Form 10-Q
Table of Contents

 

 

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 December 31, 2010

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x     Accelerated filer ¨     Non-accelerated filer ¨     Smaller reporting company ¨

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 January 15, 2011

Class A Common stock, par value $0.001 per share

  51,625,270

Class B Common stock, par value $0.001 per share

  545,343,821

 

 


Table of Contents

VIACOM INC.

INDEX TO FORM 10-Q

 

               Page      

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Consolidated Statements of Earnings for the quarters ended December 31, 2010 and 2009      1   
   Consolidated Balance Sheets as of December 31, 2010 and September 30, 2010      2   
   Consolidated Statements of Cash Flows for the quarters ended December 31, 2010 and 2009      3   
   Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the quarters ended December 31, 2010 and 2009      4   
   Notes to Consolidated Financial Statements      5   

Item 2.

   Management’s Discussion and Analysis of Results of Operations and Financial Condition      14   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      23   

Item 4.

   Controls and Procedures      23   

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings      23   

Item 1A.

   Risk Factors      23   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      23   

Item 6.

   Exhibits      24   


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

VIACOM INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

      Quarter Ended
December 31,
 
(in millions, except per share amounts)    2010      2009  

Revenues

   $         3,828       $         4,019   

Expenses:

     

Operating

     2,017         2,005   

Selling, general and administrative

     700         727   

Depreciation and amortization

     71         86   

Asset impairment

             60   
                 

Total expenses

     2,788         2,878   

Operating income

     1,040         1,141   

Interest expense, net

     (104)         (105)   

Equity in net earnings (losses) of investee companies

     24         (20)   

Other items, net

             10   
                 

Earnings from continuing operations before provision for income taxes

     960         1,026   

Provision for income taxes

     (331)         (335)   
                 

Net earnings from continuing operations

     629         691   

Discontinued operations, net of tax

     (10)         (30)   
                 

Net earnings (Viacom and noncontrolling interests)

     619         661   

Net (earnings) losses attributable to noncontrolling interests

     (9)         33   
                 

Net earnings attributable to Viacom

   $ 610       $ 694   
                 

Amounts attributable to Viacom:

     

Net earnings from continuing operations

   $ 620       $ 724   

Discontinued operations, net of tax

     (10)         (30)   
                 

Net earnings attributable to Viacom

   $ 610       $ 694   
                 

Basic earnings per share attributable to Viacom:

     

Continuing operations

   $ 1.03       $ 1.19   

Discontinued operations

   $ (0.02)       $ (0.05)   

Net earnings

   $ 1.01       $ 1.14   

Diluted earnings per share attributable to Viacom:

     

Continuing operations

   $ 1.02       $ 1.19   

Discontinued operations

   $ (0.02)       $ (0.05)   

Net earnings

   $ 1.00       $ 1.14   

Weighted average number of common shares outstanding:

     

Basic

     603.4         607.4   

Diluted

     608.0         609.4   

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

   $ 0.15       $   

See accompanying notes to the Consolidated Financial Statements

 

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Table of Contents

VIACOM INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(in millions, except par value)    December 31,
2010
    September 30,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 911     $ 837  

Receivables, net

     2,652       2,417  

Inventory, net

     844       861  

Deferred tax assets, net

     73       77  

Prepaid and other assets

     272       281  

Assets held for sale

     -        76  
                

Total current assets

     4,752       4,549  

Property and equipment, net

     1,073       1,102  

Inventory, net

     4,105       4,145  

Goodwill

     11,047       11,035  

Intangibles, net

     450       467  

Deferred tax assets, net

     223       156  

Other assets

     779       568  

Assets held for sale

     -        74  
                

Total assets

   $ 22,429     $ 22,096  
                

LIABILITIES AND EQUITY

    

Current liabilities:

    

Accounts payable

   $ 321     $ 210  

Accrued expenses

     1,012       1,000  

Participants’ share and residuals

     1,180       1,059  

Program rights obligations

     443       390  

Deferred revenue

     275       256  

Current portion of debt

     31       31  

Other liabilities

     487       435  

Liabilities held for sale

     -        117  
                

Total current liabilities

     3,749       3,498  

Noncurrent portion of debt

     6,722       6,721  

Participants’ share and residuals

     418       453  

Program rights obligations

     620       691  

Other liabilities

     1,337       1,343  

Redeemable noncontrolling interest

     133       131  

Commitments and contingencies (Note 8)

    

Viacom stockholders’ equity:

    

Class A Common stock, par value $0.001, 375.0 authorized; 51.6 and 52.0 outstanding, respectively

     -        -   

Class B Common stock, par value $0.001, 5,000.0 authorized; 546.8 and 556.5 outstanding, respectively

     1       1  

Additional paid-in capital

     8,388       8,346  

Treasury stock, 161.9 and 151.5 common shares held in treasury, respectively

     (6,125     (5,725

Retained earnings

     7,294       6,775  

Accumulated other comprehensive loss

     (86     (114
                

Total Viacom stockholders’ equity

     9,472       9,283  

Noncontrolling interests

     (22     (24
                

Total equity

     9,450       9,259  
                

Total liabilities and equity

   $         22,429     $         22,096  
                

 

See accompanying notes to the Consolidated Financial Statements

 

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VIACOM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

      Quarter Ended
December 31,
 
(in millions)    2010     2009  

OPERATING ACTIVITIES

    

Net earnings (Viacom and noncontrolling interests)

    $             619      $             661  

Discontinued operations, net of tax

     10       30  
                

Net earnings from continuing operations

     629       691  

Reconciling items:

    

Depreciation and amortization

     71       86  

Asset impairment

     -        60  

Feature film and program amortization

     1,141       1,347  

Equity-based compensation

     30       31  

Equity in net (income) losses and distributions from investee companies

     (20 )      33  

Deferred income taxes

     (59 )      (59

Decrease in securitization program

     -        (775

Operating assets and liabilities, net of acquisitions:

    

Receivables

     (200 )      (447

Inventory, program rights and participations

     (1,023 )      (914

Accounts payable and other current liabilities

     264       214  

Other, net

     (115 )      41  

Discontinued operations, net

     (5 )      111  
                

Cash provided by operations

     713       419  
                

INVESTING ACTIVITIES

    

Acquisitions and investments

     (59 )      (91

Capital expenditures

     (17 )      (65

Discontinued operations, net

     -        (1
                

Net cash flow used in investing activities

     (76 )      (157
                

FINANCING ACTIVITIES

    

Borrowings

     -        698  

Debt repayments

     -        (700

Commercial paper

     -        (190

Purchase of treasury stock

     (379 )      -   

Dividends paid

     (182 )      -   

Other, net

     (7 )      (27
                

Net cash flow used in financing activities

     (568 )      (219
                

Effect of exchange rate changes on cash and cash equivalents

     5       6  
                

Net change in cash and cash equivalents

     74       49  

Cash and cash equivalents at beginning of period

     837       249  
                

Cash and cash equivalents at end of period

    $ 911      $ 298  
                

 

