VIA-2015.03.31-10Q


 
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, 2015
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, 2015
Class A common stock, par value $0.001 per share
 
50,373,269

Class B common stock, par value $0.001 per share
 
346,592,776

 


Table of Contents

VIACOM INC.
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
Consolidated Statements of Earnings for the quarter and six months ended March 31, 2015 and 2014
 
Consolidated Statements of Comprehensive Income for the quarter and six months ended March 31, 2015 and 2014
 
Consolidated Balance Sheets as of March 31, 2015 and September 30, 2014
 
Consolidated Statements of Cash Flows for the six months ended March 31, 2015 and 2014
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
VIACOM INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
  
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions, except per share amounts)
2015
 
2014
 
2015
 
2014
Revenues
$
3,078

 
$
3,174

 
$
6,422

 
$
6,371

Expenses:
 
 
 
 
 
 
 
Operating
2,056

 
1,538

 
3,679

 
3,012

Selling, general and administrative
721

 
712

 
1,452

 
1,416

Depreciation and amortization
57

 
52

 
112

 
111

Restructuring
206

 

 
206

 

Total expenses
3,040

 
2,302

 
5,449

 
4,539

Operating income
38

 
872

 
973

 
1,832

Interest expense, net
(166
)
 
(152
)
 
(326
)
 
(301
)
Equity in net earnings of investee companies
42

 
10

 
75

 
36

Other items, net
(12
)
 
(3
)
 
(30
)
 
(3
)
Earnings/(loss) before provision for income taxes
(98
)
 
727

 
692

 
1,564

Provision for income taxes
50

 
(216
)
 
(227
)
 
(496
)
Net earnings/(loss) (Viacom and noncontrolling interests)
(48
)
 
511

 
465

 
1,068

Net earnings attributable to noncontrolling interests
(5
)
 
(9
)
 
(18
)
 
(19
)
Net earnings/(loss) attributable to Viacom
$
(53
)
 
$
502

 
$
447

 
$
1,049

 
 
 
 
 
 
 
 
Basic earnings/(loss) per share attributable to Viacom
$
(0.13
)
 
$
1.15

 
$
1.10

 
$
2.38

Diluted earnings/(loss) per share attributable to Viacom
$
(0.13
)
 
$
1.13

 
$
1.09

 
$
2.33

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
402.5

 
436.1

 
406.6

 
440.5

Diluted
402.5

 
444.6

 
411.4

 
449.3

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

 
$
0.30

 
$
0.66

 
$
0.60

 
 
 
 
 
 
 
 
 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)
2015
 
2014
 
2015
 
2014
Net earnings/(loss) (Viacom and noncontrolling interests)
$
(48
)
 
$
511

 
$
465

 
$
1,068

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(158
)
 
7

 
(262
)
 
33

Defined benefit pension plans
(1
)
 

 
(21
)
 

Cash flow hedges

 
1

 

 
1

Available for sale securities
(1
)
 

 
(1
)
 

Other comprehensive income/(loss) (Viacom and noncontrolling interests)
(160
)
 
8

 
(284
)
 
34

Comprehensive income/(loss)
(208
)
 
519

 
181

 
1,102

Less: Comprehensive income attributable to noncontrolling interest
1

 
9

 
12

 
20

Comprehensive income/(loss) attributable to Viacom
$
(209
)
 
$
510

 
$
169

 
$
1,082

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

2

Table of Contents

VIACOM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value)
March 31,
2015
 
September 30,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
306

 
$
1,000

Receivables, net
2,758

 
3,066

Inventory, net
787

 
846

Prepaid and other assets
532

 
340

Total current assets
4,383

 
5,252

Property and equipment, net
949

 
1,016

Inventory, net
3,663

 
3,897

Goodwill
11,429

 
11,535

Intangibles, net
351

 
399

Other assets
982

 
1,018

Total assets
$
21,757

 
$
23,117

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
359

 
$
475

Accrued expenses
727

 
969

Participants' share and residuals
835

 
993

Program obligations
704

 
703

Deferred revenue
270

 
259

Current portion of debt
17

 
18

Other liabilities
655

 
518

Total current liabilities
3,567

 
3,935

Noncurrent portion of debt
13,213

 
12,751

Participants' share and residuals
274

 
403

Program obligations
413

 
459

Deferred tax liabilities, net
369

 
266

Other liabilities
1,405

 
1,340

Redeemable noncontrolling interest
194

 
216

Commitments and contingencies (Note 6)


 


Viacom stockholders' equity:
 
 
 
Class A common stock, par value $0.001, 375.0 authorized; 50.4 and 50.9 outstanding, respectively

 

Class B common stock, par value $0.001, 5,000.0 authorized; 346.7 and 363.3 outstanding, respectively

 

Additional paid-in capital
9,961

 
9,772

Treasury stock, 398.0 and 377.0 common shares held in treasury, respectively
(20,725
)
 
(19,225
)
Retained earnings
13,638

 
13,465

Accumulated other comprehensive loss
(571
)
 
(293
)
Total Viacom stockholders' equity
2,303

 
3,719

Noncontrolling interests
19

 
28

Total equity
2,322

 
3,747

Total liabilities and equity
$
21,757

 
$
23,117

 
 
 
 
 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)
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net earnings (Viacom and noncontrolling interests)
$
465

 
$
1,068

Reconciling items:
 
 
 
Depreciation and amortization
112

 
111

Feature film and program amortization
2,581

 
1,862

Equity-based compensation
51

 
63

Equity in net earnings and distributions from investee companies
(71
)
 
(22
)
Deferred income taxes
46

 
(94
)
Operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
329

 
323

Inventory, program rights and participations
(2,567
)
 
(2,168
)
Accounts payable and other current liabilities
(248
)
 
(224
)
Other, net
(18
)
 
(106
)
Cash provided by operations
680

 
813

INVESTING ACTIVITIES
 
 
 
Acquisitions and investments, net
5

 
13

Capital expenditures
(64
)
 
(49
)
Net cash flow used in investing activities
(59
)
 
