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 June 30, 2018
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 July 31, 2018
Class A common stock, par value $0.001 per share
 
49,430,905

Class B common stock, par value $0.001 per share
 
353,433,073

 


Table of Contents

VIACOM INC.
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
Consolidated Statements of Earnings for the quarter and nine months ended June 30, 2018 and 2017
 
Consolidated Statements of Comprehensive Income for the quarter and nine months ended June 30, 2018 and 2017
 
Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017
 
Consolidated Statements of Cash Flows for the nine months ended June 30, 2018 and 2017
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
VIACOM INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
  
Quarter Ended 
 June 30,
 
Nine Months Ended 
 June 30,
(in millions, except per share amounts)
2018
 
2017
 
2018
 
2017
Revenues
$
3,237

 
$
3,364

 
$
9,458

 
$
9,944

Expenses:
 
 
 
 
 
 
 
Operating
1,681

 
1,788

 
4,925

 
5,551

Selling, general and administrative
738

 
756

 
2,249

 
2,205

Depreciation and amortization
51

 
53

 
159

 
167

Restructuring and related costs
15

 
21

 
200

 
237

Total expenses
2,485

 
2,618

 
7,533

 
8,160

Operating income
752

 
746

 
1,925

 
1,784

Interest expense, net
(138
)
 
(155
)
 
(428
)
 
(469
)
Equity in net earnings of investee companies
2

 
47

 
5

 
78

Gain on sale of EPIX

 
285

 

 
285

Other items, net
(9
)
 
(2
)
 
(15
)
 
(37
)
Earnings from continuing operations before provision for income taxes
607

 
921

 
1,487

 
1,641

Provision for income taxes
(93
)
 
(233
)
 
(158
)
 
(417
)
Net earnings from continuing operations
514

 
688

 
1,329

 
1,224

Discontinued operations, net of tax
11

 
3

 
23

 
3

Net earnings (Viacom and noncontrolling interests)
525

 
691

 
1,352

 
1,227

Net earnings attributable to noncontrolling interests
(3
)
 
(8
)
 
(27
)
 
(27
)
Net earnings attributable to Viacom
$
522

 
$
683

 
$
1,325

 
$
1,200

Amounts attributable to Viacom:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
511

 
$
680

 
$
1,302

 
$
1,197

Discontinued operations, net of tax
11

 
3

 
23

 
3

Net earnings attributable to Viacom
$
522

 
$
683

 
$
1,325

 
$
1,200

Basic earnings per share attributable to Viacom:
 
 
 
 
 
 
 
Continuing operations
$
1.27

 
$
1.69

 
$
3.23

 
$
3.00

Discontinued operations
0.03

 
0.01

 
0.06

 
0.01

Net earnings
$
1.30

 
$
1.70

 
$
3.29

 
$
3.01

Diluted earnings per share attributable to Viacom:
 
 
 
 
 
 
 
Continuing operations
$
1.27

 
$
1.69

 
$
3.23

 
$
2.99

Discontinued operations
0.02

 
0.01

 
0.06

 
0.01

Net earnings
$
1.29

 
$
1.70

 
$
3.29

 
$
3.00

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
402.8

 
402.0

 
402.6

 
399.1

Diluted
403.3

 
402.6

 
402.9

 
400.0

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

 
$
0.20

 
$
0.60

 
$
0.60

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

1

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
  
Quarter Ended 
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2018
 
2017
 
2018
 
2017
Net earnings (Viacom and noncontrolling interests)
$
525

 
$
691

 
$
1,352

 
$
1,227

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(228
)
 
59

 
(175
)
 
(16
)
Defined benefit pension plans
1

 
1

 
4

 
4

Cash flow hedges
(3
)
 
5

 
(3
)
 
7

Available-for-sale securities
9

 

 
22

 

Other comprehensive income/(loss) (Viacom and noncontrolling interests)
(221
)
 
65

 
(152
)
 
(5
)
Comprehensive income
304

 
756

 
1,200

 
1,222

Less: Comprehensive income attributable to noncontrolling interest
1

 
9

 
25

 
27

Comprehensive income attributable to Viacom
$
303

 
$
747

 
$
1,175

 
$
1,195

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

2

Table of Contents

VIACOM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(in millions, except par value)
June 30,
2018
 
September 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
929

 
$
1,389

Receivables, net
3,149

 
2,970

Inventory, net
916

 
919

Prepaid and other assets
579

 
523

Total current assets
5,573

 
5,801

Property and equipment, net
875

 
978

Inventory, net
3,851

 
3,982

Goodwill
11,610

 
11,665

Intangibles, net
311

 
313

Other assets
941

 
959

Total assets
$
23,161

 
$
23,698

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
305

 
$
431

Accrued expenses
764

 
869

Participants’ share and residuals
774

 
825

Program obligations
654

 
712

Deferred revenue
317

 
463

Current portion of debt
23

 
19

Other liabilities
460

 
434

Total current liabilities
3,297

 
3,753

Noncurrent portion of debt
10,065

 
11,100

Participants’ share and residuals
414

 
384

Program obligations
465

 
477

Deferred tax liabilities, net
350

 
294

Other liabilities
1,254

 
1,323

Redeemable noncontrolling interest
245

 
248

Commitments and contingencies (Note 6)


 


