VIA-2014.06.30-10Q


 
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 June 30, 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 July 15, 2014
Class A common stock, par value $0.001 per share
 
50,959,645

Class B common stock, par value $0.001 per share
 
372,070,552

 


Table of Contents

VIACOM INC.
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
Consolidated Statements of Earnings for the quarter and nine months ended June 30, 2014 and 2013
 
Consolidated Statements of Comprehensive Income for the quarter and nine months ended June 30, 2014 and 2013
 
Consolidated Balance Sheets as of June 30, 2014 and September 30, 2013
 
Consolidated Statements of Cash Flows for the nine months ended June 30, 2014 and 2013
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
VIACOM INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
  
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions, except per share amounts)
2014
 
2013
 
2014
 
2013
Revenues
$
3,421

 
$
3,693

 
$
9,792

 
$
10,142

Expenses:
 
 
 
 
 
 
 
Operating
1,565

 
1,845

 
4,577

 
5,147

Selling, general and administrative
718

 
705

 
2,134

 
2,091

Depreciation and amortization
52

 
58

 
163

 
175

Total expenses
2,335

 
2,608

 
6,874

 
7,413

Operating income
1,086

 
1,085

 
2,918

 
2,729

Interest expense, net
(158
)
 
(114
)
 
(459
)
 
(334
)
Equity in net earnings of investee companies
22

 
6

 
58

 
46

Loss on extinguishment of debt
(11
)
 

 
(11
)
 

Other items, net
3

 
(2
)
 

 
(1
)
Earnings from continuing operations before provision for income taxes
942

 
975

 
2,506

 
2,440

Provision for income taxes
(288
)
 
(309
)
 
(784
)
 
(803
)
Net earnings from continuing operations
654

 
666

 
1,722

 
1,637

Discontinued operations, net of tax
(1
)
 
(4
)
 
(1
)
 
(10
)
Net earnings (Viacom and noncontrolling interests)
653

 
662

 
1,721

 
1,627

Net earnings attributable to noncontrolling interests
(43
)
 
(19
)
 
(62
)
 
(36
)
Net earnings attributable to Viacom
$
610

 
$
643

 
$
1,659

 
$
1,591

Amounts attributable to Viacom:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
611

 
$
647

 
$
1,660

 
$
1,601

Discontinued operations, net of tax
(1
)
 
(4
)
 
(1
)
 
(10
)
Net earnings attributable to Viacom
$
610

 
$
643

 
$
1,659

 
$
1,591

Basic earnings per share attributable to Viacom:
 
 
 
 
 
 
 
Continuing operations
$
1.43

 
$
1.34

 
$
3.80

 
$
3.25

Discontinued operations

 
(0.01
)
 

 
(0.02
)
Net earnings
$
1.43

 
$
1.33

 
$
3.80

 
$
3.23

Diluted earnings per share attributable to Viacom:
 
 
 
 
 
 
 
Continuing operations
$
1.40

 
$
1.32

 
$
3.73

 
$
3.20

Discontinued operations

 
(0.01
)
 

 
(0.02
)
Net earnings
$
1.40

 
$
1.31

 
$
3.73

 
$
3.18

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
428.0

 
482.6

 
436.4

 
492.1

Diluted
435.8

 
491.9

 
444.8

 
500.5

Dividends declared per share of Class A and Class B common stock
$
0.33

 
$
0.30

 
$
0.93

 
$
0.85

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

1

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
  
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Net earnings (Viacom and noncontrolling interests)
$
653

 
$
662

 
$
1,721

 
$
1,627

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(7
)
 
24

 
26

 
(40
)
Defined benefit pension plans

 
1

 

 
17

Cash flow hedges

 
1

 
1

 
7

Available for sale securities

 

 

 
3

Other comprehensive income (loss) (Viacom and noncontrolling interests)
(7
)
 