 

See accompanying notes to the Consolidated Financial Statements

 

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VIACOM INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

(in millions)   Common
Stock
Outstanding
(shares)
    Common
Stock/
APIC
    Treasury
Stock
    Retained
Earnings
    Accumulated Other
Comprehensive
Income (Loss)
    Total Viacom
Stockholders’
Equity
    Noncontrolling
Interests
    Total Equity  

September 30, 2010

    608.5      $     8,347     $     (5,725)      $     6,775      $                         (114)      $           9,283      $         (24)      $             9,259   

Net earnings

          610               610              619   

Translation adjustments

            28        28              29   

Defined benefit pension plans

                                

Other

            (1)        (1)               (1)   
                                 

Comprehensive income

              638        10        648   

Noncontrolling interests

                     (8)        (8)   

Dividends declared

          (91)          (91)          (91)   

Purchases of treasury stock

    (10.4)          (400)            (400)          (400)   

Equity-based compensation and other

    0.3        42             42          42   
                                                               

December 31, 2010

    598.4      $ 8,389     $ (6,125)      $ 7,294      $ (86)      $ 9,472      $ (22)      $ 9,450   
                                                               
                 
(in millions)   Common
Stock
Outstanding
(shares)
    Common
Stock/
APIC
    Treasury
Stock
    Retained
Earnings
    Accumulated Other
Comprehensive
Income (Loss)
    Total Viacom
Stockholders’
Equity
    Noncontrolling
Interests
    Total Equity  

September 30, 2009

    607.4     $ 8,257     $ (5,725)      $ 5,408     $ 89      $ 8,029      $ 15      $ 8,044   

Net earnings

          694              694        (33)        661   

Translation adjustments

                                

Defined benefit pension plans

            (61)        (61)               (61)   

Other

                                
                                 

Comprehensive income

              640        (33)        607   

Noncontrolling interests

          4               (9)        (5)   

Equity-based compensation and other

           31             31          31   
                                                               

December 31, 2009

    607.4     $ 8,288     $ (5,725)      $ 6,106     $ 35      $ 8,704      $ (27)      $ 8,677   
                                                               

 

 

See accompanying notes to the Consolidated Financial Statements

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Viacom Inc. including its consolidated subsidiaries (“Viacom” or the “Company”) is a leading global entertainment content company, engaging audiences on television, motion picture, Internet and mobile platforms through many of the world’s best known entertainment brands. Viacom operates through two reporting segments: Media Networks, which includes MTV Networks (“MTVN”) and BET Networks (“BETN”); and Filmed Entertainment. The Media Networks segment provides entertainment content for consumers in key demographics attractive to advertisers, content distributors and retailers. The Filmed Entertainment segment produces, finances and distributes motion pictures and other entertainment content under the Paramount Pictures, Paramount Vantage, MTV Films and Nickelodeon Movies brands. It also acquires films for distribution and has distribution relationships with third parties.

Basis of Presentation

Unaudited Interim Financial Statements

The accompanying unaudited consolidated quarterly financial statements have been prepared on a basis consistent with generally accepted accounting principles in the United States (“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 the 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, 2011 (“fiscal year 2011”) or any future period. These statements should be read in conjunction with the Company’s Form 10-KT for the nine month transition period ended September 30, 2010, as filed with the SEC on November 12, 2010 (the “2010 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 reporting periods presented. Significant estimates inherent in the preparation of the accompanying Consolidated Financial Statements include estimates of film ultimate revenues, product returns, allowances for doubtful accounts, 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.

Reclassification

Certain amounts have been reclassified to conform to the fiscal year 2011 presentation.

NOTE 2. EARNINGS PER SHARE

Basic earnings per common share excludes potentially dilutive securities and 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 potential dilutive effect of equity-based compensation awards based upon the application of the treasury stock method. Anti-dilutive common shares are excluded from the calculation of diluted earnings per common share.

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table sets forth the computation of the common shares outstanding used in determining basic and diluted earnings per common share and anti-dilutive shares:

 

 

 

Common Shares Outstanding and Anti-dilutive Common Shares        Quarter Ended    
December 31,
 
(in millions)        2010              2009      

Weighted average common shares outstanding, basic

     603.4        607.4  

Dilutive effect of equity-based compensation awards

     4.6        2.0  
                 

Weighted average common shares outstanding, diluted

         608.0            609.4  
                 

Anti-dilutive common shares

     27.9        37.5  

 

 

NOTE 3. INVENTORY

 

 

Inventory

(in millions)

  

December 31,

2010

      

September 30,

2010

 

Film inventory:

       

Released, net of amortization

   $ 901         $ 900   

Completed, not yet released

     75           83   

In process and other

     669           652   
                   

Total film inventory, net of amortization

     1,645           1,635   

Original programming:

       

Released, net of amortization

     1,057           1,033   

Completed, not yet released

     12            

In process and other

     484           475   
                   

Total original programming, net of amortization

     1,553           1,513   

Acquired program rights, net of amortization

     1,608           1,708   

Merchandise and other inventory, net of allowance of $79 and $73

     143           150   
                   

Total inventory, net

     4,949           5,006   

Less current portion of inventory, net

     (844)           (861)   
                   

Total inventory—noncurrent, net

   $ 4,105         $ 4,145   
                   

 

 

NOTE 4. DEBT

 

  

Debt

(in millions)

  

December 31,

2010

      

September 30,

2010

 

Senior notes and debentures:

       

Senior notes due April 2011, 5.750%

   $ 193         $ 193   

Senior notes due September 2014, 4.375%

     597           597   

Senior notes due September 2015, 4.250%

     250           250   

Senior notes due April 2016, 6.250%

     1,497           1,496   

Senior notes due October 2017, 6.125%

     497           497   

Senior notes due September 2019, 5.625%

     554           554   

Senior debentures due April 2036, 6.875%

     1,735           1,735   

Senior debentures due October 2037, 6.750%

     248           248   

Senior notes due December 2055, 6.850%

     750           750   

Capital lease and other obligations

     432           432   
                   

Total debt

     6,753           6,752   

Less current portion

     (31)           (31)   
                   

Total noncurrent portion

   $ 6,722         $ 6,721   
                   

 

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

At December 31, 2010, the total unamortized net discount related to the senior notes and debentures was $22 million. The fair value of the Company’s senior notes and debentures exceeded the carrying value by $651 million at December 31, 2010. The valuation of the Company’s publicly traded debt is based on quoted prices in active markets.

At December 31, 2010, there were no amounts outstanding under the Company’s $2.0 billion revolving facility due October 2013. The credit facility has one principal financial covenant that requires the Company’s interest coverage for the most recent four consecutive fiscal quarters to be at least 3.0x, which the Company met at December 31, 2010.

