VIA-2014.03.31-10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the quarterly period ended March 31, 2014
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 April 15, 2014
Class A common stock, par value $0.001 per share
 
50,973,288

Class B common stock, par value $0.001 per share
 
378,847,996

 


Table of Contents

VIACOM INC.
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
VIACOM INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
  
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions, except per share amounts)
2014
 
2013
 
2014
 
2013
Revenues
$
3,174

 
$
3,135

 
$
6,371

 
$
6,449

Expenses:
 
 
 
 
 
 
 
Operating
1,538

 
1,539

 
3,012

 
3,302

Selling, general and administrative
712

 
689

 
1,416

 
1,386

Depreciation and amortization
52

 
60

 
111

 
117

Total expenses
2,302

 
2,288

 
4,539

 
4,805

Operating income
872

 
847

 
1,832

 
1,644

Interest expense, net
(152
)
 
(110
)
 
(301
)
 
(220
)
Equity in net earnings of investee companies
10

 
16

 
36

 
40

Other items, net
(3
)
 
(6
)
 
(3
)
 
1

Earnings from continuing operations before provision for income taxes
727

 
747

 
1,564

 
1,465

Provision for income taxes
(216
)
 
(258
)
 
(496
)
 
(494
)
Net earnings from continuing operations
511

 
489

 
1,068

 
971

Discontinued operations, net of tax

 
(3
)
 

 
(6
)
Net earnings (Viacom and noncontrolling interests)
511

 
486

 
1,068

 
965

Net earnings attributable to noncontrolling interests
(9
)
 
(8
)
 
(19
)
 
(17
)
Net earnings attributable to Viacom
$
502

 
$
478

 
$
1,049

 
$
948

Amounts attributable to Viacom:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
502

 
$
481

 
$
1,049

 
$
954

Discontinued operations, net of tax

 
(3
)
 

 
(6
)
Net earnings attributable to Viacom
$
502

 
$
478

 
$
1,049

 
$
948

Basic earnings per share attributable to Viacom:
 
 
 
 
 
 
 
Continuing operations
$
1.15

 
$
0.98

 
$
2.38

 
$
1.92

Discontinued operations

 
(0.01
)
 

 
(0.01
)
Net earnings
$
1.15

 
$
0.97

 
$
2.38

 
$
1.91

Diluted earnings per share attributable to Viacom:
 
 
 
 
 
 
 
Continuing operations
$
1.13

 
$
0.96

 
$
2.33

 
$
1.89

Discontinued operations

 

 

 
(0.01
)
Net earnings
$
1.13

 
$
0.96

 
$
2.33

 
$
1.88

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
436.1

 
492.0

 
440.5

 
496.8

Diluted
444.6

 
500.3

 
449.3

 
504.7

Dividends declared per share of Class A and Class B common stock
$
0.30

 
$
0.275

 
$
0.60

 
$
0.55

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

1

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
  
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
 
2014
 
2013
Net earnings (Viacom and noncontrolling interests)
$
511

 
$
486

 
$
1,068

 
$
965

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
7

 
(46
)
 
33

 
(64
)
Defined benefit pension plans

 
2

 

 
16

Cash flow hedges
1

 
(1
)
 
1

 
6

Available for sale securities

 

 

 
3

Other comprehensive income (Viacom and noncontrolling interests)
8

 
(45
)
 
34

 
(39
)
Comprehensive income
519

 
441

 
1,102

 
926

Less: Comprehensive income attributable to noncontrolling interests
9

 
8

 
20

 
15

Comprehensive income attributable to Viacom
$
510

 
$
433

 
$
1,082

 
$
911

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

2

Table of Contents

VIACOM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value)
March 31,
2014
 
September 30,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,580

 
$
2,403

Receivables, net
2,674

 
2,987

Inventory, net
717

 
770

Deferred tax assets, net
51

 
58

Prepaid and other assets
574

 
508

Total current assets
6,596

 
6,726

Property and equipment, net
1,011

 
1,040

Inventory, net
4,087

 
3,945

Goodwill
11,096

 
11,079

Intangibles, net
258

 
279

Other assets
814

 
760

Total assets
$
23,862

 
$
23,829

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
341

 
$
316

Accrued expenses
792

 
1,074

Participants’ share and residuals
968

 
1,110

Program rights obligations
576

 
576

Deferred revenue
216

 
230

Current portion of debt
618

 
18

Other liabilities
403

 
466

Total current liabilities
3,914

 
3,790

Noncurrent portion of debt
12,761

 
11,867

Participants’ share and residuals
373

 
437

Program rights obligations
461

 
527

Deferred tax liabilities, net
562

 
649

Other liabilities
1,160

 
1,169

Redeemable noncontrolling interest
210

 
200

Commitments and contingencies (Note 7)


 


Viacom stockholders’ equity:
 
 
 
Class A common stock, par value $0.001, 375.0 authorized; 51.0 and 51.1 outstanding, respectively

 

Class B common stock, par value $0.001, 5,000.0 authorized; 380.5 and 398.2 outstanding, respectively

 

Additional paid-in capital
9,607

 
9,490

Treasury stock, 356.6 and 336.3 common shares held in treasury, respectively
(17,525
)
 
(15,825
)
Retained earnings
12,410

 
11,629

Accumulated other comprehensive loss
(68
)
 
(101
)
Total Viacom stockholders’ equity
4,424

 
5,193

Noncontrolling interests
(3
)
 
(3
)
Total equity
4,421

 
5,190

Total liabilities and equity
$
23,862

 
$
23,829

 
 
 
 
 See accompanying notes to Consolidated Financial Statements

3

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
  
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net earnings (Viacom and noncontrolling interests)
$
1,068

 
$
965

Discontinued operations, net of tax

 
6

Net earnings from continuing operations
1,068

 
971

Reconciling items:
 
 
 
Depreciation and amortization
111

 
117

Feature film and program amortization
1,862

 
2,005

Equity-based compensation
63

 
60

Equity in net earnings and distributions from investee companies
(22
)
 
(30
)
Deferred income taxes
(94
)
 
475

Operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
323

 
(18
)
Inventory, program rights and participations
(2,168
)
 
(1,988
)
Accounts payable and other current liabilities
(224
)
 
(247
)
Other, net
(106
)
 
(49
)
Discontinued operations, net

 
(3
)
Cash provided by operations
813

 
1,293

INVESTING ACTIVITIES
 
 
 
