Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the quarterly period ended June 30, 2016
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, 2016
Class A common stock, par value $0.001 per share
 
49,431,379

Class B common stock, par value $0.001 per share
 
347,224,638

 


Table of Contents

VIACOM INC.
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
Consolidated Statements of Earnings for the quarter and nine months ended June 30, 2016 and 2015
 
Consolidated Statements of Comprehensive Income for the quarter and nine months ended June 30, 2016 and 2015
 
Consolidated Balance Sheets as of June 30, 2016 and September 30, 2015
 
Consolidated Statements of Cash Flows for the nine months ended June 30, 2016 and 2015
 
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
VIACOM INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
  
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions, except per share amounts)
2016
 
2015
 
2016
 
2015
Revenues
$
3,107

 
$
3,058

 
$
9,262

 
$
9,480

Expenses:
 
 
 
 
 
 
 
Operating
1,575

 
1,252

 
4,822

 
4,931

Selling, general and administrative
708

 
666

 
2,080

 
2,118

Depreciation and amortization
55

 
56

 
166

 
168

Restructuring

 

 

 
206

Total expenses
2,338

 
1,974

 
7,068

 
7,423

Operating income
769

 
1,084

 
2,194

 
2,057

Interest expense, net
(156
)
 
(166
)
 
(466
)
 
(492
)
Equity in net earnings of investee companies
19

 
28

 
85

 
103

Other items, net
3

 

 
(1
)
 
(30
)
Earnings before provision for income taxes
635

 
946

 
1,812

 
1,638

Provision for income taxes
(195
)
 
(301
)
 
(602
)
 
(528
)
Net earnings (Viacom and noncontrolling interests)
440

 
645

 
1,210

 
1,110

Net earnings attributable to noncontrolling interests
(8
)
 
(54
)
 
(26
)
 
(72
)
Net earnings attributable to Viacom
$
432

 
$
591

 
$
1,184

 
$
1,038

 
 
 
 
 
 
 
 
Basic earnings per share attributable to Viacom
$
1.09

 
$
1.49

 
$
2.99

 
$
2.57

Diluted earnings per share attributable to Viacom
$
1.09

 
$
1.47

 
$
2.98

 
$
2.54

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
396.5

 
397.5

 
396.4

 
403.6

Diluted
398.0

 
401.2

 
397.9

 
408.0

Dividends declared per share of Class A and Class B common stock
$
0.40

 
$
0.40

 
$
1.20

 
$
1.06

 
 
 
 
 
 
 
 
 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)
2016
 
2015
 
2016
 
2015
Net earnings (Viacom and noncontrolling interests)
$
440

 
$
645

 
$
1,210

 
$
1,110

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(75
)
 
73

 
(93
)
 
(189
)
Defined benefit pension plans
1

 
43

 
(3
)
 
22

Cash flow hedges
(2
)
 
2

 
(1
)
 
2

Available for sale securities

 
1

 

 

Other comprehensive income/(loss) (Viacom and noncontrolling interests)
(76
)
 
119

 
(97
)
 
(165
)
Comprehensive income
364

 
764

 
1,113

 
945

Less: Comprehensive income attributable to noncontrolling interest
11

 
57

 
25

 
69

Comprehensive income attributable to Viacom
$
353

 
$
707

 
$
1,088

 
$
876

 
 
 
 
 
 
 
 
 See accompanying notes to Consolidated Financial Statements

2

Table of Contents

VIACOM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except par value)
June 30,
2016
 
September 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
192

 
$
506

Receivables, net
2,973

 
2,807

Inventory, net
829

 
786

Prepaid and other assets
615

 
479

Total current assets
4,609

 
4,578

Property and equipment, net
852

 
947

Inventory, net
4,106

 
3,616

Goodwill
11,411

 
11,456

Intangibles, net
326

 
340

Other assets
1,301

 
1,206

Total assets
$
22,605

 
$
22,143

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
277

 
$
506

Accrued expenses
702

 
748

Participants' share and residuals
773

 
860

Program obligations
634

 
703

Deferred revenue
428

 
481

Current portion of debt
1,369

 
18

Other liabilities
452

 
537

Total current liabilities
4,635

 
3,853

Noncurrent portion of debt
10,996

 
12,267

Participants' share and residuals
380

 
351

Program obligations
326

 
356

Deferred tax liabilities, net
632

 
150

Other liabilities
1,281

 
1,348

Redeemable noncontrolling interest
203

 
219

Commitments and contingencies (Note 6)