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; 353.7 and 353.0 outstanding, respectively

 

Additional paid-in capital
10,132

 
10,119

Treasury stock, 393.1 and 393.8 common shares held in treasury, respectively
(20,562
)
 
(20,590
)
Retained earnings
18,247

 
17,124

Accumulated other comprehensive loss
(811
)
 
(618
)
Total Viacom stockholders’ equity
7,006

 
6,035

Noncontrolling interests
65

 
84

Total equity
7,071

 
6,119

Total liabilities and equity
$
23,161

 
$
23,698

 
 
 
 
 See accompanying notes to Consolidated Financial Statements

3

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  
Nine Months Ended 
 June 30,
(in millions)
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net earnings (Viacom and noncontrolling interests)
$
1,352

 
$
1,227

Discontinued operations, net of tax
(23
)
 
(3
)
Net earnings from continuing operations
1,329

 
1,224

Reconciling items:
 
 
 
Depreciation and amortization
159

 
167

Feature film and program amortization
3,402

 
3,475

Equity-based compensation
45

 
52

Equity in net earnings and distributions from investee companies
2

 
(11
)
Gain on sale of EPIX

 
(285
)
Deferred income taxes
27

 
(118
)
Operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(211
)
 
(504
)
Production and programming
(3,373
)
 
(3,252
)
Accounts payable and other current liabilities
(384
)
 
(139
)
Other, net
1

 
45

Net cash provided by operating activities
997

 
654

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Acquisitions and investments, net
(90
)
 
(358
)
Capital expenditures
(102
)
 
(139
)
Proceeds from asset sales
57

 
108

Proceeds from sale of EPIX

 
593

Proceeds from grantor trusts
7

 
52

Net cash provided by/(used in) investing activities
(128
)
 
256

 
 
 
 
FINANCING ACTIVITIES
 
 
 
Borrowings

 
2,569

Debt repayments
(1,000
)
 
(3,300
)
Dividends paid
(241
)
 
(239
)
Exercise of stock options
2

 
172

Other, net
(70
)
 
(64
)
Net cash used in financing activities
(1,309
)
 
(862
)
Effect of exchange rate changes on cash and cash equivalents
(20
)
 
(2
)
Net change in cash and cash equivalents
(460
)
 
46

Cash and cash equivalents at beginning of period
1,389

 
379

Cash and cash equivalents at end of period
$
929

 
$
425

 
 
 
 
 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 entertainment content - including television programs, motion pictures, short-form content, games, consumer products, podcasts, live events and social media experiences - for audiences in 183 countries on various platforms and devices. Viacom operates through two reportable segments: Media Networks and Filmed Entertainment. The Media Networks segment provides entertainment content, services 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 develops, produces, finances, acquires and distributes motion pictures, television programming and other entertainment content under the Paramount Pictures, Paramount Players, Paramount Animation and Paramount Television divisions, in various markets and media worldwide, for itself and for third parties. It partners on various projects with key Viacom franchises, including Nickelodeon Movies and MTV Films. 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, 2018 (“fiscal 2018”) or any future period. These financial statements should be read in conjunction with our Form 10-K for the year ended September 30, 2017, as filed with the SEC on November 16, 2017 (the “2017 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
Equity-Based Compensation
On October 1, 2017, we adopted Accounting Standards Update (“ASU”) 2016-09 - Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for and presentation of share-based payments in the financial statements. The new guidance requires all excess tax benefits and tax deficiencies arising from share-based payment activity to be (i) recognized within Provision for income taxes in the Consolidated Statements of Earnings in the period in which the awards vest or are exercised or canceled, and (ii) reported as operating activities in the Consolidated Statements of Cash Flows. We retrospectively reclassified $1 million of excess tax benefits in the nine months ended June 30, 2017 from financing activities to operating activities in the Consolidated Statements of Cash Flows.
Derivatives and Hedging
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12 - Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. Among other provisions, ASU 2017-12 expands the eligibility of hedging strategies that qualify for hedge accounting, changes the assessment of hedge effectiveness and modifies the presentation and disclosure of hedging activities. 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 on our consolidated financial statements.
Income Taxes
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). ASU 2018-02 allows for reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act from AOCI to retained earnings. Certain tax effects become stranded in AOCI when deferred tax balances originally recorded at the historical income tax rate are adjusted in income from continuing operations based on the lower newly enacted income tax rate. We early adopted this guidance in the