Acquisitions and investments, net of cash acquired
13

 
12

Capital expenditures
(49
)
 
(67
)
Net cash flow used in investing activities
(36
)
 
(55
)
FINANCING ACTIVITIES
 
 
 
Borrowings
1,485

 
784

Stock repurchases
(1,830
)
 
(1,398
)
Dividends paid
(271
)
 
(277
)
Excess tax benefits on equity-based compensation awards
38

 
20

Exercise of stock options
75

 
169

Other, net
(103
)
 
(92
)
Net cash flow used in financing activities
(606
)
 
(794
)
Effect of exchange rate changes on cash and cash equivalents
6

 
(32
)
Net change in cash and cash equivalents
177

 
412

Cash and cash equivalents at beginning of period
2,403

 
848

Cash and cash equivalents at end of period
$
2,580

 
$
1,260

 
 
 
 
 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 Inc. is a leading global entertainment content company that connects with audiences in over 160 countries and territories and creates compelling television programs, motion pictures, short-form video, applications ("apps"), games, consumer products, social media and other entertainment content. Viacom operates through two reporting segments: Media Networks, which includes Music and Logo, Nickelodeon, Entertainment and BET Networks; and Filmed Entertainment. The Media Networks segment provides entertainment content and related branded products for consumers in targeted demographics attractive to advertisers, content distributors and retailers. The Filmed Entertainment segment produces, finances, acquires and distributes motion pictures and other entertainment content under the Paramount Pictures, Paramount Vantage, Paramount Classics, Insurge Pictures, MTV Films and Nickelodeon Movies brands. References in this document to “Viacom”, “Company”, “we”, “us” and “our” mean Viacom Inc. and our consolidated subsidiaries, unless the context requires otherwise.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated quarterly financial statements have been prepared on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of our results of operations, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results expected for the fiscal year ending September 30, 2014 (“fiscal 2014”) or any future period. These financial statements should be read in conjunction with our Form 10-K for the year ended September 30, 2013, as filed with the SEC on November 14, 2013 (the “2013 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, allowance 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 prior year amounts have been reclassified to conform to the fiscal 2014 presentation.
NOTE 2. 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 shares:
Weighted Average Number of Common Shares Outstanding and Anti-dilutive Common Shares
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
 
2014
 
2013
Weighted average number of common shares outstanding, basic
436.1

 
492.0

 
440.5

 
496.8

        Dilutive effect of equity awards
8.5

 
8.3

 
8.8

 
7.9

Weighted average number of common shares outstanding, diluted
444.6

 
500.3

 
449.3

 
504.7

Anti-dilutive common shares
0.1

 

 
0.1

 
3.6

 
 
 
 
 
 
 
 
 

5

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

NOTE 3. INVENTORY
Our total inventory consists of the following:
Inventory
(in millions)
March 31,
2014
 
September 30,
2013
Film inventory:
 
 
 
Released, net of amortization
$
661

 
$
570

Completed, not yet released

 
40

In process and other
777

 
653

Total film inventory, net of amortization
1,438

 
1,263

Original programming:
 
 
 
Released, net of amortization
1,392

 
1,343

In process and other
569

 
590

Total original programming, net of amortization
1,961

 
1,933

Acquired program rights, net of amortization
1,291

 
1,391

Home entertainment inventory, net of allowance of $69 and $75, respectively
114

 
128

Total inventory, net
4,804

 
4,715

Less current portion
(717
)
 
(770
)
Total inventory-noncurrent, net
$
4,087

 
$
3,945

 
 
 
 
NOTE 4. DEBT
Our total debt consists of the following:
Debt
(in millions)
March 31,
2014
 
September 30,
2013
Senior Notes and Debentures:
 
 
 
                Senior notes due September 2014, 4.375%
$
600

 
$
599

                Senior notes due February 2015, 1.250%
600

 
600

                Senior notes due September 2015, 4.250%
250

 
250

                Senior notes due April 2016, 6.250%
917

 
917

                Senior notes due December 2016, 2.500%
398

 
398

                Senior notes due April 2017, 3.500%
498

 
497

                Senior notes due October 2017, 6.125%
499

 
499

                Senior notes due September 2018, 2.500%
497

 
497

                Senior notes due April 2019, 2.200%
400

 

                Senior notes due September 2019, 5.625%
552

 
552

                Senior notes due March 2021, 4.500%
494

 
494

                Senior notes due December 2021, 3.875%
592

 
592

                Senior notes due June 2022, 3.125%
296

 
296

                Senior notes due March 2023, 3.250%
298

 
298

                Senior notes due September 2023, 4.250%
1,238

 
1,237

                Senior notes due April 2024, 3.875%
546

 

                Senior debentures due April 2036, 6.875%
1,072

 
1,072

                Senior debentures due October 2037, 6.750%
76

 
76

                Senior debentures due February 2042, 4.500%
245

 
245

                Senior debentures due March 2043, 4.375%
1,087

 
1,085

                Senior debentures due June 2043, 4.875%
249

 
249

                Senior debentures due September 2043, 5.850%
1,242

 
1,242

                Senior debentures due April 2044, 5.250%
549

 

Capital lease and other obligations
184

 
190

Total debt
13,379

 
11,885

Less current portion
(618
)
 
(18
)
Total noncurrent portion of debt
$
12,761

 
$
11,867

 
 
 
 

6

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

Senior Notes and Debentures
We issued a total of $1.5 billion of senior notes and debentures in March 2014 as follows:
2.200% Senior Notes due April 2019 with an aggregate principal amount of $400 million at a price equal to 99.947% of the principal amount.
3.875% Senior Notes due April 2024 with an aggregate principal amount of $550 million at a price equal to 99.192% of the principal amount.
5.250% Senior Debentures due April 2044 with an aggregate principal amount of $550 million at a price equal to 99.831% of the principal amount.
The proceeds, net of the discount and other issuance fees and expenses, from the issuance of the senior notes and debentures were $1.485 billion.
On April 3, 2014, we redeemed all $600 million of our outstanding 4.375% Senior Notes due September 2014 (the “2014 Notes”) at a redemption price equal to the sum of the principal amount and a make-whole amount, together totaling $611 million, and accrued and unpaid interest of $1 million. As a result of the redemption, we will recognize a pre-tax extinguishment loss of $11 million in the third quarter.
The total unamortized net discount related to our senior notes and debentures was $425 million as of March 31, 2014. The fair value of our senior notes and debentures was approximately $14.3 billion as of March 31, 2014. The valuation of our publicly traded debt is based on quoted prices in active markets.
The Senior Notes due in February 2015 are classified as long-term debt as we have the intent as well as the ability, through utilization of our $2.5 billion revolving credit facility, to refinance this debt.
Credit Facility
At March 31, 2014, there were no amounts outstanding under our $2.5 billion revolving credit facility due November 2017. The credit facility has one principal financial covenant that requires our interest coverage for the most recent four consecutive fiscal quarters to be at least 3.0x, which we met as of March 31, 2014.
NOTE 5. PENSION BENEFITS
The components of net periodic benefit cost (income) for our defined benefit pension plans are as follows:
Net Periodic Benefit Cost (Income)
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2014
 