The Senior Notes due in April 2011 are classified as long-term debt as the Company has the intent and ability, through utilization of its $2.0 billion revolving credit facility due October 2013, to refinance this debt.

NOTE 5. FINANCIAL INSTRUMENTS

At December 31, 2010, the Company’s financial assets and liabilities reflected in the Consolidated Financial Statements at fair value consist of marketable securities and foreign exchange contracts. Fair value for marketable securities is determined utilizing a market approach based on quoted market prices in active markets at period end. Fair value for foreign exchange contracts is determined utilizing a market-based approach. The following table summarizes the valuation of the Company’s financial assets and liabilities at December 31, 2010 and September 30, 2010:

 

 

 

Financial Asset (Liability)

(in millions)

           Total             

Quoted Prices In

Active Markets for

Identical Assets

Level 1

    

Significant Other
Observable

Inputs

Level 2

    

Significant

Unobservable

Inputs

Level 3

 

December 31, 2010

           

Marketable securities

   $ 83       $ 83      $       $ -   

Foreign exchange contracts

     (1)         -         (1)         -   
                                   

Total

   $ 82       $ 83      $ (1)       $ -   
                                   

September 30, 2010

           

Marketable securities

   $ 78       $ 78      $       $ -   

Foreign exchange contracts

            -                -   
                                   

Total

   $ 79       $ 78      $      $ -   
                                   

 

NOTE 6. PENSION

The Company’s defined pension plans principally consist of both funded and unfunded noncontributory plans covering the majority of domestic employees and retirees. Net periodic benefit costs for the Company under its defined benefit pension plans consist of the following:

 

 

 

Net Periodic Benefit Costs        Quarter Ended    
December 31,
 
(in millions)        2010              2009      

Service cost

   $      $  

Interest cost

     11         10   

Expected return on plan assets

     (9)         (6)   

Amortization of unrecognized prior service cost

              

Recognized actuarial loss

             
                 

Net periodic benefit costs

   $             12       $             12   
                 

 

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7. RELATED PARTY TRANSACTIONS

National Amusements, Inc. (“NAI”), directly and through a wholly-owned subsidiary, is the controlling stockholder of both Viacom and CBS Corporation (“CBS”). Sumner M. Redstone, the Chairman, Chief Executive Officer and controlling shareholder of NAI, is the Executive Chairman of the Board and Founder of both Viacom and CBS. In addition, Shari Redstone, who is Sumner Redstone’s daughter, is the President of NAI, and the Vice Chair of the Board of both Viacom and CBS. George Abrams, one of the Company’s directors, serves on the boards of both NAI and Viacom, and Frederic Salerno, another of the Company’s directors, serves on the boards of both Viacom and CBS. Philippe Dauman, the Company’s President and Chief Executive Officer, also serves on the boards of both NAI and Viacom. Transactions between Viacom and related parties are overseen by the Company’s Governance and Nominating Committee.

Viacom and NAI Related Party Transactions

NAI licenses films in the ordinary course of business for its motion picture theaters from all major studios, including Paramount. During the quarters ended December 31, 2010 and 2009, Paramount earned revenues from NAI in connection with these licenses in the aggregate amounts of approximately $5 million and $3 million, respectively.

Viacom and CBS Corporation Related Party Transactions

In the ordinary course of business, the Company is involved in transactions with CBS and its various businesses that result in the recognition of revenues and expenses by Viacom. Transactions with CBS are settled in cash.

Paramount earns revenues and recognizes expenses associated with the distribution of certain television products into the home entertainment market on behalf of CBS. 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 also earns revenues from CBS through leasing of studio space and licensing of certain film products. Additionally, the Media Networks segment recognizes advertising revenues from CBS.

The Media Networks segment purchases television programming from CBS. The cost of such purchases is initially recorded as acquired program rights inventory and amortized over the estimated period that revenues will be generated. Both of the Company’s segments recognize advertising expenses related to the placement of advertisements with CBS.

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the transactions with CBS as included in the Company’s Consolidated Financial Statements:

 

 

 

CBS Related Party Transactions    Quarter Ended
December 31,
 
(in millions)    2010      2009  

Consolidated Statements of Earnings

     

Revenues

   $ 108      $ 135  

Operating expenses

   $ 130      $ 150  
     December 31,
2010
     September 30,
2010
 

Consolidated Balance Sheets

     

Accounts receivable

   $ 10      $ 9  

Other assets

     1        1  
                 

Total due from CBS

   $ 11      $ 10  
                 

Accounts payable

   $ 5      $ 4  

Participants’ share and residuals, current

     164        227  

Program rights, current

     104        100  

Program rights, noncurrent

     241        263  

Other liabilities

     39        39  
                 

Total due to CBS

   $ 553      $ 633  
                 

 

Other Related Party Transactions

In the ordinary course of business, the Company is involved in related party transactions with equity investees, principally related to investments in unconsolidated variable interest entities (“VIEs”) as more fully described in Note 10. 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 the Company’s Consolidated Financial Statements is as follows:

 

 

 

Other Related Party Transactions        Quarter Ended    
December 31,
 
(in millions)        2010              2009      

Consolidated Statements of Earnings

     

Revenues

   $ 38       $ 126  

Operating expenses

   $      $ 65  

Selling, general and administrative

   $ (4)       $ -   
     December 31,
2010
     September 30,
2010
 

Consolidated Balance Sheets

     

Accounts receivable

   $ 87       $ 88  

Other assets

            9  
                 

Total due from other related parties

   $ 90       $ 97  
                 

Accounts payable

   $ 27       $ 26  

Other liabilities

     14         29  
                 

Total due to other related parties

   $ 41       $ 55  
                 

 

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

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8. COMMITMENTS AND CONTINGENCIES

As more fully described in Notes 3 and 14 of the 2010 Form 10-K, the Company’s commitments primarily consist of programming and talent commitments, operating lease arrangements, purchase obligations for goods and services and future funding commitments related to equity investees. These arrangements result from the Company’s normal course of business and represent obligations that may be payable over several years.

The Company is also subject to a redeemable put option, payable in a foreign currency, with respect to an international subsidiary, which was recently renewed. The put option now expires in January 2016, and is classified as Redeemable noncontrolling interest in the Consolidated Balance Sheets.

Contingencies

The Company has certain indemnification obligations with respect to leases associated with the previously discontinued operations of Famous Players and Blockbuster Inc. (“Blockbuster”). In addition, Viacom has certain indemnities provided by the acquirer of Famous Players and by Blockbuster. At December 31, 2010, these lease commitments, substantially all of which relate to Famous Players, amounted to $648 million. 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. The Company may also have exposure for certain other expenses related to the leases, such as property taxes and common area maintenance. The Company has recorded a liability of $209 million with respect to such obligations. Based on the Company’s consideration of financial information available to it, the lessees’ historical performance in meeting their lease obligations and the underlying economic factors impacting the lessees’ business models, the Company believes its accrual is sufficient to meet any future obligations.