26

 
27

 
(13
)
Comprehensive income
646

 
688

 
1,748

 
1,614

Less: Comprehensive income attributable to noncontrolling interests
44

 
20

 
64

 
35

Comprehensive income attributable to Viacom
$
602

 
$
668

 
$
1,684

 
$
1,579

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

2

Table of Contents

VIACOM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value)
June 30,
2014
 
September 30,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,585

 
$
2,403

Receivables, net
2,958

 
2,987

Inventory, net
690

 
770

Deferred tax assets, net
64

 
58

Prepaid and other assets
407

 
508

Total current assets
5,704

 
6,726

Property and equipment, net
998

 
1,040

Inventory, net
4,068

 
3,945

Goodwill
11,081

 
11,079

Intangibles, net
242

 
279

Other assets
855

 
760

Total assets
$
22,948

 
$
23,829

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
337

 
$
316

Accrued expenses
849

 
1,074

Participants’ share and residuals
941

 
1,110

Program rights obligations
557

 
576

Deferred revenue
231

 
230

Current portion of debt
20

 
18

Other liabilities
448

 
466

Total current liabilities
3,383

 
3,790

Noncurrent portion of debt
12,758

 
11,867

Participants’ share and residuals
381

 
437

Program rights obligations
396

 
527

Deferred tax liabilities, net
472

 
649

Other liabilities
1,158

 
1,169

Redeemable noncontrolling interest
214

 
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; 373.3 and 398.2 outstanding, respectively

 

Additional paid-in capital
9,724

 
9,490

Treasury stock, 366.6 and 336.3 common shares held in treasury, respectively
(18,375
)
 
(15,825
)
Retained earnings
12,878

 
11,629

Accumulated other comprehensive loss
(76
)
 
(101
)
Total Viacom stockholders’ equity
4,151

 
5,193

Noncontrolling interests
35

 
(3
)
Total equity
4,186

 
5,190

Total liabilities and equity
$
22,948

 
$
23,829

 
 
 
 
 See accompanying notes to Consolidated Financial Statements

3

Table of Contents

VIACOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
  
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net earnings (Viacom and noncontrolling interests)
$
1,721

 
$
1,627

Discontinued operations, net of tax
1

 
10

Net earnings from continuing operations
1,722

 
1,637

Reconciling items:
 
 
 
Depreciation and amortization
163

 
175

Feature film and program amortization
2,884

 
3,164

Equity-based compensation
93

 
95

Equity in net earnings and distributions from investee companies
(30
)
 
(11
)
Deferred income taxes
(198
)
 
513

Operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
51

 
(383
)
Inventory, program rights and participations
(3,239
)
 
(3,059
)
Accounts payable and other current liabilities
42

 
7

Other, net
(125
)
 
(103
)
Discontinued operations, net

 
(3
)
Cash provided by operations
1,363

 
2,032

INVESTING ACTIVITIES
 
 
 
Acquisitions and investments, net of cash acquired
(5
)
 
11

Capital expenditures
(81
)
 
(97
)
Net cash flow used in investing activities
(86
)
 
(86
)
FINANCING ACTIVITIES
 
 
 
Borrowings
1,484

 
784

Debt repayments
(600
)
 

Stock repurchases
(2,681
)
 
(2,094
)
Dividends paid
(401
)
 
(411
)
Excess tax benefits on equity-based compensation awards
80

 
39

Exercise of stock options
159

 
230

Other, net
(154
)
 
(165
)
Net cash flow used in financing activities
(2,113
)
 
(1,617
)
Effect of exchange rate changes on cash and cash equivalents
18

 
(33
)
Net change in cash and cash equivalents
(818
)
 
296

Cash and cash equivalents at beginning of period
2,403

 
848

Cash and cash equivalents at end of period
$
1,585

 
$
1,144

 
 
 
 
 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.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09”), a comprehensive revenue recognition model that supersedes the current revenue recognition requirements and most industry-specific guidance. The underlying core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. ASU 2014-09 will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, and allows adoption either under a full retrospective or a modified retrospective approach. Early adoption is not permitted. We will adopt ASU 2014-09 during the first quarter of fiscal 2018. We are currently evaluating the impact of the new standard.

5

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

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  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Weighted average number of common shares outstanding, basic
428.0

 
482.6

 
436.4

 
492.1

        Dilutive effect of equity awards
7.8

 
9.3

 
8.4

 
8.4

Weighted average number of common shares outstanding, diluted
435.8

 
491.9

 
444.8

 
500.5

 
 
 
 
 
 
 
 
Anti-dilutive common shares
2.1

 
3.2

 
0.8

 
3.5

 
 
 
 
 
 
 
 
 
NOTE 3. INVENTORY
Our total inventory consists of the following:
Inventory
(in millions)
June 30,
2014
 
September 30,
2013
Film inventory:
 
 
 
Released, net of amortization
$
827

 
$
570

Completed, not yet released
28

 
40

In process and other
587

 
653

Total film inventory, net of amortization
1,442

 
1,263

Original programming:
 
 
 