(36
)
FINANCING ACTIVITIES
 
 
 
Borrowings
990

 
1,485

Debt repayments
(600
)
 

Commercial paper
75

 

Purchase of treasury stock
(1,506
)
 
(1,830
)
Dividends paid
(273
)
 
(271
)
Excess tax benefits on equity-based compensation awards
39

 
38

Exercise of stock options
126

 
75

Other, net
(79
)
 
(103
)
Net cash flow used in financing activities
(1,228
)
 
(606
)
Effect of exchange rate changes on cash and cash equivalents
(87
)
 
6

Net change in cash and cash equivalents
(694
)
 
177

Cash and cash equivalents at beginning of period
1,000

 
2,403

Cash and cash equivalents at end of period
$
306

 
$
2,580

 
 
 
 
 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 more than 165 countries and territories and creates compelling television programs, motion pictures, short-form videos, apps, games, brands for consumer products, social media and other entertainment content. Viacom operates through two reporting segments: Media Networks, which includes the Music & Entertainment Group, the Kids & Family Group 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, television programming and other entertainment content under the Paramount Pictures, Paramount Vantage, Paramount Classics, Insurge Pictures, MTV Films, Nickelodeon Movies and Paramount Television brands. References in this document to “Viacom”, “Company”, “we”, “us” and “our” mean Viacom Inc. and our consolidated subsidiaries, unless the context requires otherwise.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated quarterly financial statements have been prepared on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of our results of operations, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results expected for the fiscal year ending September 30, 2015 (“fiscal 2015”) or any future period. These financial statements should be read in conjunction with our Form 10-K for the year ended September 30, 2014, as filed with the SEC on November 13, 2014 (the “2014 Form 10-K”).
Use of Estimates
Preparing financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the periods presented. Significant estimates inherent in the preparation of the accompanying Consolidated Financial Statements include estimates of film ultimate revenues, product returns, potential outcome of uncertain tax positions, fair value of acquired assets and liabilities, fair value of equity-based compensation and pension benefit assumptions. Estimates are based on past experience and other considerations reasonable under the circumstances. Actual results may differ from these estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) 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. On April 29, 2015, the FASB issued an exposure draft to defer the effective date by one year. We are currently evaluating the impact of the new standard.

5

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

NOTE 2. INVENTORY
Our total inventory consists of the following:
Inventory
(in millions)
March 31,
2015
 
September 30,
2014
Film inventory:
 
 
 
Released, net of amortization
$
687

 
$
664

Completed, not yet released
3

 
131

In process and other
704

 
436

Total film inventory, net of amortization
1,394

 
1,231

Original programming:
 
 
 
Released, net of amortization
1,122

 
1,409

In process and other
608

 
631

Total original programming, net of amortization
1,730

 
2,040

Acquired program rights, net of amortization
1,227

 
1,367

Home entertainment inventory
99

 
105

Total inventory, net
4,450

 
4,743

Less: current portion
(787
)
 
(846
)
Total inventory-noncurrent, net
$
3,663

 
$
3,897

 
 
 
 

6

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

NOTE 3. DEBT
Our total debt consists of the following:
Debt
(in millions)
March 31,
2015
 
September 30,
2014
Senior Notes and Debentures:
 
 
 
                Senior notes due February 2015, 1.250%
$

 
$
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

 
399

                Senior notes due April 2017, 3.500%
499

 
498

                Senior notes due October 2017, 6.125%
499

 
499

                Senior notes due September 2018, 2.500%
498

 
498

                Senior notes due April 2019, 2.200%
400

 
400

                Senior notes due September 2019, 5.625%
552

 
552

                Senior notes due December 2019, 2.750%
400

 

                Senior notes due March 2021, 4.500%
495

 
495

                Senior notes due December 2021, 3.875%
594

 
593

                Senior notes due June 2022, 3.125%
297

 
296

                Senior notes due March 2023, 3.250%
298

 
298

                Senior notes due September 2023, 4.250%
1,239

 
1,238

                Senior notes due April 2024, 3.875%
546

 
546

                Senior debentures due December 2034, 4.850%
597

 

                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%
246

 
245

                Senior debentures due March 2043, 4.375%
1,091

 
1,089

                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

 
549

Commercial paper
75

 

Capital lease and other obligations
150

 
168

Total debt
13,230

 
12,769

Less: current portion
(17
)
 
(18
)
Total noncurrent portion of debt
$
13,213

 
$
12,751

 
 
 
 
Senior Notes and Debentures
In December 2014, we issued a total of $1.0 billion of senior notes and debentures as follows:
2.750% Senior Notes due December 2019 with an aggregate principal amount of $400 million at a price equal to 99.986% of the principal amount.
4.850% Senior Debentures due December 2034 with an aggregate principal amount of $600 million at a price equal to 99.543% 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 $990 million.
The total unamortized net discount related to our senior notes and debentures was $415 million as of March 31, 2015. The fair value of our senior notes and debentures was approximately $14.2 billion as of March 31, 2015. The valuation of our publicly traded debt is based on quoted prices in active markets.
During the quarter, we repaid the $600 million aggregate principal amount of our 1.250% Senior Notes due in February 2015.
The Senior Notes due in September 2015 and commercial paper outstanding are classified as long-term debt as we have the intent and the ability, through utilization of our $2.5 billion revolving credit facility, to refinance this debt.

7

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

Credit Facility
In November 2014, we amended our revolving credit agreement, originally dated as of October 8, 2010, to, among other things, extend the maturity date of the $2.5 billion revolving credit facility from November 9, 2017 to November 18, 2019. At March 31, 2015, there were no amounts outstanding under the credit facility. 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, 2015.
NOTE 4. PENSION BENEFITS
During the quarter ended December 31, 2014, we offered certain participants of our funded pension plan the option to receive a one-time lump-sum payment equal to the present value of their respective pension benefit. The settlement triggered a remeasurement of the net pension obligation and settlement accounting. The remeasurement resulted in a $53 million increase to the net benefit obligation, primarily driven by a decline in the discount rate to 4.0% from 4.5%. The settlement resulted in the recognition of a non-cash settlement loss of $24 million reclassed from unrecognized actuarial loss included within Accumulated other comprehensive income/(loss) in the Consolidated Balance Sheet.