2013
 
2014
 
2013
Service cost
$

 
$

 
$

 
$
8

Interest cost
12

 
10

 
24

 
21

Expected return on plan assets
(12
)
 
(11
)
 
(25
)
 
(22
)
Recognized actuarial loss

 
2

 

 
5

Prior service cost

 

 

 
1

          Net periodic benefit cost (income)
$

 
$
1

 
$
(1
)
 
$
13

 
 
 
 
 
 
 
 


7

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

NOTE 6. FAIR VALUE MEASUREMENTS
The following table summarizes our financial assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2014 and September 30, 2013:
Financial Asset (Liability)
  
 
Quoted Prices In
Active Markets for
Identical Assets
 
Significant Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(in millions)
Total        
 
Level 1
 
Level 2
 
Level 3
March 31, 2014
 
 
 
 
 
 
 
Marketable securities
$
104

 
$
104

 
$

 
$

Derivatives
9

 

 
9

 

Total
$
113

 
$
104

 
$
9

 
$

September 30, 2013
 
 
 
 
 
 
 
Marketable securities
$
89

 
$
89

 
$

 
$

Derivatives
(2
)
 

 
(2
)
 

Total
$
87

 
$
89

 
$
(2
)
 
$

 
 
 
 
 
 
 
 
The fair value for marketable securities is determined utilizing a market approach based on quoted market prices in active markets at period end and the fair value for derivatives is determined utilizing a market-based approach.
The notional value of all foreign exchange contracts was $412 million and $196 million as of March 31, 2014 and September 30, 2013, respectively. At March 31, 2014, $206 million related to our foreign currency balances, $143 million related to anticipated investing cash flows and $63 million related to future production costs and programming obligations. At September 30, 2013, $178 million related to our foreign currency balances and $18 million related to future production costs and programming obligations.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Commitments
As more fully described in Notes 3 and 11 of the 2013 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. Additionally, we are subject to a redeemable put option, payable in a foreign currency, with respect to an international subsidiary. The put option expires in January 2016 and is classified as Redeemable noncontrolling interest in the Consolidated Balance Sheets.
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 $420 million as of March 31, 2014. The amount of lease commitments varies over time depending on expiration or termination of individual underlying leases, or of the related indemnification obligation, and foreign exchange rates, among other things. We may also have exposure for certain other expenses related to the leases, such as property taxes and common area maintenance. We have recorded a liability of $195 million with respect to such obligations as of March 31, 2014. We believe our accrual is sufficient to meet any future obligations based on our consideration of available financial information, the lessees’ historical performance in meeting their lease obligations and the underlying economic factors impacting the lessees’ business models.
Legal Matters
Litigation is inherently uncertain and always difficult to predict. However, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the legal matters described below and other litigation to which we are a party are not likely, in the aggregate, to have a material adverse effect on our results of continuing operations, financial position or operating cash flows.

8

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

In March 2007, we 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 continued to violate our copyrights. We sought both damages and injunctive relief. After extended discovery and decisions by both the District Court and the U.S. Court of Appeals, the matter was settled on March 18, 2014. The terms of the settlement were not material to our financial statements.
In February 2013, Cablevision Systems Corporation filed a lawsuit in the United States District Court for the Southern District of New York alleging that Viacom’s industry standard practice of offering discounts for additional network distribution constituted a “tying” arrangement in violation of federal and New York state antitrust laws. Similar arrangements have been upheld by numerous federal and state courts, including in a federal case in which Cablevision itself advocated for the legality of such arrangements. We believe the lawsuit is without merit and, in May 2013, we filed a motion to dismiss. In July 2013, Cablevision filed an amended complaint, and in August 2013, Viacom once again moved to dismiss the action. Briefing on the motion is now complete, and discovery in the action has been stayed pending the court’s decision on the motion to dismiss.
In August 2012, a complaint was filed in the United States District Court for the District of Delaware by a Viacom Class B stockholder against us and each member of our Board of Directors. The complaint purported to be a derivative action alleging that, between 2008 and 2011, we violated the terms of our 2007 Senior Executive Short-Term Incentive Plan (the “2007 Plan”) by allegedly using improper subjective criteria to determine the bonuses paid to Messrs. Redstone, Dauman and Dooley in each of those years, which, according to the complaint, constituted a breach of fiduciary duty by the members of the Board of Directors. The plaintiff alleged that during this period Messrs. Redstone, Dauman and Dooley were paid more than the 2007 Plan permitted and the plaintiff sought to recover the amount of the claimed overpayment, plus interest, for the Company. The plaintiff also alleged that adoption of the Viacom 2012 Senior Executive Short-Term Incentive Plan (the “2012 Plan”) required the vote of all Viacom stockholders and not simply holders of our voting Class A common stock. Accordingly, the plaintiff sought to enjoin any overpayment under the 2012 Plan until a new vote on that plan that included Class B stockholders occurred. In July 2013, the District Court granted our motion to dismiss the complaint, whereupon the plaintiff appealed to the United States Court of Appeals for the Third Circuit. Oral argument on the appeal was heard on March 25, 2014, and we now await a decision.
NOTE 8. STOCKHOLDERS’ EQUITY
The components of stockholders’ equity are as follows:
  
Six Months Ended  
 March 31, 2014
 
Six Months Ended  
 March 31, 2013
Stockholders’ Equity
(in millions)
Total Viacom Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
Total Viacom Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
Beginning Balance
$
5,193

 
$
(3
)
 
$
5,190

 
$
7,448

 
$
(9
)
 