Released, net of amortization
1,416

 
1,343

In process and other
596

 
590

Total original programming, net of amortization
2,012

 
1,933

Acquired program rights, net of amortization
1,200

 
1,391

Home entertainment inventory, net of allowance of $58 and $75, respectively
104

 
128

Total inventory, net
4,758

 
4,715

Less: current portion
(690
)
 
(770
)
Total inventory-noncurrent, net
$
4,068

 
$
3,945

 
 
 
 

6

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

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

 
$
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%
399

 
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%
593

 
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%
1,088

 
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
180

 
190

Total debt
12,778

 
11,885

Less: current portion
(20
)
 
(18
)
Total noncurrent portion of debt
$
12,758

 
$
11,867

 
 
 
 
Senior Notes and Debentures
In March 2014, we issued a total of $1.5 billion of senior notes and debentures 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 $1.484 billion.
In April 2014, we redeemed all $600 million of our outstanding 4.375% Senior Notes due September 2014 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 recognized a pre-tax extinguishment loss of $11 million in the quarter ended June 30, 2014.
The total unamortized net discount related to our senior notes and debentures was $422 million as of June 30, 2014. The fair value of our senior notes and debentures was approximately $13.9 billion as of June 30, 2014. The valuation of our publicly traded debt is based on quoted prices in active markets.

7

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

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 June 30, 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 June 30, 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  
 June 30,
 
Nine Months Ended 
 June 30,
2014
 
2013
 
2014
 
2013
Service cost
$

 
$

 
$

 
$
8

Interest cost
11

 
10

 
35

 
31

Expected return on plan assets
(13
)
 
(11
)
 
(38
)
 
(33
)
Recognized actuarial loss
1

 
2

 
1

 
7

Prior service cost

 

 

 
1

          Net periodic benefit cost (income)
$
(1
)
 
$
1

 
$
(2
)
 
$
14

 
 
 
 
 
 
 
 
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 June 30, 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
June 30, 2014
 
 
 
 
 
 
 
Marketable securities
$
108

 
$
108

 
$

 
$

Derivatives
12

 

 
12

 

Total
$
120

 
$
108

 
$
12

 
$

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 $400 million and $196 million as of June 30, 2014 and September 30, 2013, respectively. At June 30, 2014, $219 million related to our foreign currency balances, $143 million related to anticipated investing cash flows and $38 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.

8

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

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 June 30, 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 June 30, 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.
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. In June 2014, the District Court denied Viacom’s motion to dismiss. On July 31, Viacom answered the amended complaint and asserted counterclaims against Cablevision for having fraudulently induced Viacom to renew their affiliate agreement at the end of 2012 on terms which Cablevision intended to challenge in the courts. Cablevision must now answer or move to dismiss the counterclaim.
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 improperly using subjective criteria to increase the bonuses paid to Messrs. Redstone, Dauman and Dooley in each of those years. 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 just holders of our voting Class A common stock. Accordingly, the plaintiff sought to enjoin any payment 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. In June 2014, the Court of Appeals affirmed the decision of the District Court to dismiss the case. Plaintiff has until late September to petition the United States Supreme Court for discretionary review.
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.


9

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

NOTE 8. STOCKHOLDERS’ EQUITY
The components of stockholders’ equity are as follows:
  
Nine Months Ended  
 June 30, 2014
 
Nine Months Ended  
 June 30, 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
1,659

 
62

 
1,721

 
1,591

 
36

 
1,627

Other comprehensive income (loss) (1)
25

 
2

 
27

 
(12
)
 
(1
)
 
(13
)
Noncontrolling interests
(1
)
 
(26
)
 
(27
)
 
(2
)
 
(28
)
 
(30
)
Dividends declared
(409
)
 

 
(409
)
 
(423
)
 

 
(423
)
Purchase of treasury stock
(2,550
)
 

 
(2,550
)
 
(2,100
)
 

 
(2,100
)
Equity-based compensation and other
234

 

 
234

 
312

 

 
312

Ending Balance
$
4,151

 
$
35

 
$
4,186

 
$
6,814

 
$
(2
)
 
$
6,812

 
 
 
 
 
 
 
 
 
 
 
 
(1) The components of other comprehensive income (loss) are net of a tax expense of $9 million for the nine months ended June 30, 2013. There was no tax impact for the nine months ended June 30, 2014.
Equity Awards
During the quarter ended June 30, 2014, we granted 2.0 million stock options and 0.7 million restricted share units with a weighted average grant date fair value of $16.52 and $84.46 per share, respectively.
NOTE 9. RESTRUCTURING
Our restructuring liability as of June 30, 2014 by reporting segment is as follows:
Restructuring Liability (in millions)
 