The components of net periodic benefit cost/(income) for our defined benefit pension plans, which are currently frozen to future benefit accruals, are set forth below.
Net Periodic Benefit Cost/(Income)
(in millions)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
2015
 
2014
 
2015
 
2014
Interest cost
$
10

 
$
12

 
$
22

 
$
24

Expected return on plan assets
(11
)
 
(12
)
 
(24
)
 
(25
)
Recognized actuarial loss
2

 

 
3

 

Loss on pension settlement

 

 
24

 

Net periodic benefit cost/(income)
$
1

 
$

 
$
25

 
$
(1
)
 
 
 
 
 
 
 
 
NOTE 5. REDEEMABLE NONCONTROLLING INTEREST
We are subject to a redeemable put option, payable in a foreign currency, with respect to an international subsidiary. The put option expires in January 2016 and is classified as Redeemable noncontrolling interest in the Consolidated Balance Sheets.

The components of redeemable noncontrolling interest are as follows:
Redeemable Noncontrolling Interest
Six Months Ended 
 March 31,
(in millions)
2015
 
2014
Beginning balance
$
216

 
$
200

Net earnings
8

 
11

Distributions
(12
)
 
(11
)
Translation adjustment
(23
)
 
10

Redemption value adjustment
5

 

Ending Balance
$
194

 
$
210

 
 
 
 


8

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

NOTE 6. COMMITMENTS AND CONTINGENCIES
Commitments
As more fully described in Notes 4 and 11 of the 2014 Form 10-K, our commitments primarily consist of programming and talent commitments, operating and capital lease arrangements, and purchase obligations for goods and services. These arrangements result from our normal course of business and represent obligations that may be payable over several years.
Contingencies
We have certain indemnification obligations with respect to leases primarily associated with the previously discontinued operations of Famous Players Inc. (“Famous Players”). In addition, we have certain indemnities provided by the acquirer of Famous Players. These lease commitments amounted to approximately $314 million as of March 31, 2015. 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 $192 million with respect to such obligations as of March 31, 2015. We believe our accrual is sufficient to meet any future obligations based on our consideration of available financial information, the lessees’ historical performance in meeting their lease obligations and the underlying economic factors impacting the lessees’ business models.
Legal Matters
Litigation is inherently uncertain and always difficult to predict. However, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the legal matters described below and other litigation to which we are a party are not likely, in the aggregate, to have a material adverse effect on our results of operations, financial position or operating cash flows.
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. In July 2014, 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 answered the counterclaims in September 2014. The litigation is now in the discovery phase.
NOTE 7. STOCKHOLDERS’ EQUITY
The components of stockholders’ equity are as follows:
  
Six Months Ended  
 March 31, 2015
 
Six Months Ended  
 March 31, 2014
Stockholders’ Equity
(in millions)
Total Viacom Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
Total Viacom Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
Beginning Balance
$
3,719

 
$
28

 
$
3,747

 
$
5,193

 
$
(3
)
 
$
5,190

Net earnings
447

 
18

 
465

 
1,049

 
19

 
1,068

Other comprehensive income/(loss) (1)
(278
)
 
(6
)
 
(284
)
 
33

 
1

 
34

Noncontrolling interests
(5
)
 
(21
)
 
(26
)
 

 
(20
)
 
(20
)
Dividends declared
(269
)
 

 
(269
)
 
(268
)
 

 
(268
)
Purchase of treasury stock
(1,500
)
 

 
(1,500
)
 
(1,700
)
 

 
(1,700
)
Equity-based compensation and other
189

 

 
189

 
117

 

 
117

Ending Balance
$
2,303

 
$
19

 
$
2,322

 
$
4,424

 
$
(3
)
 
$
4,421

 
 
 
 
 
 
 
 
 
 
 
 
(1) The components of other comprehensive income/(loss) are net of a tax benefit of $11 million and $1 million for the six months ended March 31, 2015 and March 31, 2014, respectively.

9

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

NOTE 8. RESTRUCTURING AND PROGRAMMING CHARGES
Following a company-wide review across our worldwide Media Networks, Filmed Entertainment operations and corporate functions, we are implementing significant strategic and operational improvements. This includes reorganizing three of our operating segments (Music, Entertainment and Nickelodeon) into two new segments (Music & Entertainment and Kids & Family). The new structure realigns sales, marketing, creative and support functions, increases efficiencies in program and product development, enhances opportunities to share expertise, and promotes greater cross-marketing and cross channel programming activity. We are also reallocating resources to expand our capabilities in critical business areas including data analysis, technology development and consumer insights, reflecting the rapidly changing media marketplace, shifting consumer behavior and evolving measurement practices. In connection with the strategic realignment, we recognized a pre-tax charge of $784 million in the quarter ending March 31, 2015, reflecting $578 million of programming charges, of which $432 million reflect write-downs, and a $206 million restructuring charge associated with workforce reductions. The programming charges are included within Operating expenses in the Consolidated Statement of Earnings.

Media Networks recognized programming charges of $411 million for the write-down of underperforming programming, including the abandonment of select acquired titles, and $123 million of accelerated amortization of programming expenses associated with a change in our ultimate revenue projections for certain original programming genres that have been impacted by changing media consumption habits. Filmed Entertainment recognized charges of $21 million for the write-down of certain films not yet released and $23 million related to the abandonment of development projects. The strategic realignment is largely complete and we anticipate that a majority of the severance will be paid by March 31, 2016.