5

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

current quarter and reclassified the stranded income tax effects resulting from the Tax Cuts and Jobs Act, increasing the accumulated other comprehensive loss by $43 million with a corresponding increase to retained earnings. The reclassification was primarily comprised of amounts relating to pension benefit plan obligations and available-for-sale securities.
In October 2016, the FASB issued 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. As of June 30, 2018, the Company had approximately $165 million of unrecorded net deferred tax assets, primarily related to an intra-entity transfer of assets. Once recorded, the deferred tax assets will be amortized over the next 12 years.
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 Consolidated Statements 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. The amount that will be reclassified for the nine months ended June 30, 2017 is $33 million.
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 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. We are currently evaluating the impact of the new standard.
ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of certain financial instruments. Among other provisions, the new guidance requires the fair value measurement of equity investments. For equity 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 of equity investments 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 expect to adopt ASU 2016-01 using the modified retrospective method and record a transition adjustment to reclassify accumulated other comprehensive income related to our available-for-sale securities to retained earnings (as of June 30, 2018, the balance was $28 million, net of tax). We further expect to adopt prospectively the “measurement alternative” using subsequent available observable price changes for our investments without readily determinable fair values. Gains and losses resulting from the movements in fair value of equity investments will be recorded as a component of Other items, net on the Consolidated Statements of Earnings.
Leases
In February 2016, the FASB issued ASU 2016-02 - Leases. Subsequent ASUs have also been issued that amend and/or clarify the application of ASU 2016-02. 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. The guidance provides an option to either (1) adopt retrospectively and recognize a cumulative-effect adjustment at the beginning of the earliest period presented in the financial statements or (2) recognize a cumulative-effect adjustment at the beginning of the period of adoption. We are evaluating the adoption methodology and the impact of the new guidance on our consolidated financial statements.
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 ASUs have also been issued that amend and/or clarify the application of ASU 2014-09. The guidance provides a five-step framework

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

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, and allows adoption either under a full retrospective or a modified retrospective approach.
We continue to assess the potential impact of adopting this guidance and are finalizing our implementation. We began designing appropriate changes to our processes, systems and controls to support the recognition and disclosure requirements under the new guidance. We expect that the new standard will impact the timing of revenue recognition for renewals or extensions of existing licensing agreements for intellectual property, which upon adoption will be recognized as revenue when the renewal term begins rather than when the agreement is extended or renewed under guidance currently in effect. We have not identified any other significant impacts to our consolidated financial statements based on our assessment to date. Our continued evaluation of the expected impact of the new guidance or the issuance of additional interpretations, if any, could result in an impact that is different from our preliminary conclusions. We expect to apply the modified retrospective method of adoption, which will result in a cumulative effect adjustment to the opening retained earnings balance of our 2019 fiscal year.
NOTE 2. INVENTORY
Our total inventory consists of the following:
Inventory
(in millions)
June 30,
2018
 
September 30,
2017
Film inventory:
 
 
 
Released, net of amortization
$
519

 
$
534

Completed, not yet released

 
85

In process and other
674

 
686

 
1,193

 
1,305

Television productions:
 
 
 
Released, net of amortization
48

 
15

In process and other
197

 
237

 
245

 
252

Original programming:
 
 
 
Released, net of amortization
1,205

 
1,146

In process and other
587

 
673

 
1,792

 
1,819

Acquired program rights, net of amortization
1,460

 
1,435

Home entertainment inventory
77

 
90

Total inventory, net
4,767

 
4,901

Less current portion
916

 
919

Noncurrent portion
$
3,851

 
$
3,982

 
 
 
 

7

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

NOTE 3. DEBT
Our total debt consists of the following:
Debt
(in millions)
June 30,
2018
 
September 30,
2017
Senior Notes and Debentures:
 
 
 
Senior notes due September 2019, 5.625%
$
550

 
$
550

Senior notes due December 2019, 2.750%
252

 
252

Senior notes due March 2021, 4.500%
497

 
496

Senior notes due December 2021, 3.875%
596

 
595

Senior notes due February 2022, 2.250%
102

 
188

Senior notes due June 2022, 3.125%
194

 
297

Senior notes due March 2023, 3.250%
180

 
298

Senior notes due September 2023, 4.250%
1,239

 
1,237

Senior notes due April 2024, 3.875%
488

 
545

Senior notes due October 2026, 3.450%
474

 
587

Senior debentures due December 2034, 4.850%
281

 
585

Senior debentures due April 2036, 6.875%
1,068

 
1,067

Senior debentures due October 2037, 6.750%
75

 
75

Senior debentures due February 2042, 4.500%
61

 
102

Senior debentures due March 2043, 4.375%
1,100

 
1,096

Senior debentures due June 2043, 4.875%
32

 
37

Senior debentures due September 2043, 5.850%
1,230

 
1,229

Senior debentures due April 2044, 5.250%
345

 
545

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

 
642

Junior subordinated debentures due February 2057, 6.250%
642

 
642

Capital lease and other obligations
40

 
54

Total debt
10,088

 
11,119

Less current portion
23

 
19

Noncurrent portion
$
10,065

 
$
11,100

 
 
 
 
In the nine months ended June 30, 2018, we redeemed $1.039 billion of senior notes and debentures for a redemption price of $1.000 billion. As a result, we recognized a net pre-tax extinguishment gain of $25 million, net of $14 million of unamortized debt costs and transaction fees included in Other items, net in the Consolidated Statements of Earnings.
Our 5.875% junior subordinated debentures accrue interest at a fixed 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. Our 6.250% junior subordinated debentures accrue interest at a fixed 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 junior subordinated debentures can be called by us at any time after the expiration of the fixed-rate period.
The total unamortized discount and issuance fees and expenses related to our notes and debentures outstanding was $435 million and $457 million as of June 30, 2018 and September 30, 2017, respectively. The fair value of our notes and debentures outstanding was approximately $10.2 billion as of June 30, 2018. The valuation of our publicly traded debt is based on quoted prices in active markets (Level 1 in the fair value hierarchy).
Credit Facility
As of June 30, 2018, 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. 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 June 30, 2018.