Media Networks
Filmed Entertainment
Total
September 30, 2013
 
$
76

$
27

$
103

Severance payments
 
(28
)
(14
)
(42
)
Revisions to initial estimates
 
(6
)

(6
)
June 30, 2014
 
$
42

$
13

$
55

 
 
 
 
 
The liability as of June 30, 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 by the end of fiscal 2014.
NOTE 10. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Our supplemental cash flow information is as follows:
Supplemental Cash Flow Information
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
Cash paid for interest
$
416

 
$
351

Cash paid for income taxes
$
686

 
$
174

Cash paid for income taxes in the nine months ended June 30, 2014 increased from the nine months ended June 30, 2013, which included a benefit from the retroactive reenactment of legislation allowing for accelerated tax deductions on certain qualified film and television productions.


10

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

Our redeemable noncontrolling interest is as follows:
Redeemable Noncontrolling Interest
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
Beginning balance
$
200

 
$
179

Net earnings
14

 
11

Distributions
(15
)
 
(13
)
Translation adjustment
14

 
(6
)
Redemption value adjustment
1

 
2

Ending Balance
$
214

 
$
173

 
 
 
 
Accounts Receivable
We had $371 million of noncurrent trade receivables as of June 30, 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.
Acquisition
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.
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.
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 $65 million and $54 million as of June 30, 2014 and September 30, 2013, respectively.

Consolidated Variable Interest Entities
Our Consolidated Balance Sheets include amounts related to consolidated VIEs totaling $139 million in assets and $54 million in liabilities as of June 30, 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 nine months ended June 30, 2014, principally related to the recognition of capital loss carryforward benefits.
We recognized discrete tax benefits of $12 million and $24 million in the quarter and nine months ended June 30, 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

11

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

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  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Media Networks
$
2,591

 
$
2,569

 
$
7,507

 
$
7,196

Filmed Entertainment
856

 
1,158

 
2,368

 
3,074

Eliminations
(26
)
 
(34
)
 
(83
)
 
(128
)
Total revenues
$
3,421

 
$
3,693

 
$
9,792

 
$
10,142

 
 
 
 
 
 
 
 
 
Adjusted Operating Income (Loss)
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Media Networks
$
1,121

 
$
1,158

 
$
3,184

 
$
3,061

Filmed Entertainment
55

 
17

 
(8
)
 
(57
)
Corporate expenses
(61
)
 
(54
)
 
(164
)
 
(171
)
Equity-based compensation
(30
)
 
(35
)
 
(93
)
 
(95
)
Eliminations
1

 
(1
)
 
(1
)
 
(9
)
Operating income
1,086

 
1,085

 
2,918

 
2,729

Interest expense, net
(158
)
 
(114
)
 
(459
)
 
(334
)
Equity in net earnings of investee companies
22

 
6

 
58

 
46

Loss on extinguishment of debt
(11
)
 

 
(11
)
 

Other items, net
3

 
(2
)
 

 
(1
)
Earnings from continuing operations before provision for income taxes
$
942

 
$
975

 
$
2,506

 
$
2,440

 
 
 
 
 
 
 
 
 
Total Assets
June 30,
2014
 
September 30,
2013
(in millions)
 
Media Networks
$
16,884

 
$
16,653

Filmed Entertainment
5,301

 
5,647

Corporate/Eliminations
763

 
1,529

Total assets
$
22,948

 
$
23,829

 
 
 
 

Revenues by Component
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Advertising
$
1,249

 
$
1,220

 
$
3,698

 
$
3,580

Feature film
709

 
1,037

 
2,019

 
2,760

Affiliate fees
1,224

 
1,230

 
3,404

 
3,212

Ancillary
265

 
240

 
754

 
718

Eliminations
(26
)
 
(34
)
 
(83
)
 
(128
)
Total revenues
$
3,421

 
$
3,693

 
$
9,792

 
$
10,142

 
 
 
 
 
 
 
 


12

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

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 nine months ended June 30, 2014 and 2013, Paramount earned revenues from NAI in connection with these licenses in the aggregate amounts of approximately $8 million and $15 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 nine months ended June 30, 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.
The following table summarizes the transactions with CBS as included in our Consolidated Financial Statements:
CBS Related Party Transactions
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Consolidated Statement of Earnings
 