Legal Matters

Litigation is inherently uncertain and always difficult to predict. However, based on the Company’s understanding and evaluation of the relevant facts and circumstances, the Company believes that the legal matters described below and other litigation to which the Company is a party are not likely, in the aggregate, to have a material adverse effect on its results of operations, financial position or cash flows.

In March 2007, the Company filed a complaint in the United States District Court for the Southern District of New York against Google Inc. (“Google”) and its wholly-owned subsidiary YouTube, alleging that Google and YouTube violated and continue to violate the Company’s copyrights. The Company is seeking both damages and injunctive relief. In March 2010, the Company and Google filed motions for summary judgment, and in June 2010, Google’s motion was granted. In December 2010, the Company filed its opening brief for its appeal to the U.S. Court of Appeals for the Second Circuit. The Company believes it has substantial grounds on which to appeal.

In September 2007, Brantley, et al. v. NBC Universal, Inc., et al., was filed in the United States District Court for the Central District of California against the Company and several other program content providers on behalf of a purported nationwide class of cable and satellite subscribers. The plaintiffs also sued several major cable and satellite program distributors. Plaintiffs allege that separate contracts between the program providers and the cable and satellite operator defendants providing for the sale of programming in specific tiers each unreasonably restrain trade in a variety of markets in violation of the Sherman Act. In October 2009, the court dismissed, with prejudice, the plaintiff’s third amended complaint. The plaintiffs appealed the dismissal and the appeal is pending. The Company believes the plaintiffs’ position in this litigation is without merit and intends to continue to vigorously defend this lawsuit.

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Harmonix acquisition agreement provided that to the extent financial results exceeded specific contractual targets against a defined gross profit metric for the calendar years 2007 and 2008, former Harmonix shareholders would be eligible for incremental earn-out payments. In 2008, the Company paid $150 million, subject to adjustment, under this earn-out agreement related to 2007 performance. The Company believes that it is entitled to a refund of a substantial portion of amounts previously paid, but the final amount of the earn-out has not yet been determined and is subject to a private dispute resolution process. In December 2010, a representative of the selling shareholders filed a lawsuit in the Court of Chancery for the State of Delaware alleging that the Company breached its obligations under the acquisition agreement in a manner that could impact the earn-out calculation and made certain other claims. In January 2011, the Company filed a motion to dismiss or stay the lawsuit. The Company believes the plaintiffs’ position in these proceedings is without merit and intends to vigorously defend this lawsuit.

NOTE 9. DISCONTINUED OPERATIONS

In December 2010, the Company completed the sale of Harmonix Music Systems, Inc. Included in the pre-tax loss from discontinued operations for the quarter ended December 31, 2010 is a $12 million loss from operations for the period through the date of sale and a $14 million loss on disposal.

 

 

 

Discontinued Operations        Quarter Ended    
December 31,
 
(in millions)    2010      2009  

Revenues from discontinued operations

   $             49       $             79   

Pre-tax loss from discontinued operations

   $ (26)       $ (49)   

Income tax provision

     16         19   
                 

Net loss from discontinued operations

   $ (10)       $ (30)   
                 

 

For tax purposes, the disposal generated a tax benefit of approximately $115 million, of which approximately $45 million is expected to be realized as a cash refund of taxes previously paid on capital gains and the remaining $70 million benefit will be available to offset qualifying future cash taxes.

NOTE 10. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

 

 

Supplemental Cash Flow Information        Quarter Ended    
December 31,
 
(in millions)        2010              2009      

Cash paid for interest

   $         154      $         157  

Cash paid for income taxes

   $ 147      $ 265  
   
   
Redeemable Noncontrolling Interest        Quarter Ended    
December 31,
 
(in millions)        2010              2009      

Beginning balance

   $ 131       $ 170   

Net earnings

             

Distributions

     (4)         (1)   

Translation adjustment

            (3)   

Redemption value adjustment

             (4)   
                 

Ending balance

   $ 133       $ 168   
                 

 

 

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Investments in Variable Interest Entities

Unconsolidated Variable Interest Entities

At December 31, 2010 and September 30, 2010, the Company’s aggregate investment carrying value in unconsolidated VIEs was $118 million and $98 million, respectively. The impact of the Company’s unconsolidated VIEs on its Consolidated Financial Statements, including related party transactions, is further described in Note 7.

Consolidated Variable Interest Entities

At December 31, 2010 and September 30, 2010, there were $36 million and $37 million of assets and $85 million and $84 million of liabilities, respectively, included within the Company’s Consolidated Balance Sheets in respect of MTV Tr3s’ investment interest in a Hispanic-oriented television broadcaster. The operating results of this consolidated VIE for the quarter ended December 31, 2009 included a $60 million non-cash impairment charge related to certain broadcast licenses held by the entity. The impact to Net earnings attributable to Viacom in 2009 was a reduction of $19 million, with the remaining $41 million allocated to the noncontrolling interest. Except for the impairment charge, the entity’s revenues, expenses and operating income for the quarters ended December 31, 2010 and 2009 were not significant to the Company.

Accounts Receivable

At December 31, 2010, there were $395 million of noncurrent trade receivables in the Filmed Entertainment segment included within Other assets in the Company’s Consolidated Balance Sheet principally related to long-term television license arrangements and amounts due from MVL Productions LLC, a subsidiary of The Walt Disney Company, in connection with the sale of distribution rights. Such amounts are due in accordance with the underlying terms of the respective agreements and are principally from investment grade companies with which the Company has historically done business under similar terms, for which credit loss allowances are generally not considered necessary.

During the quarter ended December 31, 2009, activity under our former accounts receivable securitization programs consisted of $433 million of proceeds from the sale of receivables and $1.109 billion of cash remitted to the facility, including $3 million of cash paid for interest. There were no amounts outstanding under the programs at December 31, 2009.

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11. REPORTING SEGMENTS

The following tables set forth the Company’s financial performance by reporting segment. The Company’s reporting segments have been determined in accordance with the Company’s internal management structure. The Company manages its 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 purchase of Filmed Entertainment’s feature films exhibition rights by Media Networks. The elimination of such intercompany transactions in the Consolidated Financial Statements is included within eliminations in the table below.

The Company’s measure of segment performance is adjusted operating income (loss). Adjusted operating income (loss) is defined as operating income (loss), less equity-based compensation and certain other items identified as affecting comparability, including asset impairment, when applicable.