$
7,439

Net earnings
1,049

 
19

 
1,068

 
948

 
17

 
965

Other comprehensive income (loss) (1)
33

 
1

 
34

 
(37
)
 
(2
)
 
(39
)
Noncontrolling interests

 
(20
)
 
(20
)
 
(3
)
 
(18
)
 
(21
)
Dividends declared
(268
)
 

 
(268
)
 
(277
)
 

 
(277
)
Purchase of treasury stock
(1,700
)
 

 
(1,700
)
 
(1,400
)
 

 
(1,400
)
Equity-based compensation and other
117

 

 
117

 
210

 

 
210

Ending Balance
$
4,424

 
$
(3
)
 
$
4,421

 
$
6,889

 
$
(12
)
 
$
6,877

 
 
 
 
 
 
 
 
 
 
 
 
(1) The components of other comprehensive income (loss) are net of a tax benefit of $1 million for the six months ended March 31, 2014, and net of tax expense of $8 million for the six months ended March 31, 2013.

9

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 9. RESTRUCTURING
Our restructuring liability as of March 31, 2014 by reporting segment is as follows:
Restructuring Liability
 
Media Networks
Filmed Entertainment
Total
(in millions)
 
 
 
 
September 30, 2013
 
$
76

$
27

$
103

Severance payments
 
(22
)
(10
)
(32
)
Revisions to initial estimates
 
(4
)

(4
)
March 31, 2014
 
$
50

$
17

$
67

 
 
 
 
 
The liability as of March 31, 2014 is primarily related to future severance payments in connection with the restructuring plan undertaken in fiscal 2013, as further described in Note 13 of the 2013 Form 10-K. We expect that the restructuring plan will be substantially completed by September 30, 2014 and the majority of the severance will be paid in fiscal 2014.
NOTE 10. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Our supplemental cash flow information is as follows:
Supplemental Cash Flow Information
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
Cash paid for interest
$
291

 
$
230

Cash paid for income taxes
$
506

 
$
118

The increase in cash paid for income taxes in the six months ended March 31, 2014 is primarily due to the timing of payments.

Our redeemable noncontrolling interest is as follows:
Redeemable Noncontrolling Interest
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
Beginning balance
$
200

 
$
179

Net earnings
11

 
7

Distributions
(11
)
 
(11
)
Translation adjustment
10

 
(13
)
Redemption value adjustment

 
3

Ending Balance
$
210

 
$
165

 
 
 
 
Accounts Receivable
We had $378 million of noncurrent trade receivables as of March 31, 2014. The accounts receivable were primarily in the Filmed Entertainment segment, included within Other assets in our Consolidated Balance Sheets, and principally related to long-term television license arrangements. Such amounts are due in accordance with the underlying terms of the respective agreements and are principally from investment grade companies with which we have historically done business under similar terms, for which credit loss allowances are generally not considered necessary.
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.

10

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Unconsolidated Variable Interest Entities
We have an unconsolidated investment in Viacom 18, a 50% owned joint venture in India with Network 18 Fincap Limited that qualifies as a VIE. Our aggregate investment carrying value in Viacom 18 was $63 million and $54 million as of March 31, 2014 and September 30, 2013, respectively.

Consolidated Variable Interest Entities
Our Consolidated Balance Sheets include amounts related to consolidated VIEs totaling $75 million in assets and $63 million in liabilities as of March 31, 2014, and $77 million in assets and $56 million in liabilities as of September 30, 2013. The consolidated VIEs' revenues, expenses and operating income were not significant for all periods presented.
Income Taxes
We recognized discrete tax benefits of $20 million in the quarter and six months ended March 31, 2014, principally related to the recognition of capital loss carryforward benefits.
We recognized discrete tax benefits of $12 million in the six months ended March 31, 2013, principally reflecting the release of tax reserves with respect to certain effectively settled tax positions.
NOTE 11. REPORTING SEGMENTS
The following tables set forth our financial performance by reporting segment. Our reporting segments have been determined in accordance with our internal management structure. We manage our operations through two reporting segments: (i) Media Networks and (ii) Filmed Entertainment. Typical intersegment transactions include the purchase of advertising by the Filmed Entertainment segment on Media Networks’ properties and the 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 tables below.
 
Our measure of segment performance is adjusted operating income (loss). Adjusted operating income (loss) is defined as operating income (loss), before equity-based compensation and certain other items identified as affecting comparability, including restructuring and other charges, when applicable.
 
Revenues by Segment
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
 
2014
 
2013
Media Networks
$
2,375

 
$
2,233

 
$
4,916

 
$
4,627

Filmed Entertainment
831

 
941

 
1,512

 
1,916

Eliminations
(32
)
 
(39
)
 
(57
)
 
(94
)
Total revenues
$
3,174

 
$
3,135

 
$
6,371

 
$
6,449

 
 
 
 
 
 
 
 
 
Adjusted Operating Income (Loss)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
 
2014
 
2013
Media Networks
$
949

 
$
873

 
$
2,063

 
$
1,903

Filmed Entertainment
11

 
65

 
(63
)
 
(74
)
Corporate expenses
(52
)
 
(57
)
 
(103
)
 
(117
)
Equity-based compensation
(31
)
 
(29
)
 
(63
)
 
(60
)
Eliminations
(5
)
 
(5
)
 
(2
)
 
(8
)
Operating income
872

 
847

 
1,832

 
1,644

Interest expense, net
(152
)
 
(110
)
 
(301
)
 
(220
)
Equity in net earnings of investee companies
10

 
16

 
36

 
40

Other items, net
(3
)
 
(6
)
 
(3
)
 
1

Earnings from continuing operations before provision for income taxes
$
727

 
$
747

 
$
1,564

 
$
1,465

 
 
 
 
 
 
 
 
 

11

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

Total Assets
March 31,
2014
 
September 30,
2013
(in millions)
 
Media Networks
$
16,615

 
$
16,653

Filmed Entertainment
5,269

 
5,647

Corporate/Eliminations
1,978

 
1,529

Total assets
$
23,862

 
$
23,829

 
 
 
 

Revenues by Component
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
 
2014
 
2013
Advertising
$
1,124

 
$
1,091

 
$
2,449

 
$
2,360

Feature film
715

 
827

 
1,310

 
1,723

Affiliate fees
1,114

 
1,010

 
2,180

 
1,982

Ancillary
253

 
246

 
489

 
478

Eliminations
(32
)
 