 


Viacom stockholders' equity:
 
 
 
Class A common stock, par value $0.001, 375.0 authorized; 49.4 and 50.1 outstanding, respectively

 

Class B common stock, par value $0.001, 5,000.0 authorized; 347.4 and 348.0 outstanding, respectively

 

Additional paid-in capital
10,059

 
10,017

Treasury stock, 399.5 and 398.0 common shares held in treasury, respectively
(20,804
)
 
(20,725
)
Retained earnings
15,467

 
14,780

Accumulated other comprehensive loss
(630
)
 
(534
)
Total Viacom stockholders' equity
4,092

 
3,538

Noncontrolling interests
60

 
61

Total equity
4,152

 
3,599

Total liabilities and equity
$
22,605

 
$
22,143

 
 
 
 
 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)
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net earnings (Viacom and noncontrolling interests)
$
1,210

 
$
1,110

Reconciling items:
 
 
 
Depreciation and amortization
166

 
168

Feature film and program amortization
3,253

 
3,475

Equity-based compensation
71

 
72

Equity in net earnings and distributions from investee companies
(81
)
 
(99
)
Deferred income taxes
470

 
38

Operating assets and liabilities, net of acquisitions:
 
 
 
Receivables
(137
)
 
317

Inventory, program rights and participations
(3,915
)
 
(3,885
)
Accounts payable and other current liabilities
(482
)
 
(23
)
Other, net
(155
)
 
(93
)
Net cash provided by operating activities
400

 
1,080

 
 
 
 
INVESTING ACTIVITIES
 
 
 
Acquisitions and investments, net
(59
)
 
5

Capital expenditures
(80
)
 
(90
)
Net cash flow used in investing activities
(139
)
 
(85
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Borrowings

 
990

Debt repayments
(368
)
 
(600
)
Commercial paper
453

 

Purchase of treasury stock
(100
)
 
(1,548
)
Dividends paid
(476
)
 
(405
)
Excess tax benefits on equity-based compensation awards

 
45

Exercise of stock options
10

 
142

Other, net
(64
)
 
(131
)
Net cash flow used in financing activities
(545
)
 
(1,507
)
Effect of exchange rate changes on cash and cash equivalents
(30
)
 
(67
)
Net change in cash and cash equivalents
(314
)
 
(579
)
Cash and cash equivalents at beginning of period
506

 
1,000

Cash and cash equivalents at end of period
$
192

 
$
421

 
 
 
 
 See accompanying notes to Consolidated Financial Statements

4

Table of Contents
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1. BASIS OF PRESENTATION
Description of Business
Viacom is home to premier global media brands that create compelling television programs, motion pictures, short-form content, apps, games, consumer products, social media experiences and other entertainment content for audiences in 180 countries. 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, Paramount Animation, Insurge Pictures, Nickelodeon Movies, MTV Films 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, 2016 (“fiscal 2016”) or any future period. These financial statements should be read in conjunction with our Form 10-K for the year ended September 30, 2015, as filed with the SEC on November 12, 2015 (the “2015 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.
Reclassification
Certain prior year amounts have been reclassified to conform to the fiscal 2016 presentation.
Recent Accounting Pronouncements
In connection with its financial instruments project, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments in June 2016 and ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016.
ASU 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.
ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities.
We are currently evaluating the impact of the new standards.