The following table presents the 2015 restructuring and programming charges by segment:
2015 Restructuring and Programming Charges                                                                             (in millions)
Media Networks
Filmed Entertainment
Corporate
Total
Restructuring charge
$
137

$
57

$
12

$
206

Programming charges
534

44


578

Total
$
671

$
101

$
12

$
784

 
 
 
 
 
NOTE 9. EARNINGS/(LOSS) PER SHARE
Basic earnings/(loss) per common share is computed by dividing Net earnings/(loss) attributable to Viacom by the weighted average number of common shares outstanding during the period. The determination of diluted earnings/(loss) 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/(loss) per common share.
The following table sets forth the weighted average number of common shares outstanding used in determining basic and diluted earnings/(loss) per common share and anti-dilutive common shares:
Weighted Average Number of Common Shares Outstanding and Anti-dilutive Common Shares
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Weighted average number of common shares outstanding, basic
402.5

 
436.1

 
406.6

 
440.5

        Dilutive effect of equity awards

 
8.5

 
4.8

 
8.8

Weighted average number of common shares outstanding, diluted
402.5

 
444.6

 
411.4

 
449.3

 
 
 
 
 
 
 
 
Anti-dilutive common shares
8.6

 
0.1

 
4.3

 
0.1

 
 
 
 
 
 
 
 
 


10

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

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)
2015
 
2014
Cash paid for interest
$
305

 
$
291

Cash paid for income taxes
$
211

 
$
506

Cash paid for income taxes in the six months ended March 31, 2015 reflects the benefit from the retroactive reenactment of legislation allowing for accelerated tax deductions on certain qualified film and television productions.
Accounts Receivable
We had $406 million and $482 million of noncurrent trade receivables as of March 31, 2015 and September 30, 2014, respectively. 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.
Unconsolidated Variable Interest Entities: We have an unconsolidated investment in Viacom 18, a 50% owned joint venture in India with Network 18 Media and Investments Limited that qualifies as a VIE. Our aggregate investment carrying value in Viacom 18 was $74 million and $68 million as of March 31, 2015 and September 30, 2014, respectively.

Consolidated Variable Interest Entities: Our Consolidated Balance Sheets include amounts related to consolidated VIEs totaling $125 million in assets and $53 million in liabilities as of March 31, 2015, and $138 million in assets and $54 million in liabilities as of September 30, 2014. The consolidated VIEs’ revenues, expenses and operating income were not significant for all periods presented.
Income Taxes
Our effective tax rate was 51.0% in the quarter ended March 31, 2015, which included the restructuring and programming charges that contributed 19.8 percentage points to the effective tax rate. Our effective tax rate was 32.8% in the six months ended March 31, 2015, which included the restructuring and programming charges, the pension settlement loss and other discrete tax expense that, when taken together, contributed 1 percentage point to the effective tax rate. This discrete tax expense was principally related to a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation.
Our effective tax rate was 29.7% in the quarter and 31.7% in the six months ended March 31, 2014, which included discrete tax benefits that reduced the effective tax rate by 2.8 and 1.3 percentage points, respectively. This discrete tax benefit was principally related to the recognition of capital loss carryforward benefits.


11

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

NOTE 11. 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, 2015 and September 30, 2014:
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, 2015
 
 
 
 
 
 
 
Marketable securities
$
115

 
$
115

 
$

 
$

Derivatives
(12
)
 

 
(12
)
 

Total
$
103

 
$
115

 
$
(12
)
 
$

September 30, 2014
 
 
 
 
 
 
 
Marketable securities
$
107

 
$
107

 
$

 
$

Derivatives
(8
)
 

 
(8
)
 

Total
$
99

 
$
107

 
$
(8
)
 
$

 
 
 
 
 
 
 
 
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 $924 million and $628 million as of March 31, 2015 and September 30, 2014, respectively. At March 31, 2015, $629 million related to our foreign currency balances, $151 million related to anticipated investing cash flows and $144 million related to future production and programming costs. At September 30, 2014, $390 million related to our foreign currency balances, $154 million related to anticipated investing cash flows and $84 million related to future production costs.
As described in Note 8, we recognized impairment charges related to the write-down of certain programming and films. The impairment charges reflect the excess of the unamortized cost of the impaired programs and films over their estimated fair value using discounted cash flows, which is a Level 3 valuation technique.
NOTE 12. 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 programming charges, when applicable.
Revenues by Segment
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Media Networks
$
2,452

 
$
2,375

 
$
5,106

 
$
4,916

Filmed Entertainment
659

 
831

 
1,379

 
1,512

Eliminations
(33
)
 
(32
)
 
(63
)
 
(57
)
Total revenues
$
3,078

 
$
3,174

 
$
6,422

 
$
6,371

 
 
 
 
 
 
 
 
 

12

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

Adjusted Operating Income/(Loss)
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Media Networks
$
903

 
$
949

 
$
2,007

 
$
2,063

Filmed Entertainment
1

 
11

 
(59
)
 
(63
)
Corporate expenses
(57
)
 
(52
)
 
(118
)
 
(103
)
Eliminations

 
(5
)
 
2

 
(2
)
Equity-based compensation
(25
)
 
(31
)
 
(51
)
 
(63
)
Restructuring and programming charges
(784
)
 

 
(784
)
 

Loss on pension settlement

 

 
(24
)
 

Operating income
38

 
872

 
973

 
1,832

Interest expense, net
(166
)
 
(152
)
 
(326
)
 
(301
)
Equity in net earnings of investee companies
42

 
10

 
75

 
36

Other items, net
(12
)
 
(3
)
 
(30
)
 
(3
)
Earnings/(loss) before provision for income taxes
$
(98
)
 
$
727

 
$
692

 
$
1,564

 
 
 
 
 
 
 
 
 
Total Assets
March 31,
2015
 
September 30,
2014
(in millions)
 
Media Networks
$
16,752

 
$
17,647

Filmed Entertainment
5,645

 
5,440

Corporate/Eliminations
(640
)
 
30

Total assets
$
21,757

 
$
23,117

 
 
 
 

Revenues by Component
Quarter Ended  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Advertising
$
1,172

 
$
1,124

 
$
2,539

 
$
2,449

Feature film
605

 
789

 
1,279

 
1,428

Affiliate fees
1,146

 
1,114

 
2,278

 
2,180

Ancillary
188

 
179

 
389

 
371

Eliminations
(33
)
 
(32
)
 
(63
)
 
(57
)
Total revenues
$
3,078

 
$
3,174

 
$
6,422

 
$
6,371

 
 
 
 
 
 
 
 

Certain prior year revenues for the Filmed Entertainment segment have been reclassified to conform to the current year presentation.