(39
)
 
(57
)
 
(94
)
Total revenues
$
3,174

 
$
3,135

 
$
6,371

 
$
6,449

 
 
 
 
 
 
 
 

NOTE 12. 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 controlling shareholder, Chairman and Chief Executive Officer of NAI, serves as our Executive Chairman and Founder and as the Executive Chairman and Founder of CBS. Shari Redstone, who is Sumner Redstone’s daughter, is the President and a director of NAI, and serves as non-executive Vice Chair of the Board of Directors of both Viacom and CBS. George Abrams, one of our directors, serves on the boards of both NAI and Viacom, and Frederic Salerno, another of our directors, serves on the boards of both Viacom and CBS. Philippe Dauman, our President and Chief Executive Officer, also serves on the boards of both NAI and Viacom. Transactions between Viacom and related parties are overseen by our 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 six months ended March 31, 2014 and 2013, Paramount earned revenues from NAI in connection with these licenses in the aggregate amounts of approximately $5 million and $8 million, respectively.
Viacom and CBS Corporation Related Party Transactions
In the ordinary course of business, we are involved in transactions with CBS and its various businesses that result in the recognition of revenues and expenses by us. Transactions with CBS are settled in cash.
Our Filmed Entertainment segment earns revenues and recognizes expenses associated with its distribution of certain television products into the home entertainment market on behalf of CBS. Pursuant to its agreement with CBS, Paramount distributes CBS’s library of television and other content on DVD and Blu-ray disc on a worldwide basis. Under the terms of the agreement, Paramount is entitled to retain a fee based on a percentage of gross receipts and is generally responsible for all out-of-pocket costs, which are recoupable together with any advance amounts paid. Paramount made advance payments of $75 million to CBS in the six months ended March 31, 2014. Paramount also earns revenues from CBS through leasing of studio space and licensing of certain film products.
Our Media Networks segment recognizes advertising revenues and purchases television programming from CBS. The cost of the programming purchases is initially recorded as acquired program rights inventory and amortized over the estimated period that revenues will be generated.
Both of our segments recognize advertising expenses related to the placement of advertisements with CBS.


12

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

The following table summarizes the transactions with CBS as included in our Consolidated Financial Statements:
CBS Related Party Transactions
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
 
2014
 
2013
Consolidated Statement of Earnings
 
 
 
 
 
 
 
Revenue
$
38

 
$
44

 
$
111

 
$
125

Operating expenses
$
57

 
$
60

 
$
153

 
$
158

 
 
 
 
 
 
 
 
  
 
 
 
 
March 31,
2014
 
September 30,
2013
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
3

 
$
5

Other assets
 
 
 
 

 

                Total due from CBS
 
 
 
 
$
3

 
$
5

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
1

 
$
3

Participants' share and residuals, current
 
 
 
 
109

 
115

Program rights obligations, current
 
 
 
 
74

 
99

Program rights obligations, noncurrent
 
 
 
 
112

 
139

Other liabilities
 
 
 
 
14

 
15

                Total due to CBS
 
 
 
 
$
310

 
$
371

 
 
 
 
 
 
 
 

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
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2014
 
2013
 
2014
 
2013
Consolidated Statement of Earnings
 
 
 
 
 
 
 
Revenue
$
67

 
$
62

 
$
80

 
$
98

Operating expenses
$
28

 
$
31

 
$
30

 
$
35

Selling, general and administrative
$
(4
)
 
$
(4
)
 
$
(6
)
 
$
(8
)
 
 
 
 
 
 
 
 
  
 
 
 
 
March 31,
2014
 
September 30,
2013
Consolidated Balance Sheets
 
 
 
 
 
 
 
Account receivable
 
 
 
 
$
62

 
$
84

Other assets
 
 
 
 
1

 
1

                Total due from other related parties
 
 
 
 
$
63

 
$
85

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
2

 
$
4

Other liabilities
 
 
 
 
31

 
26

                Total due to other related parties
 
 
 
 
$
33

 
$
30

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

13

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

NOTE 13. SUBSEQUENT EVENT
On May 1, 2014, we announced a definitive agreement with Northern & Shell Media Group for the acquisition of Channel 5 Broadcasting Limited, a UK television public service broadcaster, for £450 million. The transaction is subject to customary regulatory approvals.
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, 2013, as filed with the Securities and Exchange Commission (“SEC”) on November 14, 2013 (the “2013 Form 10-K”). References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries, unless the context requires otherwise.
Significant components of management’s discussion and analysis of results of operations and financial condition include:
Overview. The overview section provides a summary of our business.
Results of Operations. The results of operations section provides an analysis of our results on a consolidated and reportable segment basis for the quarter and six months ended March 31, 2014, compared to the quarter and six months ended March 31, 2013. In addition, we provide a discussion of items that affect the comparability of our results of operations.
Liquidity and Capital Resources. The liquidity and capital resources section provides a discussion of our cash flows for the six months ended March 31, 2014, compared to the six months ended March 31, 2013, and of our outstanding debt, commitments and contingencies existing as of March 31, 2014.
OVERVIEW
Summary
We are a leading global entertainment content company that connects with audiences in over 160 countries and territories and creates compelling television programs, motion pictures, short-form video, apps, games, consumer products, social media and other entertainment content. With media networks reaching approximately 700 million households worldwide, Viacom's leading brands include MTV®, VH1®, CMT®, Logo®, BET®, CENTRIC®, Nickelodeon®, Nick Jr.®, TeenNick®, Nicktoons®, Nick at Nite®, COMEDY CENTRAL®, TV Land®, SPIKE®, Tr3s®, Paramount Channel™ and VIVA™, among others. Paramount Pictures®, America's oldest film studio, is a major global producer and distributor of filmed entertainment.
We operate through two reporting segments: Media Networks and Filmed Entertainment. Our measure of segment performance is adjusted operating income (loss). We define adjusted operating income (loss) for our segments as operating income (loss), before equity-based compensation and certain other items identified as affecting comparability, including restructuring and other charges, 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.
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, 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 accounting principles generally accepted in the United States of America (“GAAP”), they should not 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 the section entitled “Factors Affecting Comparability”.
Media Networks
Our Media Networks segment generates revenues in three categories: (i) the sale of advertising related to our content and marketing services, (ii) affiliate fees from multichannel television service providers, including cable television operators, direct-to-home satellite television operators and telecommunications operators, subscription and advertising supported video-on-