5

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

In March 2016, the FASB issued ASU 2016-09 - Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, such as requiring all income tax effects of awards to be recognized in the income statement when the awards vest or are settled and allowing a policy election to account for forfeitures as they occur. In addition, all related cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows. The guidance will be effective for the first interim period of our 2018 fiscal year, with early adoption permitted. The new standard will impact our financial statements by increasing or decreasing our income tax provision and increasing cash flow from operating activities.
In February 2016, the FASB issued ASU 2016-02 - Leases. ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for most leases. For income statement purposes, leases will be classified as either operating or finance, generally resulting in straight-line expense recognition for operating leases (similar to current operating leases) and accelerated expense recognition for financing leases (similar to current capital leases). The guidance will be effective for the first interim period of our 2020 fiscal year, with early adoption permitted. We are currently evaluating the impact of the new standard.
In November 2015, the FASB issued ASU 2015-17 - Income Taxes: Balance Sheet Classification of Deferred Taxes, which requires that all deferred taxes be classified as noncurrent in the balance sheet. The guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted on either a prospective or retrospective basis. In the quarter ended December 31, 2015, we adopted the new guidance on a retrospective basis. As a result, our $99 million net deferred tax liability in the Consolidated Balance Sheet as of September 30, 2015 is presented as a deferred tax asset of $51 million within Other assets and $150 million in Deferred tax liabilities, net.
In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers, a comprehensive revenue recognition model that supersedes the current revenue recognition requirements and most industry-specific guidance. Subsequent accounting standard updates have also been issued which amend and/or clarify the application of ASU 2014-09. The guidance provides a five step framework to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The guidance will be effective for the first interim period of our 2019 fiscal year (with early adoption permitted beginning fiscal year 2018), and allows adoption either under a full retrospective or a modified retrospective approach. We are currently evaluating the impact of the new standard.
NOTE 2. INVENTORY
Our total inventory consists of the following:
Inventory
(in millions)
June 30,
2016
 
September 30,
2015
Film inventory:
 
 
 
Released, net of amortization
$
695

 
$
576

Completed, not yet released
160

 
55

In process and other
1,018

 
806

Total film inventory, net of amortization
1,873

 
1,437

Television productions
85

 
8

Total film and television production inventory
1,958

 
1,445

Original programming:
 
 
 
Released, net of amortization
1,164

 
1,161

In process and other
599

 
599

Total original programming, net of amortization
1,763

 
1,760

Acquired program rights, net of amortization
1,123

 
1,108

Home entertainment inventory
91

 
89

Total inventory, net
4,935

 
4,402

Less: current portion
(829
)
 
(786
)
Total inventory-noncurrent, net
$
4,106

 
$
3,616

 
 
 
 

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)
June 30,
2016
 
September 30,
2015
Senior Notes and Debentures:
 
 
 
                Senior notes due April 2016, 6.250%

 
368

                Senior notes due December 2016, 2.500%
400

 
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%
497

 
497

                Senior notes due April 2019, 2.200%
399

 
398

                Senior notes due September 2019, 5.625%
550

 
550

                Senior notes due December 2019, 2.750%
399

 
398

                Senior notes due March 2021, 4.500%
495

 
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%
297

 
297

                Senior notes due September 2023, 4.250%
1,234

 
1,233

                Senior notes due April 2024, 3.875%
544

 
543

                Senior debentures due December 2034, 4.850%
593

 
592

                Senior debentures due April 2036, 6.875%
1,066

 
1,066

                Senior debentures due October 2037, 6.750%
75

 
75

                Senior debentures due February 2042, 4.500%
244

 
244

                Senior debentures due March 2043, 4.375%
1,089

 
1,085

                Senior debentures due June 2043, 4.875%
246

 
246

                Senior debentures due September 2043, 5.850%
1,228

 
1,228

                Senior debentures due April 2044, 5.250%
545

 
544

Commercial paper
453

 

Capital lease and other obligations
124

 
143

Total debt
12,365

 
12,285

Less: current portion
(1,369
)
 
(18
)
Total noncurrent portion of debt
$
10,996

 
$
12,267

 
 
 
 
In the third quarter, we repaid the $368 million aggregate principal amount of our 6.250% Senior Notes due April 2016.
The total unamortized discount and issuance fees and expenses related to our senior notes and debentures was $464 million as of June 30, 2016 and $478 million as of September 30, 2015. The fair value of our senior notes and debentures was approximately $12.3 billion as of June 30, 2016. The valuation of our publicly traded debt is based on quoted prices in active markets.
Credit Facility
At June 30, 2016, there were no amounts outstanding under our $2.5 billion revolving credit facility due November 2019. The credit facility is used for general corporate purposes and to support commercial paper outstanding. The amount of unused capacity under the credit facility, after deducting commercial paper outstanding of $453 million with a weighted average maturity of 29 days and weighted average interest rate of 1.24%, was $2.05 billion as of June 30, 2016. 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, 2016.

