
 
Operating Income
 
Earnings Before Provision for Income Taxes
 
Provision for Income Taxes
 
Net Earnings
Attributable to 
Viacom
 
Diluted EPS
Reported results (GAAP)
$
1,425

 
$
1,177

 
$
407

 
$
752

 
$
1.89

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Discrete tax expense

 

 
(21
)
 
21

 
0.05

Adjusted results (Non-GAAP)
$
1,425


$
1,177


$
386


$
773


$
1.94

 
 
 
 
 
 
 
 
 
 
Restructuring and programming charges: In February 2017, following a comprehensive review of our operations and performance, we announced new strategic priorities that included, among other things, increased focus and commitment to six flagship brands: BET, Comedy Central, MTV, Nickelodeon, Nick Jr. and Paramount (our “flagship brand strategy”). In connection with strategic initiatives resulting from execution of the new strategic priorities, we recognized pre-tax restructuring and programming charges of $280 million and $322 million in the quarter and six months ended March 31, 2017, respectively. The charges, as detailed in the table below, include severance charges, a non-cash intangible asset impairment charge resulting from the decision to abandon an international trade name and a programming charge associated with management’s decision to cease use of certain original and acquired programming in connection with our flagship brand strategy. The programming charge is included within Operating expenses in the Consolidated Statement of Earnings. As we continue to evaluate our strategic initiatives, we may incur additional restructuring and other charges in the third fiscal quarter.

19

Table of Contents
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)


The following table presents the restructuring and programming charges incurred in 2017 by reporting segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and
Programming Charges
(in millions)
Quarter Ended  
 March 31, 2017
 
Six Months Ended  
 March 31, 2017
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
 
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
    Severance
$
97

 
$
47

 
$
12

 
$
156

 
$
130

 
$
48

 
$
20

 
$
198

    Asset impairment
18

 

 

 
18

 
18

 

 

 
18

Restructuring
115

 
47

 
12

 
174

 
148

 
48

 
20

 
216

Programming
106

 

 

 
106

 
106

 

 

 
106

Total
$
221

 
$
47

 
$
12

 
$
280

 
$
254

 
$
48

 
$
20

 
$
322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss on extinguishment of debt: In 2017, we redeemed $2.3 billion of our senior notes outstanding at a redemption price equal to the sum of the principal amounts and a make-whole amount, together totaling $2.333 billion. As a result of the redemptions, we recognized pre-tax extinguishment losses of $30 million, which included $3 million of unamortized debt discount and issuance fees, and $36 million in the quarter and six months ended March 31, 2017, respectively.
Discrete taxes: The net discrete tax benefit in the quarter ended March 31, 2017 was related to the release of tax reserves with respect to certain effectively settled tax positions. The net discrete tax benefit in the six months ended March 31, 2017 was principally related to the reversal of a valuation allowance on net operating losses upon receipt of a favorable tax authority ruling, as well as the release of tax reserves with respect to certain effectively settled tax positions. The net discrete tax expense in the six months ended March 31, 2016 was principally related to a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation.
Revenues
Worldwide revenues increased $255 million, or 8%, to $3.256 billion in the quarter and $425 million, or 7%, to $6.580 billion in the six months ended March 31, 2017. Filmed Entertainment revenues increased $240 million, or 37%, in the quarter and $386 million, or 30%, in the six months, reflecting increases across all revenue streams. Media Networks revenues increased $13 million, or 1%, in the quarter and $37 million, or 1%, in the six months, principally reflecting higher affiliate revenues, partially offset by lower advertising revenues, as well as higher ancillary revenues in the six month period.
Expenses
Total expenses increased $509 million, or 21%, to $2.924 billion in the quarter ended March 31, 2017, reflecting restructuring and programming charges of $280 million and higher segment expenses. Total expenses increased $812 million, or 17%, to $5.542 billion in the six months ended March 31, 2017, primarily driven by higher segment expenses and restructuring and programming charges of $322 million. Filmed Entertainment expenses increased $170 million, or 21%, in the quarter and $350 million, or 23%, in the six months, driven by higher operating expenses. Media Networks expenses increased $71 million, or 5%, in the quarter and $165 million, or 5%, in the six months, driven by higher SG&A and operating expenses.
Operating
Operating expenses increased $290 million, or 18%, to $1.944 billion in the quarter and $516 million, or 16%, to $3.763 billion in the six months. Consolidated operating expenses include a Media Networks programming charge of $106 million in the quarter and six months. Filmed Entertainment operating expenses increased $177 million, or 26%, in the quarter and $361 million, or 27%, in the six months. Media Networks segment operating expenses increased $8 million, or 1%, in the quarter and $53 million, or 3%, in the six months.
Selling, General and Administrative
SG&A expenses increased $43 million, or 6%, to $748 million in the quarter and $77 million, or 6%, to $1.449 billion in the six months, reflecting higher segment expenses of $54 million in the quarter and $98 million in the six months, partially offset by a decrease in equity-based compensation of $12 million in the quarter and $22 million in the six months, primarily driven by management changes. Media Networks SG&A expenses increased $59 million, or 11%, in the quarter and $106 million, or 10%, in the six months. Filmed Entertainment SG&A expenses decreased $5 million, or 6%, in the quarter and