13

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

NOTE 13. 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, 2015 and 2014, Paramount earned revenues from NAI in connection with these licenses in the aggregate amounts of approximately $6 million and $5 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 during the six months ended March 31, 2015. 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  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Consolidated Statement of Earnings
 
 
 
 
 
 
 
Revenue
$
33

 
$
38

 
$
92

 
$
111

Operating expenses
$
80

 
$
57

 
$
148

 
$
153

 
 
 
 
 
 
 
 
  
 
 
 
 
March 31,
2015
 
September 30,
2014
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
5

 
$
5

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
3

 
$
2

Participants’ share and residuals, current
 
 
 
 
72

 
100

Program obligations, current
 
 
 
 
95

 
87

Program obligations, noncurrent
 
 
 
 
79

 
104

Other liabilities
 
 
 
 
7

 
9

                Total due to CBS
 
 
 
 
$
256

 
$
302

 
 
 
 
 
 
 
 


14

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  
 March 31,
 
Six Months Ended 
 March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Consolidated Statement of Earnings
 
 
 
 
 
 
 
Revenue
$
45

 
$
67

 
$
58

 
$
80

Operating expenses
$
19

 
$
28

 
$
21

 
$
30

Selling, general and administrative
$
(4
)
 
$
(4
)
 
$
(6
)
 
$
(6
)
 
 
 
 
 
 
 
 
  
 
 
 
 
March 31,
2015
 
September 30,
2014
Consolidated Balance Sheets
 
 
 
 
 
 
 
Account receivable
 
 
 
 
$
65

 
$
84

Other assets
 
 
 
 
2

 
1

                Total due from other related parties
 
 
 
 
$
67

 
$
85

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
4

 
$
2

Other liabilities
 
 
 
 
41

 
37

                Total due to other related parties
 
 
 
 
$
45

 
$
39

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

15


Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.
Management’s discussion and analysis of results of operations and financial condition is provided as a supplement to and should be read in conjunction with the unaudited consolidated financial statements and related notes to enhance the understanding of our results of operations, financial condition and cash flows. Additional context can also be found in our Form 10-K for the fiscal year ended September 30, 2014, as filed with the Securities and Exchange Commission (“SEC”) on November 13, 2014 (the “2014 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, 2015, compared with the quarter and six months ended March 31, 2014. 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, 2015, compared with the six months ended March 31, 2014, and of our outstanding debt, commitments and contingencies existing as of March 31, 2015.
OVERVIEW
Summary
We are a leading global entertainment content company that connects with audiences in more than 165 countries and territories and is home to premier global media brands that create compelling television programs, motion pictures, short-form video, apps, games, consumer products, social media and other entertainment content. With media networks reaching a cumulative 3.2 billion television subscribers worldwide, Viacom’s leading brands include Nickelodeon®, CMT®, Nick Jr.®, TeenNick®, Nicktoons®, TV Land®, Nick at Nite®, MTV®, VH1®, COMEDY CENTRAL®, SPIKE®, Logo®, BET®, CENTRIC®, Channel 5® (UK), Tr3s®, Paramount Channel™ and VIVA™, among others. Paramount Pictures® is a major global producer and distributor of filmed entertainment and Paramount Television™, our television production division, is focused on developing programming for television and digital platforms.
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 programming 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 attributable to Viacom and adjusted diluted earnings per share (“EPS”), among other measures, to evaluate our actual operating performance and for planning and forecasting of future periods. We believe that the adjusted results provide relevant and useful information for investors because they clarify our actual operating performance, make it easier to compare our results with those of other companies and allow investors to review performance in the same way as our management. Since these are not measures of performance calculated in accordance with 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 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”.

16

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


Media Networks
Our Media Networks segment generates revenues in three categories: (i) the sale of advertising and marketing services related to our content, (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, sale of content on DVDs and Blu-ray discs, licensing of our content for download-to-own and download-to-rent services and television syndication.
Media Networks segment expenses consist of operating expenses, selling, general and administrative (“SG&A”) expenses and depreciation and amortization. Operating expenses are comprised of costs related to original and acquired programming, including programming amortization, expenses associated with the distribution of home entertainment products and consumer products licensing, 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 revenues, which include 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, transactional video-on-demand and download-to-own services, (iii) licensing of film exhibition rights to pay and basic cable television, broadcast television, syndicated television and subscription video-on-demand services and (iv) ancillary revenues from 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. We incur marketing costs before and throughout the theatrical release of a film and, to a lesser extent, other distribution windows. Such costs are incurred to generate public interest in our films and are expensed as incurred; therefore, we typically incur losses with respect to a particular film prior to and during the film’s theatrical exhibition and profitability may not be realized until well after a film’s theatrical release. Therefore, the results of the Filmed Entertainment segment can be volatile as films work their way through the various distribution windows. SG&A expenses include employee compensation, facility and occupancy costs, professional service fees and other overhead costs. Depreciation and amortization expense principally consists of depreciation of fixed assets. 

17

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, 2015 and 2014.
  