7

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

NOTE 4. PENSION BENEFITS
The components of net periodic benefit cost for our defined benefit pension plans, which are currently frozen to future benefit accruals, are set forth below.
Net Periodic Benefit Cost
(in millions)
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
2016
 
2015
 
2016
 
2015
Interest cost
$
9

 
$
10

 
$
26

 
$
32

Expected return on plan assets
(10
)
 
(11
)
 
(29
)
 
(35
)
Recognized actuarial loss
1

 
2

 
4

 
5

Loss on pension settlement

 

 

 
24

Net periodic benefit cost
$

 
$
1

 
$
1

 
$
26

 
 
 
 
 
 
 
 
NOTE 5. REDEEMABLE NONCONTROLLING INTEREST
We are subject to a redeemable put option, payable in a foreign currency, with respect to an international subsidiary. The put option expires in December 2022 and is classified as Redeemable noncontrolling interest in the Consolidated Balance Sheets.

The activity reflected within redeemable noncontrolling interest is as follows:
Redeemable Noncontrolling Interest
Nine Months Ended 
 June 30,
(in millions)
2016
 
2015
Beginning balance
$
219

 
$
216

Net earnings
12

 
11

Distributions
(16
)
 
(16
)
Translation adjustment
(30
)
 
(9
)
Redemption value adjustment
18

 
4

Ending Balance
$
203

 
$
206

 
 
 
 
NOTE 6. COMMITMENTS AND CONTINGENCIES
Commitments
As more fully described in Note 11 of the 2015 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 $242 million as of June 30, 2016. 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 June 30, 2016. 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
Various Litigations Involving National Amusements, Inc. and the Sumner M. Redstone National Amusements Trust
National Amusements, Inc. (“National Amusements”), directly and indirectly, is the controlling stockholder of Viacom. National Amusements owns shares in Viacom representing approximately 79.8% of the voting interest in Viacom and approximately 10% of Viacom’s combined common stock. National Amusements is controlled by Sumner M. Redstone, our Chairman Emeritus, who is the Chairman and Chief Executive Officer of National Amusements, through the Sumner M. Redstone National Amusements Trust (the “SMR Trust”), which owns shares in National Amusements representing 80% of the