8

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

NOTE 4. 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 
 June 30,
 
Nine Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Interest cost
$
9

 
$
8

 
$
26

 
$
24

Expected return on plan assets
(10
)
 
(10
)
 
(30
)
 
(28
)
Recognized actuarial loss
1

 
2

 
5

 
6

Net periodic benefit cost
$

 
$

 
$
1

 
$
2

 
 
 
 
 
 
 
 
NOTE 5. 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)
Nine Months Ended 
 June 30,
2018
 
2017
Beginning balance
$
248

 
$
211

Net earnings
13

 
13

Distributions
(14
)
 
(13
)
Translation adjustment
(4
)
 
(1
)
Redemption value adjustment
2

 
(1
)
Ending Balance
$
245

 
$
209

 
 
 
 
NOTE 6. COMMITMENTS AND CONTINGENCIES
Commitments
As more fully described in Note 11 of the 2017 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 $151 million, and are recorded as a liability as of June 30, 2018. 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 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 matter 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 Derivative Action
In July 2016, a purported derivative action was commenced in the Delaware Chancery Court by a purported Viacom stockholder against Viacom and its directors. The complaint alleged that Viacom’s directors breached their fiduciary duties to

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Viacom in connection with compensation paid to Mr. Redstone and that these breaches permitted a waste of corporate assets and the unjust enrichment of Mr. Redstone. In October 2017, the Court granted Viacom’s motion to dismiss the action. In May 2018, following an appeal by the plaintiff, the Delaware Supreme Court affirmed the dismissal.
NOTE 7. STOCKHOLDERS’ EQUITY
The components of stockholders’ equity are as follows:
  
Nine Months Ended 
 June 30, 2018
 
Nine Months Ended 
 June 30, 2017
Stockholders’ Equity
(in millions)
Total Viacom Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
Total Viacom Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
Beginning Balance
$
6,035

 
$
84

 
$
6,119

 
$
4,277

 
$
53

 
$
4,330

Net earnings
1,325

 
27

 
1,352

 
1,200

 
27

 
1,227

Other comprehensive loss (1)
(150
)
 
(2
)
 
(152
)
 
(5
)
 

 
(5
)
Noncontrolling interests
(2
)
 
(44
)
 
(46
)
 
1

 
(27
)
 
(26
)
Dividends declared
(243
)
 

 
(243
)
 
(240
)
 

 
(240
)
Equity-based compensation and other
41

 

 
41

 
176

 

 
176

Ending Balance
$
7,006

 
$
65

 
$
7,071

 
$
5,409

 
$
53

 
$
5,462

 
 
 
 
 
 
 
 
 
 
 
 
(1) The components of other comprehensive loss are net of tax expense of $15 million and $7 million for the nine months ended June 30, 2018 and 2017, respectively.
NOTE 8. RESTRUCTURING AND RELATED COSTS
In the second quarter of fiscal 2018, we launched a program of cost transformation initiatives to improve our margins, including an organizational realignment of support functions across Media Networks, new sourcing and procurement policies, real estate consolidation and technology enhancements. We recognized pre-tax restructuring-related costs of $15 million in the quarter, comprised of third-party professional services. In the nine months ended June 30, 2018, we recorded $200 million of restructuring and related costs. The charges, as detailed in the table below, included severance charges, exit costs principally resulting from vacating certain leased properties and related costs comprised of third-party professional services.
 
 
 
 
 
 
 
 
Restructuring and Related Costs
(in millions)
Nine Months Ended 
 June 30, 2018
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
Severance (1)
$
123

 
$

 
$

 
$
123

Exit costs
40

 

 

 
40

Other related costs

 

 
37

 
37

Total
$
163

 
$

 
$
37

 
$
200

 
 
 
 
 
 
 
 
(1) Includes equity-based compensation expense of $6 million.
Our restructuring liability by reportable segment is as follows:
 
 
 
 
 
 
 
 
Restructuring Liability
(in millions)
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
September 30, 2017
$
119

 
$
45

 
$
44

 
$
208

Accruals
157

 

 

 
157

Severance payments
(74
)
 
(21
)
 
(19
)
 
(114
)
Lease payments
(10
)
 

 

 
(10
)
June 30, 2018
$
192

 
$
24

 
$
25

 
$
241

 
 
 
 
 
 
 
 
As of June 30, 2018, of the remaining $241 million liability, $168 million is classified as a current liability in the Consolidated Balance Sheets, with the remaining $73 million classified as a noncurrent liability. We expect to complete our restructuring actions in fiscal 2019. Amounts classified as noncurrent are expected to be substantially paid through 2021, in accordance with applicable contractual terms.