 

 

 

Revenues by Segment    Quarter Ended
December 31,
 
(in millions)    2010      2009  

Media Networks

   $ 2,380       $ 2,254   

Filmed Entertainment

     1,497         1,791   

Eliminations

     (49)         (26)   
                 

Total revenues

   $         3,828       $         4,019   
                 
                   
     
Adjusted Operating Income (Loss)    Quarter Ended
December 31,
 
(in millions)    2010      2009  

Media Networks

   $ 1,051       $ 982   

Filmed Entertainment

     68         302   

Corporate expenses

     (49)         (52)   

Equity-based compensation

     (30)         (31)   

Asset impairment

             (60)   
                 

Operating income

     1,040         1,141   

Interest expense, net

     (104)         (105)   

Equity in net earnings (losses) of investee companies

     24         (20)   

Other items, net

             10   
                 

Earnings from continuing operations before provision for income taxes

   $           960       $         1,026   
                 
                   
     

Total Assets

(in millions)

   December 31,
2010
     September 30,
2010
 

Media Networks

   $ 16,181      $ 15,911  

Filmed Entertainment

     5,688        5,343  

Corporate/Eliminations

     560        842  
                 

Total assets

   $ 22,429      $ 22,096  
                 
                   
     
Revenues by Component            Quarter Ended         
December 31,
 
(in millions)        2010              2009      

Advertising

   $         1,393       $         1,302   

Feature film

     1,328         1,683   

Affiliate fees

     814         741   

Ancillary

     342         319   

Eliminations

     (49)         (26)   
                 

Total revenues by component

   $         3,828       $ 4,019   
                 

 

 

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Table of Contents

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-KT for the nine month transition period ended September 30, 2010, as filed with the Securities and Exchange Commission (“SEC”) on November 12, 2010 (the “2010 Form 10-K”). References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries through which our various businesses are conducted, 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 Viacom’s business.

 

   

Consolidated Results of Operations. The consolidated results of operations section provides an analysis of our results on a consolidated basis for the quarter ended December 31, 2010 compared to the quarter ended December 31, 2009.

 

   

Segment Results of Operations. The segment results of operations section provides an analysis of our results on a reportable operating segment basis for the quarter ended December 31, 2010 compared to the quarter ended December 31, 2009.

 

   

Liquidity and Capital Resources. The liquidity and capital resources section provides a discussion of our cash flows for the quarter ended December 31, 2010 compared to the quarter ended December 31, 2009 and an update on our indebtedness.

OVERVIEW

Viacom is home to the world’s premier entertainment brands. Through its BET Networks, MTV Networks and Paramount Pictures divisions, Viacom connects with audiences through compelling content across television, motion picture, online and mobile platforms in more than 160 countries and territories. With approximately 170 media networks reaching more than 600 million global subscribers, Viacom’s leading brands include MTV®, VH1®, CMT®, Logo®, BET®, CENTRIC®, Nickelodeon®, Nick Jr.®, TeenNick™, Nicktoons®, Nick at Nite™, COMEDY CENTRAL®, TV Land®, Spike TV® and Tr3s®. Paramount Pictures®, America’s oldest film studio and creator of many of the most beloved motion pictures, continues today as a major global producer and distributor of filmed entertainment. Viacom operates more than 500 branded digital media properties, including several of the world’s most popular destinations for entertainment, community and casual online gaming.

We manage our operations through two reporting segments: Media Networks and Filmed Entertainment. Our measure of segment performance is adjusted operating income (loss). Adjusted operating income (loss) is defined as operating income (loss), less equity-based compensation and certain other items identified as affecting comparability, including asset impairment, when applicable.

We use consolidated adjusted operating income, adjusted net earnings from continuing operations attributable to Viacom and adjusted diluted earnings per share (“EPS”) from continuing operations, as applicable, 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 Viacom’s 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 generally accepted accounting principles (“GAAP”), they should not

 

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Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

be considered in isolation of, or as a substitute for, operating income, net earnings from continuing operations 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. For a reconciliation of our adjusted measures and discussion of the items affecting comparability refer to section entitled “Factors Affecting Comparability”.

In December 2010, we completed the sale of Harmonix Music Systems, Inc. (“Harmonix”), a developer of music-based games, including the Rock Band franchise. Accordingly, the results of operations of Harmonix are presented as discontinued operations in all periods presented.

CONSOLIDATED RESULTS OF OPERATIONS

Our consolidated results of operations are presented below for the quarter ended December 31, 2010 and 2009.

 

Consolidated Results of Operations              Quarter Ended         
December 31,
               Better/(Worse)       
(in millions, except per share amounts)              2010                        2009                        $                      %          

Revenues

     $ 3,828        $ 4,019        $ (191      (5 )% 

Operating income

       1,040          1,141          (101      (9

Adjusted operating income

       1,040          1,201          (161      (13

Net earnings from continuing operations attributable to Viacom

       620          724          (104      (14

Adjusted net earnings from continuing operations attributable to Viacom

       620          693          (73      (11

Diluted EPS from continuing operations

       1.02          1.19          (0.17      (14

Adjusted diluted EPS from continuing operations

     $ 1.02        $ 1.14        $ (0.12      (11 )% 

 

 

Revenues

Worldwide revenues decreased $191 million, or 5%, to $3.828 billion in the quarter ended December 31, 2010 driven by a decrease in Filmed Entertainment revenues, which was partially offset by an increase in Media Networks revenues. The decrease of $294 million in Filmed Entertainment revenues reflects lower home entertainment and television license fee revenues, partially offset by an increase in theatrical and ancillary revenues. The increase of $126 million in Media Networks revenues reflects higher advertising revenues and affiliate fees, partially offset by lower ancillary revenues.

Operating Income

Adjusted operating income decreased $161 million, or 13%, to $1.040 billion in the quarter ended December 31, 2010. Filmed Entertainment’s adjusted operating income decreased $234 million principally reflecting the lower revenues. Media Networks contributed a partially offsetting increase of $69 million principally reflecting the increased revenues, partially offset by our continuing investment in programming. Adjusted results for the quarter ended December 31, 2009 excludes the impact of asset impairment.

Including the impact of the prior year asset impairment, operating income decreased $101 million, or 9%. See the section entitled “Factors Affecting Comparability” for a reconciliation of our adjusted measures to our reported results.

Net Earnings from Continuing Operations Attributable to Viacom

Adjusted net earnings from continuing operations attributable to Viacom decreased $73 million, or 11%, to $620 million in the quarter ended December 31, 2010, principally due to the decrease in tax-effected adjusted operating income described above, partially offset by higher equity income principally due to EPIX generating

 

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Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

equity income this quarter as compared with a loss in the prior year period. Our effective income tax rate is 34.5% as compared with 35.5%, excluding the impact of discrete taxes, in the prior year period. The reduction in this year’s effective rate is principally due to a change in international mix of income. Adjusted diluted EPS from continuing operations decreased $0.12 per diluted share to $1.02.