8

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

voting interest of National Amusements. The shares representing the other 20% of the voting interest of National Amusements are held through a trust controlled by Shari E. Redstone, who is Mr. Redstone’s daughter and the non-executive Vice Chair of Viacom and the President and a member of the Board of Directors of National Amusements. The shares of National Amusements held by the SMR Trust are voted solely by Mr. Redstone until such time as his incapacity or death. Upon Mr. Redstone’s incapacity or death, (1) Ms. Redstone will also become a trustee of the SMR Trust and (2) the shares of National Amusements held by the SMR Trust will be voted by the trustees of the SMR Trust.
Prior to May 20, 2016, the trustees of the SMR Trust were Mr. Dauman and George Abrams, a member of the Board of Directors, as well as Mr. Redstone, Phyllis Redstone, David R. Andelman, Norman Jacobs, and Leonard Lewin. The Board of Directors of National Amusements consisted of Mr. Redstone, Shari Redstone, Mr. Abrams, Mr. Andelman, Mr. Dauman, and Tyler Korff, Ms. Redstone’s son and Mr. Redstone’s grandson. On May 20, 2016, Messrs. Dauman and Abrams received notices stating that they had been removed as Trustees of the SMR Trust and as directors and managers of National Amusements and its subsidiaries and replaced, as to the SMR Trust, by Thaddeus Jankowski, the general counsel of National Amusements, and Jill Krutick; and as to National Amusements, by Ms. Krutick and Kimberlee Korff Ostheimer, Ms. Redstone’s daughter and Mr. Redstone’s granddaughter (the May 20, 2016 removals collectively, the “Purported Removals”).
On May 23, 2016, Messrs. Dauman and Abrams filed a lawsuit (the “Massachusetts Action”) in the Probate and Family Court in Norfolk County, Massachusetts, in which they challenged the Purported Removals on the grounds that such removals were the result of Mr. Redstone’s incapacity and/or the product of undue influence or other improper conduct by Ms. Redstone or others. After commencing the Massachusetts Action, Messrs. Dauman and Abrams moved the court for expedited discovery and trial, as well as an evaluation of Mr. Redstone’s mental competency, and the defendants moved to dismiss the action. On July 28, 2016, the Massachusetts court denied the defendants’ motion to dismiss, and ordered defendants to produce certain medical records of Mr. Redstone. The case will now proceed to the discovery phase and the Massachusetts court noted that it would schedule a trial on the merits in October 2016.
Also on May 23, 2016, attorneys for Mr. Redstone filed a petition in the Superior Court of California, Los Angeles County (the “California Action”), seeking that court’s confirmation that the Purported Removals were valid.
On June 6, 2016, National Amusements and NAI Entertainment Holdings LLC (together, “NAI”) delivered to Viacom stockholder written consents purporting to amend certain provisions of our Amended and Restated Bylaws (the “Bylaws”), (i) requiring that any sale or financial transaction affecting all or a portion of Paramount Pictures Corporation (“Paramount”) and various other Viacom subsidiaries that are utilized in the conduct of business of Paramount must be unanimously approved by all of the members of the Board of Directors then in office, (ii) specifying that the Board of Directors can amend the Bylaws only by an affirmative vote of all members of the Board of Directors then in office, and (iii) modifying, in certain respects, Viacom’s existing Bylaws provision requiring that the Court of Chancery of the State of Delaware (the “Delaware Chancery Court”) is the exclusive jurisdiction for certain types of corporate litigation.
On June 13, 2016, Viacom entered into a costs and expenses agreement with each of Mr. Dauman and Mr. Abrams (together, the “Agreements”), each of which was approved in advance by a committee comprised of independent members of the Board of Directors. Under the Agreements, Viacom will pay or promptly reimburse Mr. Dauman’s and Mr. Abrams’ costs and expenses (including attorneys’ fees, expert witness fees and fees of public relations and other consultants) actually and reasonably incurred in connection with the Massachusetts Action and the California Action. Under the Agreements, each of Messrs. Dauman and Abrams is required to repay to Viacom (1) all amounts received from Viacom to the extent it is finally determined by a court of competent jurisdiction that, in instituting the Massachusetts Action, he acted in breach of his fiduciary or other duties to Viacom or that he has not acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interest of Viacom and (2) any amounts received after taking reasonable steps, as required under the Agreements, to seek recoupment or other economic recovery of costs and expenses related to the subject matter of the Massachusetts Action and the California Action from the SMR Trust and National Amusements and its subsidiaries as authorized under the respective governing documents of, and agreements with, those entities.
On June 16, 2016, NAI delivered to Viacom stockholder written consents purporting to amend additional provisions of the Bylaws to provide that any and all vacancies on the Board of Directors occurring as a result of stockholder action to remove directors or to increase the number of authorized directors shall be filled only by the affirmative vote of stockholders representing at least a majority of stock entitled to vote generally in the election of directors, except that in the case of a vacancy for any other reason, a majority of the Board of Directors then in office, though less than a quorum, or a sole remaining director shall fill such vacancy if not filled by stockholder action within 30 days of the occurrence of such other vacancy. The June 16th written consents also claimed to remove from the Board of Directors, without cause, Mr. Abrams, Mr. Dauman, Blythe J. McGarvie, Frederic V. Salerno and William Schwartz and to fill the resulting vacancies with Kenneth Lerer, Thomas J. May, Judith McHale, Ronald Nelson and Nicole Seligman (the “Purported Director Replacements”).