10

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 9. 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 
 June 30,
 
Nine Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Weighted average number of common shares outstanding, basic
402.8

 
402.0

 
402.6

 
399.1

        Dilutive effect of equity awards
0.5

 
0.6

 
0.3

 
0.9

Weighted average number of common shares outstanding, diluted
403.3

 
402.6

 
402.9

 
400.0

 
 
 
 
 
 
 
 
Anti-dilutive common shares
18.9

 
16.8

 
19.2

 
14.7

 
 
 
 
 
 
 
 
 
NOTE 10. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Our supplemental cash flow information is as follows:
Supplemental Cash Flow Information
(in millions)
Nine Months Ended 
 June 30,
2018

2017
Cash paid for interest
$
403

 
$
455

Cash paid for income taxes
$
95

 
$
480

Cash paid for income taxes in the nine months ended June 30, 2018 reflects the benefits from a lower corporate United States (“U.S.”) income tax rate as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017 and the retroactive reenactment of legislation allowing for accelerated tax deductions on certain qualified film and television productions.
Accounts Receivable
We had $493 million and $486 million of noncurrent trade receivables as of June 30, 2018 and September 30, 2017, 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.
Acquisitions
During the nine months ended June 30, 2018, the Company acquired WhoSay, a leading influence marketing firm, and VidCon, a host of conferences dedicated to online video, for total consideration of $70 million, net of cash acquired.
Investments
During the nine months ended June 30, 2018, we recognized an impairment loss of $46 million to write off certain cost method investments. We also completed the sale of a 1% equity interest in Viacom18 to our joint venture partner for $20 million, resulting in a gain of $16 million. The impairment charge and gain on asset sale are included in Other items, net in the Consolidated Statements of Earnings.
During the quarter ended June 30, 2017, we recognized an impairment loss of $10 million to write off a cost method investment. The impairment charge is included in Other items, net in the Consolidated Statements of Earnings. We also completed the sale of our 49.76% interest in EPIX, a premium entertainment network, to Metro-Goldwyn-Mayer. The sale resulted in proceeds of $593 million, net of transaction costs of $4 million, and a gain of $285 million. In addition, prior to the closing of the sale, EPIX paid a dividend, of which our pro rata share was $37 million.

11

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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 $154 million in assets and $6 million in liabilities as of June 30, 2018, and $159 million in assets and $8 million in liabilities as of September 30, 2017. The consolidated VIEs’ revenues, expenses and operating income were not significant for all periods presented.
NOTE 11. INCOME TAXES
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The currently relevant provisions of the Act provide for a reduction of the federal corporate income tax rate from 35% to 21% and a “transition tax” to be levied on the deemed repatriation of indefinitely reinvested earnings of international subsidiaries. As a result of these factors, as well as our fiscal year-end, the federal statutory tax rate will decrease from 35% to a prorated rate of 24.5% for fiscal 2018. While the Act includes many provisions, those applicable to Viacom will be phased in and will not be fully effective until fiscal 2019.
As a result of the Act, provisional amounts have been recorded in accordance with SEC guidance provided in Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, for the remeasurement of deferred tax assets and liabilities and the transition tax. For the nine months, we recognized a net discrete tax benefit of $223 million that reflects the impact of the Act on our deferred tax balances. In addition, a provisional expense of $4 million in the quarter and $69 million in the nine months has been recorded on a net basis for the one-time transition tax on the deemed repatriation of indefinitely reinvested earnings of our international subsidiaries. These amounts are provisional because certain aspects were based on estimates and assumptions where guidance has yet to be provided. As guidance is received from federal and state authorities, the outcome of these provisional amounts could further change.
No additional income taxes have been provided for any remaining undistributed international cash not subject to the transition tax or any additional outside basis differences as these amounts continue to be indefinitely reinvested outside the U.S. These amounts could be subject to approximately $100 million to $150 million of U.S. tax to the extent they are repatriated in the future.
Our effective income tax rate was 15.3% and 10.6% in the quarter and nine months ended June 30, 2018, respectively. A net discrete tax benefit of $47 million in the quarter and $196 million in the nine months, taken together with the discrete tax impact of the restructuring and related costs, investment impairments, and gain on debt extinguishment, reduced the effective income tax rate by 7.9 and 13.4 percentage points in the quarter and nine months, respectively. The net discrete tax benefit in the quarter was principally related to a tax accounting method change granted by the Internal Revenue Service and the release of tax reserves with respect to certain effectively settled tax positions. In addition to the items in the quarter, the net discrete tax benefit in the nine months was principally related to tax reform, as well as the measurement of the deferred tax balances from the retroactive reenactment of legislation allowing for accelerated tax deductions on certain qualified film and television productions.
Our effective income tax rate was 25.3% and 25.4% in the quarter and nine months ended June 30, 2017, respectively. A net discrete tax benefit of $53 million in the quarter and $72 million in the nine months, taken together with the discrete tax impact of the gain on sale of our investment in EPIX, restructuring and programming charges, the gain or loss on debt extinguishment and an investment impairment, reduced the effective income tax rate by 5.2 and 5.1 percentage points, respectively. The net discrete tax benefit in the quarter was principally related to the reversal of a valuation allowance on capital loss carryforwards in connection with the sale of our investment in EPIX and the release of tax reserves with respect to certain effectively settled tax positions. In addition to the items in the quarter, the net discrete tax benefit in the nine months included the reversal of valuation allowances on net operating losses upon receipt of a favorable tax authority ruling.
NOTE 12. FAIR VALUE MEASUREMENTS
During the first fiscal quarter of 2018, an investment previously accounted for using the cost method was listed on a public exchange. As a result, we reclassified our investment as available-for-sale. The fair value of our available-for-sale securities was $46 million as of June 30, 2018, which is included within Other assets, noncurrent in our Consolidated Balance Sheets, as