 
 
 
 
 
 
Revenue
$
47

 
$
66

 
$
158

 
$
191

Operating expenses
$
66

 
$
90

 
$
219

 
$
248

 
 
 
 
 
 
 
 
  
 
 
 
 
June 30,
2014
 
September 30,
2013
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
5

 
$
5

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
1

 
$
3

Participants’ share and residuals, current
 
 
 
 
101

 
115

Program rights obligations, current
 
 
 
 
72

 
99

Program rights obligations, noncurrent
 
 
 
 
91

 
139

Other liabilities
 
 
 
 
11

 
15

                Total due to CBS
 
 
 
 
$
276

 
$
371

 
 
 
 
 
 
 
 


13

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

Other Related Party Transactions
In the ordinary course of business, we are involved in related party transactions with equity investees. These related party transactions primarily relate to the provision of advertising services, licensing of film and programming content, distribution of films and provision of certain administrative support services, for which the impact on our Consolidated Financial Statements is as follows:
Other Related Party Transactions
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Consolidated Statement of Earnings
 
 
 
 
 
 
 
Revenue
$
29

 
$
19

 
$
109

 
$
117

Operating expenses
$
7

 
$
2

 
$
37

 
$
37

Selling, general and administrative
$
(4
)
 
$
(5
)
 
$
(10
)
 
$
(13
)
 
 
 
 
 
 
 
 
  
 
 
 
 
June 30,
2014
 
September 30,
2013
Consolidated Balance Sheets
 
 
 
 
 
 
 
Account receivable
 
 
 
 
$
80

 
$
84

Other assets
 
 
 
 

 
1

                Total due from other related parties
 
 
 
 
$
80

 
$
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.

14


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 nine months ended June 30, 2014, compared to the quarter and nine months ended June 30, 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 nine months ended June 30, 2014, compared to the nine months ended June 30, 2013, and of our outstanding debt, commitments and contingencies existing as of June 30, 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-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

15

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


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. 

16

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 nine months ended June 30, 2014 and 2013.
  
Quarter Ended  
 June 30,
 
Better/(Worse)
 
Nine Months Ended 
 June 30,
 
Better/(Worse)
(in millions, except per share amounts)
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
Revenues
$
3,421

 
$
3,693

 
$
(272
)
 
(7
)%
 
$
9,792

 
$
10,142

 
$
(350
)
 
(3
)%
Operating income
1,086

 
1,085

 
1

 

 
2,918

 
2,729

 
189

 
7

Net earnings from continuing operations attributable to Viacom
611

 
647

 
(36
)
 
(6
)
 
1,660

 
1,601

 
59

 
4

Adjusted net earnings from continuing operations attributable to Viacom
618

 
635

 
(17
)
 
(3
)
 
1,647

 
1,577

 
70

 
4

Diluted EPS from continuing operations
1.40

 
1.32

 
0.08

 
6

 
3.73

 
3.20

 
0.53

 
17

Adjusted diluted EPS from continuing operations
$
1.42

 
$
1.29

 
$
0.13

 
10
 %
 
$
3.70

 
$
3.15

 
$
0.55

 
17
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See the section entitled “Factors Affecting Comparability” for a reconciliation of our adjusted measures to our reported results.
Revenues
Worldwide revenues decreased $272 million, or 7%, to $3.421 billion in the quarter, and $350 million, or 3%, to $9.792 billion in the nine months ended June 30, 2014. Filmed Entertainment revenues declined $302 million and $706 million, respectively, driven primarily by lower theatrical and home entertainment revenues. Media Networks revenues increased $22 million and $311 million, respectively, driven by higher advertising revenues in both periods and increased affiliate fee revenues in the nine months.
Operating Income
Operating income was substantially flat at $1.086 billion in the quarter. Filmed Entertainment adjusted operating income increased $38 million reflecting the number of current quarter releases, while Media Networks adjusted operating income decreased $37 million, with higher expenses more than offsetting increased revenues.
Operating income increased $189 million, or 7%, to $2.918 billion in the nine months. Media Networks adjusted operating income increased $123 million, driven by higher revenues, partially offset by an increase in expenses. Filmed Entertainment generated an adjusted operating loss of $8 million in the nine months, compared to a loss of $57 million in the prior period, an improvement of $49 million, reflecting cost savings, as well as the number and mix of current year releases.
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 decreased $17 million, or 3%, to $618 million in the quarter, primarily driven by an increase in interest expense, reflecting higher levels of debt outstanding, and net earnings attributable to noncontrolling interests, partially offset by a change in the effective income tax rate. Net earnings attributable to noncontrolling interests includes the renewal of a content distribution arrangement at a consolidated majority-owned joint venture.
Adjusted net earnings from continuing operations attributable to Viacom increased $70 million, or 4%, to $1.647 billion in the nine months, principally due to the increase in tax-effected operating income described above and a change in the effective income tax rate, partially offset by an increase in interest expense, reflecting higher levels of debt outstanding, and net earnings attributable to noncontrolling interests.
Our effective income tax rate was 30.6% and 32.1% in the quarter and nine months ended June 30, 2014, respectively, compared to 32.9% and 33.9% in the quarter and nine months ended June 30, 2013, respectively, 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.