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

On June 16, 2016, NAI filed a lawsuit (the “NAI Delaware Action”) in the Delaware Chancery Court pursuant to 8 Del. C. § 225, (1) seeking the court’s confirmation of the validity and effectiveness of the stockholder written consents delivered by NAI to Viacom on June 6th and June 16th and (2) requesting that, pending a final court ruling, the court maintain the existing Board of Directors and prohibit the Board of Directors from taking any action not in the ordinary course of business. Also on June 16, 2016, Mr. Salerno, Viacom’s lead independent director, filed a lawsuit in the Delaware Chancery Court pursuant to 8 Del. C. § 225 (the “Salerno Delaware Action” and, together with the NAI Delaware Action, the “Delaware Actions”), with the support of the independent directors of the Board of Directors, seeking an expedited determination (1) that the Purported Director Replacements are invalid, (2) that the Board of Directors remains as currently comprised, (3) enjoining NAI from taking further wrongful actions under the authority of Mr. Redstone and (4) entering a status quo order providing that NAI shall not take any actions that would disrupt the Board of Directors’ continuing management of the business and affairs of the Company in the ordinary course. The Delaware Actions are being managed under a coordination order. The Company is paying the expenses incurred in contesting the actions purportedly taken by NAI pursuant to its written consents.
On June 27, 2016, the Delaware Chancery Court entered a status quo order preserving the Board of Directors as constituted prior to the Purported Director Replacements during the pendency of the Delaware Actions.  The status quo order further provides that none of Viacom, the Board of Directors, any committee of the Board of Directors, any member of the Board of Directors or any Viacom executive officer, or any person acting at the direction of any of them, shall authorize, agree to, knowingly cause or permit or take, directly or indirectly, any action that is outside the routine day-to-day operations of Viacom and its subsidiaries taken as a whole (the “Consolidated Company”) without providing five business days’ prior written notice to NAI (which notice shall be treated confidentially). For purposes of the status quo order, “action that is outside the routine day-to-day operations” of the Consolidated Company includes in summary, but is not limited to:
declaring any spin-off or other similar distribution of capital stock of Viacom or distributing any securities or assets of Viacom, other than Viacom’s regular quarterly dividend;
authorizing or entering into agreements with third parties not otherwise permitted by the status quo order, except for agreements entered into in the ordinary course of business consistent with past practice which do not effect a change in (i) the current business operations material to the Consolidated Company or (ii) the voting control or equity ownership of Viacom;
authorizing, creating or amending securities of the Consolidated Company, subject to certain exceptions including if such action is taken in the ordinary course of business consistent with past practice or pursuant to existing agreements;
authorizing or entering into agreements to issue, sell or dispose of securities of the Consolidated Company, subject to certain exceptions including if such action is taken in the ordinary course of business consistent with past practice or pursuant to mandatory provisions of existing agreements in existence as of June 15, 2016 (provided that under no circumstances may Viacom issue, sell or dispose of any Class A Common Stock or Class B Common Stock of Viacom);
authorizing or entering into any action or transaction that would require Viacom stockholder approval;
authorizing or entering into any transaction that is material to the business of Paramount and that is not in the ordinary course of business consistent with past practice, for any disposition of equity or assets of Paramount and its subsidiaries to a party other than the Consolidated Company;
increasing the compensation and benefits payable to current officers and employees, hiring new officers or employees, or terminating or amending existing employment agreements, subject to certain exceptions including if such action is pursuant to agreements in existence as of June 15, 2016 or would not have required the approval of the Board of Directors or a committee of the Board of Directors prior to June 27, 2016;
hiring a financial advisor where the aggregate fees would reasonably be expected to exceed $10 million;
entering into an agreement that is reasonably likely to result in Viacom incurring liability or making any payment based upon the resolution of the claims alleged in the Delaware Actions regarding the validity of the June 6 purported Bylaw amendments or the June 16 purported Bylaw amendments;
instituting or funding legal proceedings seeking the relief sought in the consolidated action, Dauman et al. v. Redstone, et al. pending in Probate and Family Court in Norfolk County, Massachusetts, or Mr. Redstone’s petition pending in California Superior Court, subject to certain exceptions including the defense of legal proceedings seeking the relief sought in those actions and any advancement or indemnification obligations of the Consolidated Company in effect on June 16, 2016; and
amending the Bylaws by action of the Board of Directors.