14

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


demand services, and other distributors of our programming and program services, and (iii) ancillary revenues, which include consumer products licensing, brand licensing, home entertainment sales and licensing of our programming, television syndication and casual gaming.
Demand and pricing for our advertising depends on our ratings and overall market conditions. We also drive additional demand through integrated sales of digital advertising inventory and through our integrated marketing services, providing unique branded entertainment and custom sponsorship opportunities to our advertisers. Our advertising revenues may be affected by the strength of advertising markets and general economic conditions and may fluctuate depending on the success of our programming, as measured by viewership, at any given time. Audience measurement ratings may vary due to the timing of availability of new episodes of popular programming, success of our programming, performance of competing programs and other entertainment alternatives for viewers, as well as variations related to the methods used by third parties to measure ratings.
Advertising revenues are principally generated from the sale of advertising time comprised of multiple commercial units. Each advertising spot comprises a deliverable for accounting purposes. Consideration for these arrangements is allocated among the individual advertising spots based on relative fair value using Viacom-specific prices, and revenue is recognized when the advertisement is aired and the contracted audience rating is met.
Affiliate revenue arrangements with certain digital distributors include multiple programs made available for distribution on one or more dates for a fixed fee. Consideration for such arrangements is allocated among the programs based on relative fair value using management’s best estimate considering viewing performance and other factors, and revenue is recognized upon initial availability of the respective programs.
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, participation fees, integrated marketing expenses and other costs of sales. SG&A expenses consist primarily of employee compensation, marketing, research and professional service fees and facility and occupancy costs. Depreciation and amortization expenses reflect depreciation of fixed assets, including transponders financed under capital leases, and amortization of finite-lived intangible assets.
Filmed Entertainment
Our Filmed Entertainment segment generates revenues worldwide principally from: (i) the theatrical release and/or distribution of motion pictures, (ii) home entertainment, which includes sales of DVDs and Blu-ray discs relating to the motion pictures we release theatrically and direct-to-DVD, as well as content distributed on behalf of Viacom and third parties, (iii) licensing of film exhibition rights to television services, including video-on-demand, subscription video-on-demand, pay and basic cable television, broadcast television and syndicated television and (iv) ancillary revenues from licensing of film exhibition rights to digital platforms, providing production services to third parties, primarily at Paramount’s studio lot, licensing of its brands for consumer products and theme parks, and distribution of content specifically developed for digital platforms and game distribution.
Filmed Entertainment segment expenses consist of operating expenses, SG&A expenses and depreciation and amortization. Operating expenses principally include the amortization of film costs of our released feature films (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 includes depreciation of fixed assets and amortization of finite-lived intangible assets. 

15

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


RESULTS OF OPERATIONS
Consolidated Results of Operations
Our summary consolidated results of operations are presented below for the quarters and six months ended March 31, 2014 and 2013.
  
Quarter Ended  
 March 31,
 
Better/(Worse)
 
Six Months Ended 
 March 31,
 
Better/(Worse)
(in millions, except per share amounts)
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
Revenues
$
3,174

 
$
3,135

 
$
39

 
1
%
 
$
6,371

 
$
6,449

 
$
(78
)
 
(1
)%
Operating income
872

 
847

 
25

 
3

 
1,832

 
1,644

 
188

 
11

Net earnings from continuing operations attributable to Viacom
502

 
481

 
21

 
4

 
1,049

 
954

 
95

 
10

Adjusted net earnings from continuing operations attributable to Viacom
482

 
481

 
1

 

 
1,029

 
942

 
87

 
9

Diluted EPS from continuing operations
1.13

 
0.96

 
0.17

 
18

 
2.33

 
1.89

 
0.44

 
23

Adjusted diluted EPS from continuing operations
$
1.08

 
$
0.96

 
$
0.12

 
13
%
 
$
2.29

 
$
1.87

 
$
0.42

 
22
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See the section entitled “Factors Affecting Comparability” for a reconciliation of our adjusted measures to our reported results.
Revenues
Worldwide revenues increased $39 million, or 1%, in the quarter ended March 31, 2014. The Media Networks revenues increase of $142 million, which reflected higher affiliate fees and advertising revenues, was partially offset by a decline in Filmed Entertainment revenues of $110 million, driven by lower home entertainment and theatrical revenues.
Worldwide revenues decreased $78 million, or 1%, to $6.371 billion in the six months ended March 31, 2014. A decline in Filmed Entertainment revenues of $404 million, driven by lower theatrical and home entertainment revenues, was partially offset by an increase in Media Networks revenues of $289 million, reflecting higher affiliate fees and advertising revenues.
Operating Income
Operating income increased $25 million, or 3%, to $872 million in the quarter. Media Networks adjusted operating income increased $76 million, reflecting higher revenues partially offset by an increase in expenses. Filmed Entertainment adjusted operating income decreased $54 million reflecting the number and mix of current year releases.

Operating income increased $188 million, or 11%, to $1.832 billion in the six months. Media Networks adjusted operating income increased $160 million, driven by higher revenues, partially offset by an increase in expenses. Filmed Entertainment generated an adjusted operating loss of $63 million in the six months, compared to $74 million in the prior period. Corporate expenses decreased $14 million, or 12%, in the six months, primarily driven by lower professional fees.
See the section entitled “Segment Results of Operations” for a more in-depth discussion of the revenues, expenses and adjusted operating income (loss) for each of the Media Networks and Filmed Entertainment segments.

Net Earnings from Continuing Operations Attributable to Viacom
Adjusted net earnings from continuing operations attributable to Viacom increased $1 million to $482 million in the quarter and $87 million, or 9%, to $1.029 billion in the six months, principally due to the increase in tax-effected operating income described above and a lower effective income tax rate, partially offset in both periods by an increase in interest expense driven by higher levels of debt outstanding.
Our effective income tax rate was 32.5% and 33.0% in the quarter and six months, respectively, compared to 34.5% in both the quarter and six months ended March 31, 2013, excluding the impact of discrete tax items. The decrease in the effective income tax rate is principally due to a change in the mix of domestic and international income.
Adjusted diluted EPS from continuing operations increased $0.12 per diluted share to $1.08 in the quarter due to fewer shares outstanding. Including the impact of discrete taxes in the current quarter, net earnings from continuing operations attributable to Viacom increased $21 million, or 4%, and diluted EPS from continuing operations increased $0.17. Adjusted diluted EPS

16

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


from continuing operations increased $0.42 per diluted share to $2.29 in the six months, reflecting fewer shares outstanding and the increase in net earnings from continuing operations. Including the impact of discrete taxes, net earnings from continuing operations attributable to Viacom increased $95 million, or 10%, and diluted EPS from continuing operations increased $0.44 per diluted share.