17

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


Adjusted diluted EPS from continuing operations increased $0.13 per diluted share to $1.42 in the quarter primarily due to fewer shares outstanding. Including the impact of a loss on the extinguishment of debt in the quarter and discrete taxes in the prior year quarter, net earnings from continuing operations attributable to Viacom decreased $36 million, or 6%, and diluted EPS from continuing operations increased $0.08 per diluted share. Adjusted diluted EPS from continuing operations increased $0.55 per diluted share to $3.70 in the nine months, reflecting fewer shares outstanding and a change in the effective income tax rate. Including the impact of discrete taxes in both periods and a loss on the extinguishment of debt in the current quarter, net earnings from continuing operations attributable to Viacom increased $59 million, or 4%, and diluted EPS from continuing operations increased $0.53 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  
 June 30,
 
Better/(Worse)  
 
Nine Months Ended 
 June 30,
 
Better/(Worse)  
(in millions)
2014
 
2013
 
$
 
%
 
2014
 
2013
 
$
 
%
Revenues by Component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
1,249

 
$
1,220

 
$
29

 
2
 %
 
$
3,698

 
$
3,580

 
$
118

 
3
 %
Affiliate fees
1,224

 
1,230

 
(6
)
 

 
3,404

 
3,212

 
192

 
6

Ancillary
118

 
119

 
(1
)
 
(1
)
 
405

 
404

 
1

 

Total revenues by component
$
2,591

 
$
2,569

 
$
22

 
1
 %
 
$
7,507

 
$
7,196

 
$
311

 
4
 %
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
907

 
$
867

 
$
(40
)
 
(5
)%
 
$
2,636

 
$
2,524

 
$
(112
)
 
(4
)%
Selling, general and administrative
527

 
510

 
(17
)
 
(3
)
 
1,579

 
1,505

 
(74
)
 
(5
)
Depreciation and amortization
36

 
34

 
(2
)
 
(6
)
 
108

 
106

 
(2
)
 
(2
)
Total expenses
$
1,470

 
$
1,411

 
$
(59
)
 
(4
)%
 
$
4,323

 
$
4,135

 
$
(188
)
 
(5
)%
Adjusted Operating Income
$
1,121

 
$
1,158

 
$
(37
)
 
(3
)%
 
$
3,184

 
$
3,061

 
$
123

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues
Worldwide revenues increased $22 million, or 1%, to $2.591 billion in the quarter ended June 30, 2014, driven by higher advertising revenues. Domestic revenues were $2.240 billion, an increase of 1%, and international revenues were $351 million, an increase of 2%. Foreign exchange had a 4-percentage point favorable impact on international revenues.
Worldwide revenues increased $311 million, or 4%, to $7.507 billion in the nine months ended June 30, 2014, driven by higher advertising and affiliate fees revenues. Domestic revenues were $6.383 billion, an increase of 4%, and international revenues were $1.124 billion, an increase of 7%. Foreign exchange had a 1-percentage point favorable impact on international revenues.
Advertising
Worldwide advertising revenues increased $29 million, or 2%, to $1.249 billion in the quarter, and $118 million, or 3%, to $3.698 billion in the nine months. Domestic advertising revenues increased 1% in the quarter, and 2% in the nine months as the demand for commercial units sold increased, partially offset by lower average unit rates. International advertising revenues increased 20% in the quarter, and 17% in the nine months, principally reflecting new channels, including MTV Italy and other channels, and European market improvements. Foreign exchange had a 6-percentage point and 4-percentage point favorable impact on international revenues in the quarter and nine months, respectively.
Affiliate Fees
Worldwide affiliate fee revenues were substantially flat at $1.224 billion in the quarter, as rate increases were more than offset by lower revenues from certain distribution arrangements which are affected by the timing of available programming. Domestic affiliate revenues were flat and international affiliate revenues decreased 5% in the quarter. Excluding the impact of