12

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

determined utilizing a market approach based on quoted market prices in active markets at period end (Level 1 in the fair value hierarchy).
The fair value of our foreign exchange contracts was a liability of $4 million as of June 30, 2018 and an asset of $7 million as of September 30, 2017, as determined utilizing a market-based approach (Level 2 in the fair value hierarchy). The notional value of all foreign exchange contracts was $665 million and $869 million as of June 30, 2018 and September 30, 2017, respectively. As of June 30, 2018, $275 million related to our foreign currency balances and $390 million related to future production costs. As of September 30, 2017, $287 million related to our foreign currency balances and $582 million related to future production costs.
NOTE 13. REPORTABLE SEGMENTS
The following tables set forth our financial performance by reportable segment. Our reportable segments have been determined in accordance with our internal management structure. We manage our operations through two reportable 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.
Revenues by Segment
(in millions)
Quarter Ended 
 June 30,
 
Nine Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Media Networks
$
2,502

 
$
2,560

 
$
7,491

 
$
7,543

Filmed Entertainment
772

 
847

 
2,057

 
2,500

Eliminations
(37
)
 
(43
)
 
(90
)
 
(99
)
Total revenues
$
3,237

 
$
3,364

 
$
9,458

 
$
9,944

 
 
 
 
 
 
 
 
 
Adjusted Operating Income/(Loss)
(in millions)
Quarter Ended 
 June 30,
 
Nine Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Media Networks
$
799

 
$
870

 
$
2,418

 
$
2,604

Filmed Entertainment
44

 
9

 
(77
)
 
(237
)
Corporate expenses
(60
)
 
(58
)
 
(175
)
 
(163
)
Eliminations
(6
)
 
(8
)
 
(2
)
 
(1
)
Equity-based compensation
(10
)
 
(8
)
 
(39
)
 
(38
)
Programming charges (1)

 
(38
)
 

 
(144
)
Restructuring and related costs (2)
(15
)
 
(21
)
 
(200
)
 
(237
)
Operating income
752

 
746

 
1,925

 
1,784

Interest expense, net
(138
)
 
(155
)
 
(428
)
 
(469
)
Equity in net earnings of investee companies
2

 
47

 
5

 
78

Gain on sale of EPIX

 
285

 

 
285

Other items, net
(9
)
 
(2
)
 
(15
)
 
(37
)
Earnings from continuing operations before provision for income taxes
$
607

 
$
921

 
$
1,487

 
$
1,641

 
 
 
 
 
 
 
 
(1) Included in Operating expenses in the Consolidated Statements of Earnings.
(2) Includes equity-based compensation expense of $6 million in the nine months ended June 30, 2018. Includes expense reduction of $6 million in the quarter ended June 30, 2017 due to modification of an equity award and equity-based compensation expense of $14 million in the nine months ended June 30, 2017.

13

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Total Assets
(in millions)
June 30,
2018
 
September 30,
2017
 
Media Networks
$
17,456

 
$
17,984

Filmed Entertainment
5,396

 
6,188

Corporate/Eliminations
309

 
(474
)
Total assets
$
23,161

 
$
23,698

 
 
 
 

Revenues by Component
(in millions)
Quarter Ended 
 June 30,
 
Nine Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Advertising
$
1,191

 
$
1,235

 
$
3,604

 
$
3,638

Affiliate
1,153

 
1,190

 
3,403

 
3,490

Feature film
731

 
781

 
1,917

 
2,244

Ancillary
199

 
201

 
624

 
671

Eliminations
(37
)
 
(43
)
 
(90
)
 
(99
)
Total revenues
$
3,237

 
$
3,364

 
$
9,458

 
$
9,944

 
 
 
 
 
 
 
 
NOTE 14. RELATED PARTY TRANSACTIONS
National Amusements, Inc. (“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 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 nine months ended June 30, 2018 and 2017, Paramount earned revenues from National Amusements in connection with these licenses in the aggregate amount of approximately $5 million in both periods.
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 prior to any participation amounts paid. 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.

14

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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 
 June 30,
 
Nine Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Consolidated Statements of Earnings
 
 
 
 
 
 
 
Revenues
$
21

 
$
25

 
$
90

 
$
99

Operating expenses
$
25

 
$
39

 
$
110

 
$
129

 
 
 
 
 
 
 
 
  
 
 
 
 
June 30,
2018
 
September 30,
2017
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
7

 
$
5

 
 
 
 
 
 
 
 
Participants’ share and residuals, current
 
 
 
 
$
69

 
$
69

Program obligations, current
 
 
 
 
37

 
54

Program obligations, noncurrent
 
 
 
 
38

 
49

Other liabilities
 
 
 
 
1

 
1

Total due to CBS
 
 
 
 
$
145

 
$
173

 
 
 
 
 
 
 
 

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 
 June 30,
 
Nine Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Consolidated Statements of Earnings
 
 
 
 
 
 
 
Revenues
$
7

 
$
15

 
$
38

 
$
110

Operating expenses
$
3

 
$
2

 
$
8

 
$
59

Selling, general and administrative
$

 
$
(1
)
 
$

 
$
(7
)
 
 
 
 
 
 
 
 
  
 
 
 
 
June 30,
2018
 
September 30,
2017
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
41

 
$
49

Other assets
 
 
 
 
3

 
5

Total due from other related parties
 
 
 
 
$
44

 
$
54

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
6

 
$
8

Other liabilities
 
 
 
 
5

 

Total due to other related parties
 
 
 
 
$
11

 
$
8

 
 
 
 
 
 
 
 
All other related party transactions are not material in the periods presented.