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

The status quo order will remain in place until a final judgment is entered in the Delaware Actions (or until the Delaware Chancery Court enters a superseding order).
On July 1, 2016, Viacom filed an answer in the NAI Delaware Action, contesting the validity and effectiveness of the stockholder written consents delivered by NAI to Viacom on June 6th and June 16th. Mr. Salerno filed a joinder in that answer and asserted additional affirmative defenses. On July 11, 2016, the plaintiffs in the NAI Delaware Action filed motions for Judgment on the Pleadings in the NAI Delaware Action and motions to dismiss in the Salerno Delaware Action. On July 29, 2016, the Delaware Chancery Court denied all of the material motions. The case will now proceed to the discovery phase and the Delaware Chancery Court noted that it would schedule trial for the week of October 17, 2016.
On July 15, 2016, Viacom received “reservation of rights” letters from counsel to each of Mr. Dauman and Mr. Dooley. The letters were delivered in light of the Purported Director Replacements and note that Messrs. Dauman and Dooley are highly engaged in overseeing Viacom's operations and are committed to pursuing and executing Viacom's strategic plan for the duration of their respective employment agreements. The letters refer to each executive's right under his employment agreement to resign upon the occurrence of certain events that constitute “Good Reason” (subject to Viacom's opportunity to cure). The letters note the belief of the authors and each executive that such events have not occurred, but, in order to preserve their rights, each executive exercises the right to resign for “Good Reason” effective 31 days after the entry of a judicial order from which no appeal may be taken establishing the validity of the Purported Director Replacements, which could potentially result in significant costs to Viacom. The letters further note that if there is an entry of a judicial order from which no appeal may be taken establishing the invalidity of the Purported Director Replacements, the executives' resignation of employment shall not take effect.
Purported Class and Derivative Actions
Between June 17, 2016 and August 1, 2016, three substantially similar purported class action complaints were filed in the Delaware Chancery Court by purported Viacom stockholders, against Viacom, Viacom’s directors, NAI and the purported new directors named in NAI’s June 16th written consents. The complaints - brought on behalf of the class of all holders of Viacom Class B common stock except the named defendants and any person or entity affiliated with any of the defendants - allege claims for breaches of fiduciary duty against the incumbent director defendants and NAI. The purported new directors named in NAI’s June 16th written consents are alleged to have aided and abetted these breaches. In addition to damages and attorneys’ fees, the complaints seek declarations invalidating the June 2016 purported Bylaw amendments described above and “such other and further relief as the Court deems just and proper.” Viacom and certain Viacom directors have moved to dismiss the first two complaints and expect to shortly move to dismiss the third.
On July 20, 2016, a purported derivative action was commenced in Delaware Chancery Court by a purported Viacom stockholder against Viacom and its directors. The complaint alleges that Viacom’s directors breached their fiduciary duties to Viacom in connection with compensation paid to Mr. Redstone. These breaches, it is alleged, permitted a waste of corporate assets and the unjust enrichment of Mr. Redstone.
European Commission Statement of Objections
In July 2015, the Directorate-General for Competition (“DG Comp”) of the European Commission (the “Commission”) issued a Statement of Objections (the “SO”) to the six major Hollywood film studios, including Paramount, and to Sky UK (“Sky”), in connection with DG Comp's investigation into whether conventional territorial restrictions in agreements licensing content to pay television broadcasters impeded European Union (“EU”) single market imperatives in an anti-competitive way. The SO directed at Paramount takes issue with certain geo-filtering provisions in Paramount’s 2009 and 2014 agreements with Sky, which were designed to enforce the territorial nature of the content Paramount licenses for distribution on Sky’s online and mobile pay television platforms. In addition, the SO challenges certain provisions in the 2009 agreement regarding Sky’s satellite distribution of Paramount content. While we believe that Paramount's licensing practices in the EU have been consistent with the region's competition and other rules, rather than prolong the dispute, Viacom and Paramount have chosen to reach agreement with the Commission in the form of binding commitments related to the types of geo-filtering clauses permitted in premium pay television license agreements with broadcasters to the extent they restrict European Economic Area (“EEA”) broadcasters from responding to unsolicited requests by consumers located in a different territory in the EEA. The commitments permit Paramount to continue to license films through premium pay television license agreements in Europe on an exclusive territorial basis. No admission of liability has been made. In addition, the commitments eliminate the possibility of fines and enable the Commission to close similar pending cases against Viacom and Paramount relating to broadcasters in Italy, France, Germany and Spain. The Commission adopted the commitments on July 26, 2016, bringing the matter to conclusion apart from ongoing compliance monitoring.