18

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


these distribution arrangements, the domestic affiliate revenue growth rate in the quarter was in the low double-digits. Foreign exchange had a 3-percentage point favorable impact on international revenues.
Worldwide affiliate fee revenues increased $192 million, or 6%, to $3.404 billion in the nine months, driven by rate increases. Domestic affiliate revenues increased 7% and international affiliate revenues increased 3% in the nine months. Excluding the impact from certain distribution agreements, domestic affiliate revenues grew high single-digits in the nine months. Foreign exchange had a 1-percentage point favorable impact on international revenues.
Expenses
Total expenses increased $59 million, or 4%, to $1.470 billion and $188 million, or 5%, to $4.323 billion in the quarter and nine months, respectively.
Operating
Operating expenses increased $40 million, or 5%, to $907 million in the quarter, and $112 million, or 4%, to $2.636 billion in the nine months. Due to our continuing investment in original content, programming costs increased $60 million, or 8%, in the quarter, and $116 million, or 5%, in the nine months. Distribution and other expenses decreased $20 million, or 17%, in the quarter and decreased $4 million, or 1%, in the nine months, primarily driven by lower participations and ancillary expenses, partially offset by higher expenses from new channels in international markets.
Selling, General and Administrative
SG&A expenses increased $17 million, or 3%, to $527 million in the quarter, and $74 million, or 5%, to $1.579 billion in the nine months. The increase for the nine months was 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 decreased $37 million, or 3%, to $1.121 billion in the quarter and increased $123 million, or 4%, to $3.184 billion in the nine months, reflecting the changes in revenues and expenses as discussed above.

Filmed Entertainment
 
Quarter Ended  
 June 30,
 
Better/(Worse)
 
Nine Months Ended 
 June 30,
 
Better/(Worse)
(in millions)
2014
 
2013
 
$        
 
%    
 
2014
 
2013
 
$        
 
%    
Revenues by Component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Theatrical
$
264

 
$
464

 
$
(200
)
 
(43
)%
 
$
652

 
$
1,068

 
$
(416
)
 
(39
)%
Home entertainment
209

 
275

 
(66
)
 
(24
)
 
605

 
872

 
(267
)
 
(31
)
Television license fees
236

 
298

 
(62
)
 
(21
)
 
762

 
820

 
(58
)
 
(7
)
Ancillary
147

 
121

 
26

 
21

 
349

 
314

 
35

 
11

Total revenues by component
$
856

 
$
1,158

 
$
(302
)
 
(26
)%
 
$
2,368

 
$
3,074

 
$
(706
)
 
(23
)%
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
685

 
$
1,011

 
$
326

 
32
 %
 
$
2,023

 
$
2,742

 
$
719

 
26
 %
Selling, general & administrative
102

 
108

 
6

 
6

 
302

 
324

 
22

 
7

Depreciation & amortization
14

 
22

 
8

 
36

 
51

 
65

 
14

 
22

Total expenses
$
801

 
$
1,141

 
$
340

 
30
 %
 
$
2,376

 
$
3,131

 
$
755

 
24
 %
Adjusted Operating Income/(Loss)
$
55

 
$
17

 
$
38

 
224
 %
 
$
(8
)
 
$
(57
)
 
$
49

 
86
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues
Worldwide revenues decreased $302 million, or 26%, to $856 million, and $706 million, or 23%, to $2.368 billion in the quarter and nine months ended June 30, 2014, primarily driven by lower theatrical and home entertainment revenues. Domestic revenues were $403 million, a decrease of 26%, and $1.134 billion, a decrease of 20%, and international revenues were $453 million, a decrease of 26%, and $1.234 billion, a decrease of 25%, in the quarter and nine months, respectively. Foreign exchange had a 1-percentage point unfavorable impact on international revenues in each of the quarter and nine months, respectively.