Including the impact of the prior year asset impairment and discrete tax benefits, net earnings from continuing operations attributable to Viacom decreased $104 million, or 14%, in the quarter ended December 31, 2010. Diluted EPS from continuing operations decreased $0.17 per diluted share. See the section entitled “Factors Affecting Comparability” for a reconciliation of our adjusted measures to our reported results.

Discontinued Operations, Net of Tax

The loss from discontinued operations for the quarter ended December 31, 2010 reflects a loss on the disposal of Harmonix and the Harmonix operating loss for the period through the date of sale, partially offset by the related tax benefit. For the quarter ended December 31, 2009, discontinued operations reflects the operating loss related to Harmonix.

SEGMENT RESULTS OF OPERATIONS

Transactions between reportable segments are accounted for as third-party arrangements for the purposes of presenting reporting segment results of operations. Typical intersegment transactions include the purchase of advertising by the Filmed Entertainment segment on Media Networks’ properties and the purchase of Filmed Entertainment’s feature films exhibition rights by Media Networks.

Media Networks

 

                Quarter Ended        
December 31,
       Better/(Worse)  
(in millions)              2010                        2009                        $                      %          

Revenues by Component

                 

Advertising

     $ 1,393        $ 1,302        $ 91       

Affiliate fees

       814          741          73        10  

Ancillary

       173          211          (38      (18
                                         

Total revenues by component

     $ 2,380        $ 2,254        $ 126       
                                         

Expenses

                 

Operating

     $ 778        $ 725        $ (53      (7 )% 

Selling, general and administrative

       503          494          (9      (2

Depreciation and amortization

       48          53          5        9  
                                         

Total expenses

     $ 1,329        $ 1,272        $ (57      (4 )% 
                                         

Adjusted operating income

     $ 1,051        $ 982        $ 69       
                                         

 

Revenues

Our Media Networks segment generates revenues principally in three categories: (i) the sale of advertising time on our program services and digital properties, (ii) affiliate fees from cable television operators, direct-to-home satellite operators, mobile networks and other content distributors and (iii) ancillary revenues, which include home entertainment sales of our programming, the licensing of our content to third parties and the licensing of our brands and properties for consumer products.

 

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Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

Worldwide revenues increased $126 million, or 6%, to $2.380 billion in the quarter ended December 31, 2010 driven by increases in advertising revenues and affiliate fees, partially offset by a decline in ancillary revenues. Domestic revenues were $1.984 billion, an increase of $152 million, or 8%. International revenues were $396 million, a decrease of $26 million, or 6%. Foreign exchange had a 2-percentage point unfavorable impact on international growth.

Advertising

Worldwide advertising revenues increased $91 million, or 7%, to $1.393 billion in the quarter ended December 31, 2010. Domestic advertising revenues increased 10% principally reflecting the stronger scatter and upfront sales markets. International advertising revenues decreased 7% principally due to timing of event-driven programming and foreign exchange. Foreign exchange had a 3-percentage point unfavorable impact on international growth.

Affiliate Fees

Worldwide affiliate fees increased $73 million, or 10%, to $814 million in the quarter ended December 31, 2010. Domestic affiliate revenues increased 11%, principally due to rate increases. International affiliate revenues increased 4%, with a 2-percentage point unfavorable impact from foreign exchange on international growth.

Ancillary

Worldwide ancillary revenues decreased $38 million, or 18%, to $173 million in the quarter ended December 31, 2010 principally reflecting lower consumer products and home entertainment revenues. Domestic and international ancillary revenues each decreased 18%.

Expenses

Media Networks segment expenses consist of operating expenses, selling, general and administrative (“SG&A”) expenses and depreciation and amortization. Operating expenses comprise costs related to original and acquired programming, including programming amortization, expenses associated with the manufacturing and distribution of home entertainment products, and consumer products licensing and participation fees. 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.

Total expenses increased $57 million, or 4%, to $1.329 billion in the quarter ended December 31, 2010, principally driven by an increase in programming costs, reflecting our continued investment in programming.

Operating

Operating expenses increased $53 million, or 7%, to $778 million for the quarter ended December 31, 2010. Production and programming expenses increased $62 million, or 10%, reflecting expenses associated with our continuing investment in programming. Distribution and other expenses decreased $9 million, or 11%.

Selling, General and Administrative

SG&A increased $9 million, or 2%, to $503 million in the quarter ended December 31, 2010, principally due to higher employee costs.

Adjusted Operating Income

Adjusted operating income increased $69 million, or 7%, to $1.051 billion in the quarter ended December 31, 2010, principally reflecting the higher advertising and affiliate revenues, partially offset by our continuing investment in programming.

 

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Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

Filmed Entertainment

 

                Quarter Ended         
December 31,
               Better/(Worse)           
(in millions)      2010        2009        $      %  

Revenues by Component

                 

Theatrical

     $         416        $         93        $         323            347 %   

Home entertainment

       638          1,145          (507          (44)       

Television license fees

       274          445          (171          (38)       

Ancillary

       169          108          61        56      
                                         

Total revenues by component

     $ 1,497        $ 1,791        $ (294          (16)%   
                                         

Expenses

                 

Operating

     $ 1,288        $ 1,306        $ 18            1 %   

Selling, general and administrative

       119          153          34            22      

Depreciation & amortization

       22          30          8            27      
                                         

Total expenses

     $ 1,429        $ 1,489        $ 60        4 %   
                                         

Adjusted Operating Income

     $ 68        $ 302        $ (234          (77)%   
                                         

 

Revenues

Our Filmed Entertainment segment generates revenues worldwide principally from: (i) the theatrical release and/or distribution of motion pictures, (ii) home entertainment, which includes sales of DVDs, Blu-ray and other products relating to the motion pictures we release theatrically, as well as certain other programming, including content we distribute on behalf of third parties and (iii) license fees paid worldwide by third parties for exhibition rights during the various other distribution windows and through digital media outlets. The Filmed Entertainment segment also generates ancillary revenues from providing production services to third parties, primarily at Paramount’s studio lot, consumer products licensing, game distribution and distribution of its content on digital platforms.

Worldwide revenues decreased $294 million, or 16%, to $1.497 billion in the quarter ended December 31, 2010, driven by a decline in home entertainment and television license fee revenues, partially offset by higher theatrical revenues and an increase in ancillary revenues reflecting the sale of substantially all of the worldwide distribution rights to The Avengers and Iron Man 3 to MVL Productions LLC (“Marvel”), a subsidiary of The Walt Disney Company. Domestic revenues were $784 million, a decline of $233 million, or 23%. International revenues were $713 million, a decline of $61 million, or 8%. Foreign exchange had a 2-percentage point unfavorable impact on international revenues in the quarter ended December 31, 2010.