Quarter Ended  
 March 31,
 
Better/(Worse)
 
Six Months Ended 
 March 31,
 
Better/(Worse)
(in millions, except per share amounts)
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenues
$
3,078

 
$
3,174

 
$
(96
)
 
(3
)%
 
$
6,422

 
$
6,371

 
$
51

 
1
 %
Operating income
38

 
872

 
(834
)
 
(96
)
 
973

 
1,832

 
(859
)
 
(47
)
Adjusted operating income
822

 
872

 
(50
)
 
(6
)
 
1,781

 
1,832

 
(51
)
 
(3
)
Net earnings/(loss) attributable to Viacom
(53
)
 
502

 
(555
)
 
(111
)
 
447

 
1,049

 
(602
)
 
(57
)
Adjusted net earnings attributable to Viacom
467

 
482

 
(15
)
 
(3
)
 
1,005

 
1,029

 
(24
)
 
(2
)
Diluted earnings/(loss) per share
(0.13
)
 
1.13

 
(1.26
)
 
(112
)
 
1.09

 
2.33

 
(1.24
)
 
(53
)
Adjusted diluted earnings per share
$
1.16

 
$
1.08

 
$
0.08

 
7
 %
 
$
2.44

 
$
2.29

 
$
0.15

 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See the section entitled “Factors Affecting Comparability” for a reconciliation of our adjusted measures to our reported results.
Revenues
Worldwide revenues decreased $96 million, or 3%, to $3.078 billion in the quarter ended March 31, 2015. Excluding an unfavorable 2% impact of foreign exchange, worldwide revenues declined 1%. Filmed Entertainment revenues decreased $172 million, or 21%, primarily driven by lower license fees and home entertainment revenues. Media Networks revenues increased $77 million, or 3%, due to higher advertising revenues, driven by the acquisition of Channel 5 Broadcast Limited ("Channel 5") in September 2014, and affiliate fees, partially offset by the impact of foreign exchange. Excluding an unfavorable 4% and 2% impact of foreign exchange, Filmed Entertainment revenues declined 17% and Media Networks revenues increased 5%, respectively.
Worldwide revenues increased $51 million, or 1%, to $6.422 billion in the six months ended March 31, 2015. Excluding an unfavorable 2% impact of foreign exchange, worldwide revenues increased 3%. Media Networks revenues increased $190 million, or 4%, due to higher affiliate fees, as well as an increase in advertising revenues driven by the acquisition of Channel 5, partially offset by the impact of foreign exchange. Filmed Entertainment revenues decreased $133 million, or 9%, primarily driven by lower license fee revenues. Excluding an unfavorable 1% and 3% impact of foreign exchange, Media Networks revenues increased 5% and Filmed Entertainment revenues declined 6%, respectively.
Operating Income
Adjusted operating income decreased $50 million, or 6%, to $822 million in the quarter. Media Networks adjusted operating income declined $46 million, reflecting an increase in programming and promotional expenses, partially offset by higher revenues, and Filmed Entertainment adjusted operating income declined $10 million due to the number and mix of available titles in the television licensing windows. Adjusted results exclude the impact of restructuring and programming charges totaling $784 million. Including the impact of the restructuring and programming charges, operating income decreased $834 million, or 96%.
Adjusted operating income decreased $51 million, or 3%, to $1.781 billion in the six months. Media Networks adjusted operating income declined $56 million, driven by an increase in programming and promotional expenses partially offset by higher revenues. Filmed Entertainment generated an adjusted operating loss of $59 million in the six months, compared to an adjusted operating loss of $63 million in the prior period. Adjusted results exclude the impact of restructuring and programming charges totaling $784 million and a non-cash pension settlement loss of $24 million. Including the impact of the restructuring and programming charges and pension settlement loss, operating income decreased $859 million, or 47%.
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.


18

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


Net Earnings/(Loss) Attributable to Viacom
Adjusted net earnings attributable to Viacom decreased $15 million, or 3%, to $467 million in the quarter and $24 million, or 2%, to $1.005 billion in the six months, principally due to the decline in tax-effected operating income described above, increased interest expense, reflecting higher levels of debt outstanding, and foreign currency exchange losses, partially offset by higher income from equity in net earnings of investee companies and a lower effective income tax rate.
Our effective income tax rate was 31.2% and 31.8% in the quarter and six months, respectively, compared with 32.5% and 33.0% in the quarter and six months ended March 31, 2014, respectively, excluding the impact of discrete tax items. The decrease in the effective income tax rate was principally due to a change in the mix of domestic and international income.
Adjusted diluted EPS increased $0.08 per diluted share to $1.16 in the quarter and $0.15 to $2.44 in the six months, principally reflecting fewer shares outstanding, partially offset by the impact of foreign exchange. Foreign exchange had a $.04 and a $.09 unfavorable impact on adjusted diluted EPS in the quarter and six months, respectively.
Adjusted results attributable to Viacom exclude the restructuring and programming charges and the pension settlement loss noted above. In the six months ended March 31, 2015, adjusted results attributable to Viacom also exclude discrete taxes. Including these items, we generated a net loss attributable to Viacom of $53 million and a diluted loss per share of $0.13 in the quarter compared to net earnings attributable to Viacom of $502 million and diluted EPS of $1.13 in the prior year quarter. Including these items, net earnings attributable to Viacom decreased $602 million, or 57%, to $447 million and diluted EPS declined $1.24 to $1.09 in the six months.
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)
2015
 
2014
 
$
 
%
 
2015
 
2014
 
$
 
%
Revenues by Component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
1,172

 
$
1,124

 
$
48

 
4
 %
 
$
2,539

 
$
2,449

 
$
90

 
4
 %
Affiliate fees
1,146

 
1,114

 
32

 
3

 
2,278

 
2,180

 
98

 
4

Ancillary
134

 
137

 
(3
)
 
(2
)
 
289

 
287

 
2

 
1

Total revenues by component
$
2,452

 
$
2,375

 
$
77

 
3
 %
 
$
5,106

 
$
4,916

 
$
190

 
4
 %
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
957

 
$
861

 
$
(96
)
 
(11
)%
 
$
1,944

 
$
1,729

 
$
(215
)
 
(12
)%
Selling, general and administrative
551

 
529

 
(22
)
 
(4
)
 
1,073

 
1,052

 
(21
)
 
(2
)
Depreciation and amortization
41

 
36

 
(5
)
 
(14
)
 
82

 
72

 
(10
)
 
(14
)
Total expenses
$
1,549

 
$
1,426

 
$
(123
)
 
(9
)%
 
$
3,099

 
$
2,853

 
$
(246
)
 
(9
)%
Adjusted Operating Income
$
903

 
$
949

 
$
(46
)
 
(5
)%
 
$
2,007

 
$
2,063

 
$
(56
)
 
(3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues
Worldwide revenues increased $77 million, or 3%, to $2.452 billion in the quarter ended March 31, 2015, and $190 million, or 4%, to $5.106 billion in the six months ended March 31, 2015, driven by higher advertising and affiliate fee revenues. Excluding an unfavorable 2% and 1% impact of foreign exchange, worldwide revenues increased 5% in both the quarter and six months, respectively. Domestic revenues were substantially flat in the quarter and six months at $2.022 billion and $4.146 billion, respectively. International revenues grew 23% to $430 million and 24% to $960 million in the quarter and six months, respectively. The growth in international revenues was primarily due to the acquisition of Channel 5, partially offset by foreign exchange, which had a 13-percentage point and a 10-percentage point unfavorable impact on international revenues in the quarter and six months, respectively.