15


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, 2017, as filed with the Securities and Exchange Commission (“SEC”) on November 16, 2017 (the “2017 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 nine months ended June 30, 2018, compared with the quarter and nine months ended June 30, 2017. 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 nine months ended June 30, 2018, compared with the nine months ended June 30, 2017, and of our outstanding debt, commitments and contingencies existing as of June 30, 2018.
OVERVIEW
Summary
We are home to premier global media brands that create compelling entertainment content - including television programs, motion pictures, short-form content, games, consumer products, podcasts, live events and social media experiences - for audiences in 183 countries on various platforms and devices.
We operate through two reportable 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.
Our Media Networks segment provides high-quality entertainment content, services and related branded products for consumers in targeted demographics attractive to advertisers, content distributors and retailers. Increasingly, our advertising and marketing services are enhanced by our advanced marketing solutions portfolio, which both utilizes advanced addressable video inventory to allow dynamic ad insertion and advanced targeting, and provides our marketing partners with a variety of consulting, creative services and associated activations. We create, acquire and distribute programming and other content for our audiences worldwide, distributed through cable, satellite and broadband services, on linear, streaming and on-demand bases, via a variety of owned and third party platforms, including television services, branded apps and sites, for viewing on a wide range of devices such as televisions, PCs, tablets, smartphones and other connected devices. The Media Networks segment also licenses its brands for consumer products and recreational opportunities, and produces live events.
Our Media Networks segment operates globally as Viacom Media Networks through three brand groups, our Global Entertainment Group, the Nickelodeon Group and BET Networks. Globally, our program services reach approximately 4.3 billion cumulative television subscribers in 183 countries and 43 languages, via 300 locally programmed and operated television channels, including Nickelodeon®, Nick Jr.®, MTV®, BET®, Comedy Central®, Paramount Network™ (formerly Spike® in the United States (“U.S.”)), VH1®, TV Land®, CMT®, Logo® and our program services created specifically for international audiences, such as British public service broadcaster Channel 5® (in the United Kingdom), Telefe® (in Argentina), Colors® (in India) and Paramount Channel™ (in a variety of territories). “Cumulative television subscribers” is an aggregation of the total subscribers to each Viacom owned and operated, joint venture and licensee channel.
Our Filmed Entertainment segment develops, produces, finances, acquires and distributes motion pictures, television programming and other entertainment content under the Paramount Pictures®, Paramount Players™, Paramount Animation® and Paramount Television™ divisions, in various markets and media worldwide, for itself and for third parties. It partners on various projects with key Viacom franchises, including Nickelodeon Movies, MTV Films and BET.
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 and (iii) ancillary activities such as consumer products.

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


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, royalties, marketing services 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 in four categories: (i) the release and/or distribution of motion pictures theatrically, (ii) the release and/or distribution of film and television product through home entertainment, (iii) the licensing of film and television product to television and digital platforms and (iv) other ancillary activities.
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. 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
Summary Consolidated Results of Operations
  
Quarter Ended 
 June 30,
 
Better/(Worse)
 
Nine Months Ended 
 June 30,
 
Better/(Worse)
(in millions, except per share amounts)
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
GAAP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
3,237

 
$
3,364

 
$
(127
)
 
(4
)%
 
$
9,458

 
$
9,944

 
$
(486
)
 
(5
)%
Operating income
752

 
746

 
6

 
1

 
1,925

 
1,784

 
141

 
8

Net earnings from continuing operations attributable to Viacom
511

 
680

 
(169
)
 
(25
)
 
1,302

 
1,197

 
105

 
9

Diluted earnings per share from continuing operations
1.27

 
1.69

 
(0.42
)
 
(25
)
 
3.23

 
2.99

 
0.24

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating income
$
767

 
$
805

 
$
(38
)
 
(5
)%
 
$
2,125

 
$
2,165

 
$
(40
)
 
(2
)%
Adjusted net earnings from continuing operations attributable to Viacom
475

 
471

 
4

 
1

 
1,259

 
1,201

 
58

 
5

Adjusted diluted earnings per share from continuing operations
1.18

 
1.17

 
0.01

 
1

 
3.12

 
3.00

 
0.12

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* 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 from continuing operations before provision for income taxes, adjusted provision for income taxes, adjusted net earnings from continuing operations attributable to Viacom and adjusted diluted earnings per share (“EPS”) from continuing operations, 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 from continuing operations before provision for income taxes, provision for income taxes, net earnings from continuing operations attributable to Viacom and diluted EPS from continuing operations as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies.