Theatrical

Worldwide theatrical revenues increased $323 million to $416 million in the quarter ended December 31, 2010, principally driven by the strength and number of our current year releases. During the quarter, we released seven films, including DreamWorks Animation’s Megamind, Jackass 3D, Paranormal Activity 2, True Grit, Little Fockers and The Fighter. In the comparable period of 2009, we released four films, including Paranormal Activity. Domestic and international theatrical revenues increased $161 million and $162 million, respectively. Foreign exchange had an insignificant impact on international theatrical revenues.

Home Entertainment

Worldwide home entertainment revenues decreased $507 million, or 44%, to $638 million in the quarter ended December 31, 2010. Current period releases consist of DreamWorks Animation’s How to Train Your Dragon and Shrek Forever After, and The Last Airbender. The decrease from the prior year quarter principally reflects the

 

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Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

difficult comparison against the release of our strong 2009 summer tentpole titles Transformers: Revenge of the Fallen, Star Trek and G.I. Joe: The Rise of Cobra. Also contributing to the decline were lower revenues from catalog sales. The industry continues to experience overall softness in the DVD market, which has particularly impacted sales of library product. Domestic and international home entertainment revenues decreased 55% and 31%, respectively, with a 2-percentage point unfavorable impact from foreign exchange on international home entertainment revenues.

Television License Fees

Worldwide television license fees decreased $171 million, or 38%, to $274 million in the quarter ended December 31, 2010, principally reflecting lower pay TV, syndication and network fees driven by fewer available titles in the quarter.

Ancillary

Ancillary revenues increased $61 million, or 56%, to $169 million in the quarter ended December 31, 2010 driven by the sale of the distribution rights to The Avengers and Iron Man 3 to Marvel, partially offset by lower digital and merchandising revenues.

Expenses

Filmed Entertainment segment expenses consist of operating expenses, SG&A expenses and depreciation and amortization expenses. Operating expenses principally include the amortization of production costs of our released feature films (including participations accrued under our third-party distribution arrangements), 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 includes depreciation of fixed assets and amortization of finite-lived intangible assets.

Total expenses decreased $60 million, or 4%, to $1.429 billion in the quarter ended December 31, 2010. The reduction in total expenses is principally due to the decrease in selling, general and administrative expenses and the net decrease in operating expenses.

Operating

Operating expenses decreased $18 million, or 1%, to $1.288 billion in the quarter ended December 31, 2010. Film costs declined $272 million, or 31%, primarily reflecting lower amortization of film costs due to the mix of home entertainment releases and fewer pay TV availabilities. Distribution and other costs, principally print and advertising expenses, increased by $254 million, or 57%, due to the increase in number of theatrical releases, partially offset by lower home entertainment costs.

Selling, General and Administrative

SG&A decreased $34 million, or 22%, to $119 million in the quarter ended December 31, 2010, principally driven by the timing of incentive compensation costs and cost savings initiatives.

Adjusted Operating Income

Adjusted operating income decreased $234 million to $68 million in the quarter ended December 31, 2010, principally reflecting the lower home entertainment and television license fee revenues, partially offset by the benefit of the sale of the distribution rights to The Avengers and Iron Man 3 to Marvel and lower selling, general and administrative costs.

 

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Table of Contents

Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

Factors Affecting Comparability

The consolidated financial statements for the quarter ended December 31, 2009 reflect our results of operations, financial position and cash flows reported in accordance with U.S. generally accepted accounting principles. These results were affected by certain items identified as affecting comparability.

The following table reconciles our results for the quarter ended December 31, 2009 to adjusted results. There were no adjustments to our results for the quarter ended December 31, 2010.

 

(in millions, except per share amounts)    Quarter Ended
December 31, 2009
 
      Operating
Income
     Pre-tax Earnings from
Continuing Operations*
    

Net Earnings from Continuing

Operations Attributable to Viacom**

   

Diluted EPS

from
Continuing
Operations

 

Reported results

   $ 1,141      $ 1,026      $ 724     $ 1.19  

Factors Affecting Comparability:

          

Asset impairment

     60        60        19       0.03  

Discrete tax benefits

     -         -         (50     (0.08
                                  

Adjusted results

   $ 1,201      $ 1,086      $ 693     $ 1.14  
                                  

 

*Pre-tax earnings from continuing operations represent earnings before provision for income taxes.

**The tax impact has been calculated using the rates applicable to the adjustments presented.

Asset Impairment

In the quarter ended December 31, 2009, we recorded a $60 million non-cash impairment charge in the Media Networks segment related to certain broadcast licenses held by a 32%-owned consolidated entity. The impact to Net earnings attributable to Viacom was a reduction of $19 million, with the remaining $41 million allocated to the noncontrolling interest.

Discrete Tax Benefits

Our effective income tax rate was 35.5%, excluding the impact of discrete items, in the quarter ended December 31, 2009. Discrete tax benefits of $50 million, taken together with the impact of asset impairment, contributed 2.8 percentage points of tax benefit, which reconciles to the reported effective rate of 32.7%. The discrete taxes were principally due to reserve releases resulting from effectively settled audits.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary source of liquidity is cash provided through the operations of our businesses. Our cash flows from operations, together with our $2.0 billion revolving credit facility, provide us with sufficient resources to fund our anticipated ongoing cash requirements.

Our principal uses of cash include the creation of new programming and film content, acquisitions of third-party content, ongoing investments in our businesses, capital expenditures, commitments to equity affiliates and acquisitions of businesses. We also use cash for interest and tax payments, quarterly cash dividends and discretionary share repurchases under our $4.0 billion stock repurchase program, as deemed appropriate.

 

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Table of Contents

Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

Cash Flows

Cash and cash equivalents increased by $74 million in the quarter ended December 31, 2010.

Operating Activities

Cash provided by operations was $713 million for the quarter ended December 31, 2010, an increase of $294 million compared with the quarter ended December 31, 2009. The increase principally reflects the comparison against a $775 million reduction in securitized receivables in 2009 and lower income tax payments, partially offset by the timing of annual incentive compensation payments as a result of the change in our fiscal year end, lower home entertainment collections and increased production spending at the Filmed Entertainment segment. In addition, cash used in discontinued operations was $5 million in 2010 as compared with cash provided by discontinued operations of $111 million in 2009, principally due to the timing of product launches.

Investing Activities

Cash used in investing activities was $76 million for the quarter ended December 31, 2010, compared with $157 million in the quarter ended December 31, 2009. The decrease is due to lower spending on capital expenditures and acquisitions and investments. In 2010, cash used in investing activities included $59 million related to acquisitions and investments principally reflecting an investment in a European television programmer. In 2009, cash used in investing activities included $91 million related to acquisitions and investments principally related to the acquisition of Teenage Mutant Ninja Turtles and investment in EPIX.