Segment Results of Operations
Transactions between reportable segments are accounted for as third-party arrangements for the purposes of presenting 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  
 March 31,
 
Better/(Worse)  
 
Six Months Ended 
 March 31,
 
Better/(Worse)  
(in millions)
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
Revenues by Component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
1,124

 
$
1,091

 
$
33

 
3
 %
 
$
2,449

 
$
2,360

 
$
89

 
4
 %
Affiliate fees
1,114

 
1,010

 
104

 
10

 
2,180

 
1,982

 
198

 
10

Ancillary
137

 
132

 
5

 
4

 
287

 
285

 
2

 
1

Total revenues by component
$
2,375

 
$
2,233

 
$
142

 
6
 %
 
$
4,916

 
$
4,627

 
$
289

 
6
 %
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
861

 
$
824

 
$
(37
)
 
(4
)%
 
$
1,729

 
$
1,657

 
$
(72
)
 
(4
)%
Selling, general and administrative
529

 
498

 
(31
)
 
(6
)
 
1,052

 
995

 
(57
)
 
(6
)
Depreciation and amortization
36

 
38

 
2

 
5

 
72

 
72

 

 

Total expenses
$
1,426

 
$
1,360

 
$
(66
)
 
(5
)%
 
$
2,853

 
$
2,724

 
$
(129
)
 
(5
)%
Adjusted Operating Income
$
949

 
$
873

 
$
76

 
9
 %
 
$
2,063

 
$
1,903

 
$
160

 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues
Worldwide revenues increased $142 million, or 6%, to $2.375 billion in the quarter ended March 31, 2014, and $289 million, or 6%, to $4.916 billion in the six months ended March 31, 2014, driven by higher affiliate fees and advertising revenues. Domestic revenues were $2.025 billion in the quarter, an increase of 6%, and $4.143 billion in the six months, an increase of 6%. International revenues were $350 million in the quarter, an increase of 10%, and $773 million in the six months, an increase of 10%. Foreign exchange had a 2-percentage point and 1-percentage point favorable impact on international revenues in the quarter and six months, respectively.
Advertising
Worldwide advertising revenues increased $33 million, or 3%, to $1.124 billion in the quarter. Domestic advertising revenues increased 2% as demand for commercial units sold increased, partially offset by lower average unit pricing. International advertising revenues increased 14% reflecting new channels and European market improvements. Foreign exchange had a 4-percentage point favorable impact on international revenues.

Worldwide advertising revenues increased $89 million, or 4%, to $2.449 billion in the six months. Domestic advertising revenues increased 2% driven by an increase in commercial units sold. International advertising revenues increased 15%. Foreign exchange also had a 2-percentage point favorable impact on international revenues.
Affiliate Fees
Worldwide affiliate fee revenues increased $104 million, or 10%, to $1.114 billion in the quarter, and $198 million, or 10%, to $2.180 billion in the six months, reflecting rate increases and the benefit from the availability of certain programming related to distribution arrangements. Excluding the impact from the timing of product available under certain distribution agreements, domestic affiliate revenues grew high-single digits in both periods. Domestic affiliate revenues increased 11% and 10% and international affiliate revenues increased 7% and 8% in the quarter and six months, respectively. Foreign exchange had a 1-percentage point favorable impact on international revenues in the quarter.

17

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


Expenses
Total expenses increased $66 million, or 5%, to $1.426 billion and $129 million, or 5%, to $2.853 billion in the quarter and six months, respectively.
Operating
Operating expenses increased $37 million, or 4%, to $861 million in the quarter, and $72 million, or 4%, to $1.729 billion in the six months. Due to our continuing investment in original content, programming costs increased $38 million, or 5%, in the quarter, and $56 million, or 4%, in the six months. Distribution and other expenses were flat in the quarter and increased $16 million, or 9%, in the six months, primarily driven by new channels in international markets, which were offset by lower ancillary expenses.
Selling, General and Administrative
SG&A expenses increased $31 million, or 6%, to $529 million in the quarter, and $57 million, or 6%, to $1.052 billion in the six months, primarily driven by higher advertising and promotional expenses related to marketing original programming, as well as increased expenses resulting from new channels in international markets.
Adjusted Operating Income
Adjusted operating income increased $76 million, or 9%, to $949 million and $160 million, or 8%, to $2.063 billion in the quarter and six months, respectively, reflecting higher revenues partially offset by an increase in expenses as discussed above.

Filmed Entertainment
 
Quarter Ended  
 March 31,
 
Better/(Worse)
 
Six Months Ended 
 March 31,
 
Better/(Worse)
(in millions)
2014
 
2013
 
$        
 
%    
 
2014
 
2013
 
$        
 
%    
Revenues by Component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Theatrical
$
229

 
$
276

 
$
(47
)
 
(17
)%
 
$
388

 
$
604

 
$
(216
)
 
(36
)%
Home entertainment
180

 
256

 
(76
)
 
(30
)
 
396

 
597

 
(201
)
 
(34
)
Television license fees
306

 
295

 
11

 
4

 
526

 
522

 
4

 
1

Ancillary
116

 
114

 
2

 
2

 
202

 
193

 
9

 
5

Total revenues by component
$
831

 
$
941

 
$
(110
)
 
(12
)%
 
$
1,512

 
$
1,916

 
$
(404
)
 
(21
)%
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
704

 
$
749

 
$
45

 
6
 %
 
$
1,338

 
$
1,731

 
$
393

 
23
 %
Selling, general & administrative
100

 
106

 
6

 
6

 
200

 
216

 
16

 
7

Depreciation & amortization
16

 
21

 
5

 
24

 
37

 
43

 
6

 
14

Total expenses
$
820

 
$
876

 
$
56

 
6
 %
 
$
1,575

 
$
1,990

 
$
415

 
21
 %
Adjusted Operating Income/(Loss)
$
11

 
$
65

 
$
(54
)
 