19

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


Advertising
Worldwide advertising revenues increased $48 million, or 4%, to $1.172 billion in the quarter and $90 million, or 4%, to $2.539 billion in the six months. Domestic advertising revenues decreased 5% in the quarter and 6% in the six months. While demand remained strong, lower ratings trends across our channels resulted in a decline in the average price per unit, partially offset by the impact of an increase in units delivered to satisfy our audience deficiency liabilities. International advertising revenues increased 80% in the quarter and 68% in the six months, driven by growth in Europe, principally from the acquisition of Channel 5, partially offset by the impact of foreign exchange, which had a 17-percentage point and a 10-percentage point unfavorable impact on international advertising revenues in the quarter and six months, respectively.

Affiliate Fees
Worldwide affiliate fee revenues increased $32 million, or 3%, to $1.146 billion in the quarter, and $98 million, or 4%, to $2.278 billion in the six months, driven by rate increases. Domestic affiliate revenues increased 5% and 6% in the quarter and six months, respectively. Excluding the impact from the timing of product available under certain distribution agreements, domestic affiliate revenues grew mid-to high-single digits. International affiliate revenues decreased 8% and 5%, respectively, principally due to foreign exchange, partially offset by an increase in revenues driven by the launch of new channels and new distribution agreements. Foreign exchange had a 13-percentage point and a 10-percentage point unfavorable impact on international affiliate revenues in the quarter and six months, respectively.
Expenses
Total expenses increased $123 million, or 9%, to $1.549 billion and $246 million, or 9%, to $3.099 billion in the quarter and six months, respectively.
Operating
Operating expenses increased $96 million, or 11%, to $957 million in the quarter and $215 million, or 12%, to $1.944 billion in the six months primarily driven by the acquisition of Channel 5. Programming costs increased $76 million, or 10%, and distribution and other expenses increased $20 million, or 23%, in the quarter. For the six months, programming costs increased $187 million, or 12%, and distribution and other expenses increased $28 million, or 14%.
Selling, General and Administrative
SG&A expenses increased $22 million, or 4%, to $551 million in the quarter and $21 million, or 2%, to $1.073 billion in the six months, driven by higher promotional expenses related to new programming and the acquisition of Channel 5, which contributed a 2-percentage point increase in the quarter and six months, partially offset by the impact of foreign exchange and lower employee costs.
Depreciation and Amortization
Depreciation and amortization increased $5 million, or 14%, to $41 million and $10 million, or 14%, to $82 million, in the quarter and six months, respectively, driven by the acquisition of Channel 5.
Adjusted Operating Income
Adjusted operating income decreased $46 million, or 5%, to $903 million and $56 million, or 3%, to $2.007 billion in the quarter and six months, respectively, reflecting the operating results discussed above and a 2-percentage point and 1-percentage point unfavorable foreign exchange impact in the quarter and six months, respectively.


20

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


Filmed Entertainment
 
Quarter Ended  
 March 31,
 
Better/(Worse)
 
Six Months Ended 
 March 31,
 
Better/(Worse)
(in millions)
2015
 
2014
 
$        
 
%    
 
2015
 
2014
 
$        
 
%    
Revenues by Component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Theatrical
$
205

 
$
229

 
$
(24
)
 
(10
)%
 
$
374

 
$
388

 
$
(14
)
 
(4
)%
Home entertainment
194

 
257

 
(63
)
 
(25
)
 
510

 
529

 
(19
)
 
(4
)
License fees
206

 
303

 
(97
)
 
(32
)
 
395

 
511

 
(116
)
 
(23
)
Ancillary
54

 
42

 
12

 
29

 
100

 
84

 
16

 
19

Total revenues by component
$
659

 
$
831

 
$
(172
)
 
(21
)%
 
$
1,379

 
$
1,512

 
$
(133
)
 
(9
)%
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
554

 
$
704

 
$
150

 
21
 %
 
$
1,222

 
$
1,338

 
$
116

 
9
 %
Selling, general & administrative
91

 
100

 
9

 
9

 
190

 
200

 
10

 
5

Depreciation & amortization
13

 
16

 
3

 
19

 
26

 
37

 
11

 
30

Total expenses
$
658

 
$
820

 
$
162

 
20
 %
 
$
1,438

 
$
1,575

 
$
137

 
9
 %
Adjusted Operating Income/(Loss)
$
1

 
$
11

 
$
(10
)
 
(91
)%
 
$
(59
)
 
$
(63
)
 