17

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 nine months ended June 30, 2018 and 2017. 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 
 June 30, 2018
 
Operating Income
 
Earnings from Continuing Operations Before Provision for Income Taxes
 
Provision for Income Taxes
 
Net Earnings from Continuing Operations Attributable to Viacom
 
Diluted EPS from Continuing Operations
Reported results (GAAP)
$
752

 
$
607

 
$
93

 
$
511

 
$
1.27

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Restructuring and related costs
15

 
15

 
4

 
11

 
0.03

Discrete tax benefit

 

 
47

 
(47
)
 
(0.12
)
Adjusted results (Non-GAAP)
$
767


$
622


$
144


$
475


$
1.18

 
 
 
 
 
 
 
 
 
 
(in millions, except per share amounts)
 
Nine Months Ended 
 June 30, 2018
 
Operating Income
 
Earnings from Continuing Operations Before Provision for Income Taxes
 
Provision for Income Taxes
 
Net Earnings from Continuing Operations Attributable to Viacom
 
Diluted EPS from Continuing Operations
Reported results (GAAP)
$
1,925

 
$
1,487

 
$
158

 
$
1,302

 
$
3.23

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Restructuring and related costs
200

 
200

 
48

 
152

 
0.38

Gain on extinguishment of debt

 
(25
)
 
(6
)
 
(19
)
 
(0.05
)
Gain on asset sale

 
(16
)
 

 
(16
)
 
(0.04
)
Investment impairments

 
46

 
10

 
36

 
0.09

Discrete tax benefit

 

 
196

 
(196
)
 
(0.49
)
Adjusted results (Non-GAAP)
$
2,125

 
$
1,692

 
$
406

 
$
1,259

 
$
3.12

 
 
 
 
 
 
 
 
 
 
(in millions, except per share amounts)
 
Quarter Ended 
 June 30, 2017
 
Operating Income
 
Earnings from Continuing Operations Before Provision for Income Taxes
 
Provision for Income Taxes
 
Net Earnings from Continuing Operations Attributable to Viacom
 
Diluted EPS from Continuing Operations
Reported results (GAAP)
$
746

 
$
921

 
$
233

 
$
680

 
$
1.69

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Restructuring and programming charges
59

 
59

 
21

 
38

 
0.09

Gain on extinguishment of debt

 
(16
)
 
(5
)
 
(11
)
 
(0.03
)
Gain on sale of EPIX

 
(285
)
 
(96
)
 
(189
)
 
(0.47
)
Investment impairment

 
10

 
4

 
6

 
0.01

Discrete tax benefit

 

 
53

 
(53
)
 
(0.12
)
Adjusted results (Non-GAAP)
$
805

 
$
689

 
$
210

 
$
471

 
$
1.17

 
 
 
 
 
 
 
 
 
 

18

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


(in millions, except per share amounts)
 
Nine Months Ended 
 June 30, 2017
 
Operating Income
 
Earnings from Continuing Operations Before Provision for Income Taxes
 
Provision for Income Taxes
 
Net Earnings from Continuing Operations Attributable to Viacom
 
Diluted EPS from Continuing Operations
Reported results (GAAP)
$
1,784

 
$
1,641

 
417

 
$
1,197

 
$
2.99

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Restructuring and programming charges
381

 
381

 
135

 
246

 
0.62

Loss on extinguishment of debt

 
20

 
7

 
13

 
0.03

Gain on sale of EPIX

 
(285
)
 
(96
)
 
(189
)
 
(0.47
)
Investment impairment

 
10

 
4

 
6

 
0.02

Discrete tax benefit

 

 
72

 
(72
)
 
(0.19
)
Adjusted results (Non-GAAP)
$
2,165

 
$
1,767

 
$
539

 
$
1,201

 
$
3.00

 
 
 
 
 
 
 
 
 
 
Restructuring and related costs: In the second quarter of fiscal 2018, we launched a program of cost transformation initiatives to improve our margins, including an organizational realignment of support functions across Media Networks, new sourcing and procurement policies, real estate consolidation and technology enhancements. We recognized pre-tax restructuring-related costs of $15 million in the quarter, comprised of third-party professional services. In the nine months ended June 30, 2018, we recorded $200 million of restructuring and related costs. The charges, as detailed in the table below, included severance charges, exit costs principally resulting from vacating certain leased properties and related costs comprised of third-party professional services.
In connection with completing our cost transformation initiatives, we expect to incur additional restructuring-related costs in the fourth fiscal quarter of approximately $20 million, and additional exit costs in the first half of fiscal 2019 of approximately $25 million. We expect our restructuring activities to give rise to approximately $100 million of savings in fiscal 2018, and to result in approximately $300 million of run-rate savings, the benefit of which will be phased in through fiscal 2020.
 
 
 
 
 
 
 
 
Restructuring and Related Costs
(in millions)
Nine Months Ended 
 June 30, 2018
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
Severance
$
123

 
$

 
$

 
$
123

Exit costs
40

 

 

 
40

Other related costs

 

 
37

 
37

Total
$
163

 
$

 
$
37

 
$
200

 
 
 
 
 
 
 
 
We recognized pre-tax restructuring and programming charges of $59 million and $381 million in the quarter and nine months ended June 30, 2017, respectively, resulting from the execution of our flagship brand strategy and strategic initiatives at Paramount.
The following table presents the restructuring and programming charges incurred in the quarter and nine months ended June 30, 2017 by reportable segment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and
Programming Charges
(in millions)
Quarter Ended  
 June 30, 2017
 
Nine Months Ended  
 June 30, 2017
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
 
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
    Severance
$
12

 
$
2

 
$

 
$
14

 
$
142

 
$
50

 
$
20

 
$
212

    Asset impairment
4

 

 

 
4

 
22

 

 

 
22

    Lease termination

 
3

 

 
3

 

 
3

 

 
3

Restructuring
16