19

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


Theatrical
Worldwide theatrical revenues decreased $200 million, or 43%, to $264 million in the quarter, principally driven by the number and timing of titles released. In the current quarter, we released Transformers: Age of Extinction and in the prior year we released Star Trek into Darkness, World War Z and Pain and Gain. Domestic theatrical revenues decreased 62%, while international theatrical revenues decreased 25%. Foreign exchange had a 2-percentage point unfavorable impact on international revenues.
Worldwide theatrical revenues decreased $416 million, or 39%, to $652 million in the nine months. Revenues from our current year releases were $367 million lower than the prior year, driven by the number and mix of titles released. During the current year we released nine titles, including Noah, Transformers: Age of Extinction, Anchorman 2: The Legend Continues, Jackass Presents: Bad Grandpa, The Wolf of Wall Street, Jack Ryan: Shadow Recruit and Paranormal Activity: The Marked Ones, compared to thirteen titles in the prior year. Carryover revenues from prior period releases were $49 million lower. Domestic theatrical revenues decreased 29% and international revenues decreased 47%. Foreign exchange had a 2-percentage point unfavorable impact on international revenues.

Home Entertainment
Worldwide home entertainment revenues decreased $66 million, or 24%, to $209 million in the quarter, primarily driven by a $49 million decrease in carryover revenues and a $17 million decrease in revenues from current quarter releases. We released four titles in each of the current and prior year quarters. Current quarter releases were Anchorman 2: The Legend Continues, Jack Ryan: Shadow Recruit, Paranormal Activity: The Marked Ones and Labor Day. Domestic home entertainment revenues decreased 14% and international home entertainment revenues decreased 35%.
Worldwide home entertainment revenues decreased $267 million, or 31%, to $605 million in the nine months. Revenues from our current releases were $191 million lower than the prior year due to the number and mix of titles released. In the current year, we released seven titles including The Wolf of Wall Street, Anchorman 2: The Legend Continues, Jackass Presents: Bad Grandpa, Jack Ryan: Shadow Recruit and Paranormal Activity: The Marked Ones. In the prior period, we released ten titles, including Madagascar 3: Europe’s Most Wanted and Rise of the Guardians. Carryover revenues from prior year releases were lower by $76 million. Domestic and international home entertainment revenues decreased 40% and 19%, respectively. Foreign exchange had a 1-percentage point unfavorable impact on international revenues.
Television License Fees
Television license fees decreased $62 million, or 21%, to $236 million, and $58 million, or 7%, to $762 million, in the quarter and nine months, respectively, driven by the number and mix of available titles.
Ancillary
Ancillary revenues increased $26 million, or 21%, to $147 million, and $35 million, or 11%, to $349 million, in the quarter and nine months, respectively, principally driven by higher digital revenues.
Expenses
Total expenses decreased $340 million, or 30%, to $801 million, and $755 million, or 24%, to $2.376 billion, in the quarter and nine months, respectively, principally driven by lower operating expenses.
Operating
Operating expenses decreased $326 million, or 32%, to $685 million, and $719 million, or 26%, to $2.023 billion in the quarter and nine months, respectively, as a result of the number and mix of films. Film costs decreased $166 million, or 30%, in the quarter, and $317 million, or 24%, in the nine months, including lower participation costs on third-party distribution arrangements. Distribution and other costs, principally print and advertising expenses, decreased $160 million, or 34%, in the quarter and $402 million, or 28%, in the nine 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 $102 million, and $22 million, or 7%, to $302 million in the quarter and nine months, respectively, primarily driven by lower employee costs.
Adjusted Operating Income/(Loss)
Adjusted operating income increased $38 million to $55 million in the quarter, principally reflecting the number of current quarter releases. Adjusted operating loss for the nine months was $8 million, representing a $49 million, or 86%, improvement over the prior year, reflecting cost savings, as well as the number and mix of current year releases. The generation of an operating loss reflects the recognition of print and advertising expenses incurred in the period, generally before and throughout

20

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


the theatrical release of a film, while revenues for the respective films are recognized as earned through its theatrical exhibition and subsequent distribution windows.
Factors Affecting Comparability
The Consolidated Financial Statements as of and for the quarters and nine months ended June 30, 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 nine months ended June 30, 2014 and 2013.
(in millions, except per share amounts)
 
Quarter Ended  
 June 30, 2014
 
Operating
Income
 
Pre-tax Earnings
from Continuing
Operations
 
Net Earnings from
Continuing Operations
Attributable to  Viacom
 
Diluted
EPS from
Continuing
Operations
Reported results
$
1,086

 
$
942

 
$
611

 
$
1.40

Factors Affecting Comparability:
 
 
 
 
 
 
 
Loss on extinguishment of debt

 
11

 
7

 
0.02

Adjusted results
$