$
4

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues
Worldwide revenues decreased $172 million, or 21%, to $659 million, and $133 million, or 9%, to $1.379 billion in the quarter and six months ended March 31, 2015, respectively. Excluding an unfavorable 4% and 3% impact of foreign exchange, worldwide revenues declined 17% and 6% in the quarter and six months, respectively. Domestic revenues were $369 million, a decrease of 14%, and $741 million, an increase of 1%, in the quarter and six months, respectively. International revenues were $290 million, a decrease of 28%, and $638 million, a decrease of 18%, with foreign exchange having a 7-percentage point and 6-percentage point unfavorable impact on international revenues, in the quarter and six months, respectively.
Theatrical
Worldwide theatrical revenues decreased $24 million, or 10%, to $205 million in the quarter. Carryover revenues were $65
million lower driven by the mix of prior period releases, while revenues from our current quarter releases were higher by $41 million principally due to the release of The SpongeBob Movie: Sponge Out of Water. We released three titles as well as the wide release of Selma in the current quarter and three titles in the prior year quarter. Domestic theatrical revenues increased 10% driven by the strong performance of The SpongeBob Movie: Sponge Out of Water, while international theatrical revenues decreased 35%. Foreign exchange had a 12-percentage point unfavorable impact on international theatrical revenues.
Worldwide theatrical revenues decreased $14 million, or 4%, to $374 million in the six months. Carryover revenues were $52 million higher driven by the prior period release of Teenage Mutant Ninja Turtles, while revenues from our current year releases were lower by $66 million due to the mix of releases. We released eight titles in both the current year and prior year, with the current year including Interstellar, The Gambler, Selma, Top Five and The SpongeBob Movie: Sponge Out of Water and the prior year including The Wolf of Wall Street, Jackass Presents: Bad Grandpa and Anchorman 2: The Legend Continues. Domestic theatrical revenues increased 1% and international theatrical revenues decreased 12%. Foreign exchange had a 12-percentage point unfavorable impact on international theatrical revenues.
Home Entertainment
Worldwide home entertainment revenues decreased $63 million, or 25%, to $194 million in the quarter. Revenues from current quarter titles decreased $32 million driven by the mix of releases. We released three titles in each of the current and prior year quarters, with the current quarter including Interstellar. The prior year quarter included The Wolf of Wall Street and Jackass Presents: Bad Grandpa. Carryover revenues from prior year releases were lower by $31 million due to the number and mix of available titles. Domestic home entertainment revenues decreased 16% and international home entertainment revenues decreased 35%. Foreign exchange had a 7-percentage point unfavorable impact on international home entertainment revenues.
Worldwide home entertainment revenues decreased $19 million, or 4%, to $510 million in the six months. Revenues from our current year titles increased $110 million as we released five titles in the current year, including Teenage Mutant Ninja Turtles, Hercules and Interstellar compared with three in the prior year, including The Wolf of Wall Street and Jackass Presents: Bad Grandpa. Carryover and catalog revenues from prior year releases were lower by $129 million due to the number and mix of available titles. Domestic home entertainment revenues increased 28%, primarily driven by the mix of releases discussed above,

21

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


while international home entertainment revenues decreased 28%, primarily from lower catalog revenues. Foreign exchange had a 6-percentage point unfavorable impact on international home entertainment revenues.
License Fees
License fees decreased $97 million, or 32%, to $206 million, and $116 million, or 23%, to $395 million, in the quarter and six months, respectively, primarily driven by the number and mix of available titles.

Ancillary
Ancillary revenues increased $12 million, or 29%, to $54 million, and $16 million, or 19%, to $100 million, in the quarter and six months, respectively, primarily driven by higher merchandising and third-party production service revenues.

Expenses
Total expenses decreased $162 million, or 20%, to $658 million, and $137 million, or 9%, to $1.438 billion, in the quarter and six months, respectively, principally driven by a decline in operating expenses.
Operating
Operating expenses decreased $150 million, or 21%, to $554 million, and $116 million, or 9%, to $1.222 billion, in the quarter and six months, respectively. Film costs decreased $53 million, or 16%, in the quarter and $37 million, or 6%, in the six months, primarily as a result of lower participation costs on third-party distribution arrangements. Distribution and other costs, principally print and advertising expenses, decreased $97 million, or 26%, in the quarter driven by the mix of prior year theatrical and home entertainment titles and decreased $79 million, or 11%, for the six months as a result of the mix of current year theatrical titles.

Selling, General and Administrative
SG&A expenses decreased $9 million, or 9%, to $91 million, and $10 million, or 5%, to $190 million, in the quarter and six
months, respectively, primarily driven by lower employee costs.

Depreciation and Amortization
Depreciation and amortization decreased $3 million, or 19%, to $13 million, in the quarter, and $11 million, or 30%, to $26 million, in the six months, driven by a decline in amortization expense associated with an intangible asset becoming fully amortized in the prior year.

Adjusted Operating Income/(Loss)
Adjusted operating income was $1 million for the quarter ended March 31, 2015 compared with $11 million for the quarter ended March 31, 2014, a decline of $10 million due to the number and mix of available titles in the television licensing windows. Adjusted operating loss was $59 million for the six months ended March 31, 2015 compared with an adjusted operating loss of $63 million for the six months ended March 31, 2014, an improvement of $4 million. 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.

22

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, 2015 and 2014 reflect our results of operations, financial position and cash flows reported in accordance with GAAP. Results for 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 tables reconcile our adjusted measures to our reported results for the quarters and six months ended March 31, 2015 and 2014. The tax impacts included in the tables have been calculated using the rates applicable to the adjustments presented.
(in millions, except per share amounts)
 
Quarter Ended  
 March 31, 2015
 
Operating
Income
 
Pre-tax Earnings/(Loss)
 
Net Earnings/(Loss) 
Attributable to Viacom
 
Diluted
EPS
Reported results
$
38

 
$
(98
)
 
$
(53
)
 
$
(0.13
)
Factors Affecting Comparability:
 
 
 
 
 
 
 
Restructuring and programming charges
784

 
784

 
520

 
1.29

Adjusted results
$
822

 
$
686

 
$
467

 
$
1.16

 
 
 
 
 
 
 
 
(in millions, except per share amounts)
 
Six Months Ended  
 March 31, 2015
 
Operating
Income
 
Pre-tax Earnings
 
Net Earnings 
Attributable to Viacom
 
Diluted
EPS
Reported results
$
973

 
$
692

 
$
447

 
$
1.09

Factors Affecting Comparability:
 
 
 
 
 
 
 
Restructuring and programming charges
784

 
784

 
520

 
1.26

Loss on pension settlement
24

 
24

 
15

 
0.04

Discrete tax expense

 

 
23