(83
)%
 
$
(63
)
 
$
(74
)
 
$
11

 
15
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues
Worldwide revenues decreased $110 million, or 12%, to $831 million, and $404 million, or 21%, to $1.512 billion in the quarter and six months ended March 31, 2014 driven by lower home entertainment and theatrical revenues. Domestic revenues were $427 million, a decrease of 1%, and $731 million, a decrease of 16%, and international revenues were $404 million, a decrease of 21%, and $781 million, a decrease of 25%, in the quarter and six months, respectively. Foreign exchange had a 2-percentage point unfavorable impact on international revenues in both the quarter and six months.
Theatrical
Worldwide theatrical revenues decreased $47 million, or 17%, to $229 million in the the quarter, principally driven by lower carryover revenues from prior period releases. Current quarter releases were Jack Ryan: Shadow Recruit, Noah and Paranormal Activity: The Marked Ones. Releases in the prior year were Hansel and Gretel: Witch Hunters and G.I. Joe: Retaliation. Domestic theatrical revenues increased 59% due to strong carryover revenues from The Wolf of Wall Street, while international theatrical revenues decreased 47% reflecting a difficult comparison against the strong international performance of Hansel and Gretel: Witch Hunters in the prior year and timing of international releases. Foreign exchange had a 4-percentage point unfavorable impact on international revenues.


18

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


Worldwide theatrical revenues decreased $216 million, or 36%, to $388 million in the six months. Revenues from our current year releases were $168 million lower than the prior year, driven by the number and mix of titles released. During the current year we released eight titles, including Anchorman 2: The Legend Continues, Jackass Presents: Bad Grandpa, The Wolf of Wall Street, Jack Ryan: Shadow Recruit, Noah and Paranormal Activity: The Marked Ones, compared to ten titles in the prior year. Carryover revenues from prior period releases were $48 million lower. Domestic theatrical revenues increased 3% and international revenues decreased 60%. Foreign exchange had a 3-percentage point unfavorable impact on international revenues.

Home Entertainment
Worldwide home entertainment revenues decreased $76 million, or 30%, to $180 million in the quarter, primarily driven by a $46 million decrease in revenues from current quarter releases and a $30 million decrease in carryover revenues. We released three titles in the current quarter, The Wolf of Wall Street, Jackass Presents: Bad Grandpa and Nebraska, and released five titles in the prior year, including Rise of the Guardians, Flight and Paranormal Activity 4. Domestic home entertainment revenues decreased 34%, and international home entertainment revenues decreased 23%. Foreign exchange had a 3-percentage point unfavorable impact on international revenues.

Worldwide home entertainment revenues decreased $201 million, or 34%, to $396 million in the six months. Revenues from our current releases were $156 million lower than the prior year due to the number and mix of titles released. In the current year, we released three titles including The Wolf of Wall Street and Jackass Presents: Bad Grandpa. In the prior period, we released six titles, including Madagascar 3: Europe’s Most Wanted, Rise of the Guardians, Flight and Paranormal Activity 4. Carryover revenues from prior period releases were lower by $45 million. Domestic and international home entertainment revenues decreased 52% and 12%, respectively. Foreign exchange had a 2-percentage point unfavorable impact on international revenues.

Television License Fees
Television license fees increased $11 million, or 4%, to $306 million, and $4 million, or 1%, to $526 million, in the quarter and six months, respectively, driven by the number and mix of available titles.
Ancillary
Ancillary revenues increased $2 million, or 2%, to $116 million, and $9 million, or 5%, to $202 million, in the quarter and six months, respectively, principally driven by higher digital revenues.

Expenses
Total expenses decreased $56 million, or 6%, to $820 million, and $415 million, or 21%, to $1.575 billion, in the quarter and six months, respectively, principally driven by lower operating expenses.
Operating
Operating expenses decreased $45 million, or 6%, to $704 million, and $393 million, or 23%, to $1.338 billion in the quarter and six months ended March 31, 2014, respectively. Film costs decreased $44 million, or 12%, in the quarter, and $151 million, or 19%, in the six months, primarily reflecting lower participation costs on third-party distribution arrangements. Distribution and other costs, principally print and advertising expenses, were flat in the quarter and decreased $242 million, or 26%, in the six months as a result of the number and mix of current year theatrical releases.

Selling, General and Administrative
SG&A expenses decreased $6 million, or 6%, to $100 million, and $16 million, or 7%, to $200 million in the quarter and six months, respectively, primarily driven by lower employee costs.
Adjusted Operating Income (Loss)
Adjusted operating income decreased $54 million, or 83%, to $11 million in the quarter, principally reflecting the number and mix of current year releases. Adjusted operating loss for the six months was $63 million, representing an $11 million, or 15%, improvement over the prior year, reflecting cost savings. The generation of an operating loss reflects the recognition of print and advertising expenses incurred in the period, generally before and throughout the theatrical release of a film, while revenues for the respective films are recognized as earned through its theatrical exhibition and subsequent distribution windows.

19

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


Factors Affecting Comparability
The Consolidated Financial Statements as of and for the quarters and six months ended March 31, 2014 and 2013 reflect our results of operations, financial position and cash flows reported in accordance with GAAP. Results for certain of the aforementioned periods, as discussed in the section entitled “Overview”, have been affected by certain items identified as affecting comparability. Accordingly, when applicable, we use adjusted measures to evaluate our actual operating performance.
The following table reconciles our adjusted measures to our reported results for the quarter and six months ended March 31, 2014 and the six months ended March 31, 2013. There were no adjustments to our results for the quarter ended March 31, 2013.
(in millions, except per share amounts)
 
Quarter Ended  
 March 31, 2014
 
Operating
Income
 
Pre-tax Earnings
from Continuing
Operations
 
Net Earnings from
Continuing Operations
Attributable to  Viacom
 
Diluted
EPS from
Continuing
Operations
Reported results
$
872

 
$
727

 
$
502

 
$
1.13

Factors Affecting Comparability:
 
 
 
 
 
 
 
Discrete tax benefits

 

 
(20
)
 
(0.05
)
Adjusted results
$
872

 
$
727

 
$
482

 
$
1.08

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended  
 March 31, 2014
 
Operating
Income
 
Pre-tax Earnings
from Continuing
Operations
 
Net Earnings from
Continuing Operations
Attributable to Viacom
 
Diluted
EPS from
Continuing
Operations