Financing Activities

Cash used in financing activities was $568 million for the quarter ended December 31, 2010. The net outflow is primarily driven by share repurchases and dividends. During the quarter ended December 31, 2010, we repurchased 10.4 million shares for an aggregate purchase price of $400 million, of which $379 million of repurchases settled as of December 31, 2010. From January 1, 2011 through February 2, 2011, we repurchased an additional 2.9 million shares for an aggregate purchase price of $119 million. On each of October 1 and December 30, 2010, we paid $91 million for the quarterly dividends declared on July 27 and November 11, 2010, respectively.

Cash used in financing activities of $219 million in the quarter ended December 31, 2009 was driven by the repayment of commercial paper borrowings.

Capital Resources

Capital Structure and Debt

At December 31, 2010, total debt was $6.753 billion, essentially flat as compared with September 30, 2010. Cash and cash equivalents were $911 million, an increase of $74 million from $837 million at September 30, 2010. There were no amounts outstanding under our $2.0 billion revolving credit facility or commercial paper program at December 31, 2010. 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 at December 31, 2010.

OTHER MATTERS

Related Party Transactions

In the ordinary course of business we enter into transactions with related parties, including National Amusements, Inc., CBS Corporation, their respective subsidiaries and affiliates, and companies which we account for under the equity method of accounting. For additional information, see Note 7 to the Consolidated Financial Statements.

 

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Table of Contents

Management’s Discussion and Analysis

Of Results of Operations and Financial Condition

(Continued)

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” contains both historical and forward-looking statements. All statements that are not statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements reflect our current expectations concerning future results, objectives, plans and goals, and involve known and unknown risks, uncertainties and other factors that are difficult to predict and which may cause actual results, performance or achievements to differ. These risks, uncertainties and other factors include, among others: the public acceptance of our programs, motion pictures and other entertainment content on the various platforms on which they are distributed; technological developments and their effect in our markets and on consumer behavior; the impact of piracy; competition for audiences and distribution; fluctuations in our results due to the timing, mix and availability of our motion pictures; economic conditions generally, and in advertising and retail markets in particular; changes in the Federal communications laws and regulations; other domestic and global economic, business, competitive and/or regulatory factors affecting our businesses generally; and other factors described in our news releases and filings with the Securities and Exchange Commission, including our 2010 Form 10-K and reports on Form 10-Q and Form 8-K. The forward-looking statements included in this document are made only as of the date of this document, and we do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.

 

22


Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of investments. In the ordinary course of business, we may employ established and prudent policies and procedures to manage our exposure principally to changes in interest rates and foreign exchange risks. The objective of such policies and procedures is to manage exposure to market risks in order to minimize the impact on earnings and cash flows. We do not enter into financial instrument transactions for speculative purposes.

Item 4. Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act.

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Since our 2010 Form 10-K, there have been no material developments in the material legal proceedings in which we are involved, except as set forth in Note 8 to the Consolidated Financial Statements included elsewhere in this report.

Item 1A. Risk Factors.

A wide range of risks may affect our business and financial results, now and in the future. We consider the risks described in our 2010 Form 10-K to be the most significant. There may be other currently unknown or unpredictable economic, business, competitive, regulatory or other factors that could have material adverse effects on our future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information about our purchases of Viacom Class B common stock under the new $4.0 billion stock repurchase program that we announced on June 9, 2010, during the quarter ended December 31, 2010:

 

      Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Program
 
Open Market Purchases    (thousands)      (dollars)      (millions)  

Month ended October 31, 2010

     3,796      $ 37.34      $ 3,858  

Month ended November 30, 2010

     2,816      $ 38.35      $ 3,750  

Month ended December 31, 2010

     3,825      $ 39.29      $ 3,600  

 

 

 

23


Table of Contents

Item 6. Exhibits.

 

Exhibit No.

 

Description of Exhibit

    31.1*   Certification of the Chief Executive Officer of Viacom Inc. pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    31.2*   Certification of the Chief Financial Officer of Viacom Inc. pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    32.1**   Certification of the Chief Executive Officer of Viacom Inc. furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    32.2**   Certification of the Chief Financial Officer of Viacom Inc. furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    101.INS**   XBRL Instance Document.
    101.SCH**   XBRL Taxonomy Extension Schema.
    101.CAL**   XBRL Taxonomy Extension Calculation Linkbase.
    101.DEF**   XBRL Taxonomy Extension Definition Linkbase.
    101.LAB**   XBRL Taxonomy Extension Label Linkbase.
    101.PRE**   XBRL Taxonomy Extension Presentation Linkbase.

 

 

* Filed herewith.

** Furnished herewith.

 

24


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

        VIACOM INC.
Date: February 3, 2011     By:  

/s/ James W. Barge

      James W. Barge
      Executive Vice President, Chief Financial Officer
Date: February 3, 2011     By:  

/s/ Katherine Gill-Charest

      Katherine Gill-Charest
     

Senior Vice President, Controller

(Chief Accounting Officer)

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit No.

 

Description of Exhibit

31.1*   Certification of the Chief Executive Officer of Viacom Inc. pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of the Chief Financial Officer of Viacom Inc. pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of the Chief Executive Officer of Viacom Inc. furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**   Certification of the Chief Financial Officer of Viacom Inc. furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document.
101.SCH**   XBRL Taxonomy Extension Schema.
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase.
101.DEF**   XBRL Taxonomy Extension Definition Linkbase.
101.LAB**   XBRL Taxonomy Extension Label Linkbase.
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase.

 

 

* Filed herewith.

**Furnished herewith.

 

26

Certification of the Chief Executive Officer of Viacom Inc.

Exhibit 31.1

CERTIFICATION

I, Philippe P. Dauman, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Viacom Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 3, 2011

 

/s/ Philippe P. Dauman

Philippe P. Dauman

President and Chief Executive Officer

Certification of the Chief Financial Officer of Viacom Inc.

Exhibit 31.2

CERTIFICATION

I, James W. Barge, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Viacom Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 3, 2011

 

 

/s/ James W. Barge

James W. Barge

Executive Vice President, Chief Financial Officer

Certification of the Chief Executive Officer of Viacom Inc.

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Viacom Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2010 as filed with the Securities and Exchange Commission (the “Report”), I, Philippe P. Dauman, President and Chief Executive Officer of the Company, certify that to my knowledge:

 

  1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Philippe P. Dauman

Philippe P. Dauman

February 3, 2011

This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of this written statement required by Section 906 has been provided to Viacom Inc. and will be retained by Viacom Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Certification of the Chief Financial Officer of Viacom Inc.

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Viacom Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2010 as filed with the Securities and Exchange Commission (the “Report”), I, James W. Barge., Executive Vice President, Chief Financial Officer of the Company, certify that to my knowledge:

 

  1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ James W. Barge

James W. Barge

February 3, 2011

This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of this written statement required by Section 906 has been provided to Viacom Inc. and will be retained by Viacom Inc. and furnished to the Securities and Exchange Commission or its staff upon request.