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

NOTE 7. STOCKHOLDERS’ EQUITY
The components of stockholders’ equity are as follows:
  
Nine Months Ended  
 June 30, 2016
 
Nine Months Ended  
 June 30, 2015
Stockholders’ Equity
(in millions)
Total Viacom Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
Total Viacom Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
Beginning Balance
$
3,538

 
$
61

 
$
3,599

 
$
3,719

 
$
28

 
$
3,747

Net earnings
1,184

 
26

 
1,210

 
1,038

 
72

 
1,110

Other comprehensive loss (1)
(96
)
 
(1
)
 
(97
)
 
(162
)
 
(3
)
 
(165
)
Noncontrolling interests
(18
)
 
(26
)
 
(44
)
 
(4
)
 
(29
)
 
(33
)
Dividends declared
(478
)
 

 
(478
)
 
(428
)
 

 
(428
)
Purchase of treasury stock
(100
)
 

 
(100
)
 
(1,500
)
 

 
(1,500
)
Equity-based compensation and other
62

 

 
62

 
209

 

 
209

Ending Balance
$
4,092

 
$
60

 
$
4,152

 
$
2,872

 
$
68

 
$
2,940

 
 
 
 
 
 
 
 
 
 
 
 
(1) The components of other comprehensive loss are net of tax expense of $4 million and $16 million for the nine months ended June 30, 2016 and 2015, respectively.
Equity Awards
During the quarter ended June 30, 2016, we granted 3.8 million stock options and 1.3 million restricted share units to employees with a weighted average grant date fair value of $8.65 and $38.86 per share, respectively.
NOTE 8. RESTRUCTURING
Our restructuring liability as of June 30, 2016 by reporting segment is as follows:
 
 
 
 
 
 
 
 
(in millions)
Media Networks
 
Filmed Entertainment
 
Corporate
 
Total
September 30, 2015
$
87

 
$
51

 
$
9

 
$
147

Severance payments
(41
)
 
(24
)
 
(4
)
 
(69
)
Revisions to initial estimates

 
(5
)
 

 
(5
)
June 30, 2016
$
46

 
$
22

 
$
5

 
$
73

 
 
 
 
 
 
 
 
The liability as of June 30, 2016 is related to future severance payments in connection with the restructuring plan undertaken in fiscal 2015, as further described in Note 14 of the 2015 Form 10-K. We anticipate that most of the liability associated with the restructuring plan will be paid by September 30, 2016.
NOTE 9. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing Net earnings attributable to Viacom by the weighted average number of common shares outstanding during the period. The determination of diluted earnings per common share includes the weighted average number of common shares plus the dilutive effect of equity awards based upon the application of the treasury stock method. Anti-dilutive common shares were excluded from the calculation of diluted earnings per common share.
The following table sets forth the weighted average number of common shares outstanding used in determining basic and diluted earnings per common share and anti-dilutive common shares:
Weighted Average Number of Common Shares Outstanding and Anti-dilutive Common Shares
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2016
 
2015
 
2016
 
2015
Weighted average number of common shares outstanding, basic
396.5

 
397.5

 
396.4

 
403.6

        Dilutive effect of equity awards
1.5

 
3.7

 
1.5

 
4.4

Weighted average number of common shares outstanding, diluted
398.0

 
401.2

 
397.9

 
408.0

 
 
 
 
 
 
 
 
Anti-dilutive common shares
17.0

 
8.1

 
14.3

 
5.6

 
 
 
 
 
 
 
 
 

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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
Nine Months Ended 
 June 30,
(in millions)
2016
 
2015
Cash paid for interest
$
464

 
$
479

Cash paid for income taxes
$
253

 
$
388

Accounts Receivable
We had $549 million and $577 million of noncurrent trade receivables as of June 30, 2016 and September 30, 2015, respectively. Accounts receivables are principally related to long-term television license arrangements at Filmed Entertainment and content distribution arrangements at Media Networks. These amounts are included within Other assets - noncurrent in our Consolidated Balance Sheets. Such amounts are due in accordance with the underlying terms of the respective agreements with companies that are investment grade or with which we have historically done business under similar terms. We have determined that credit loss allowances are generally not considered necessary for these amounts.
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 Prism TV Private Limited (“Prism”), a 50% owned joint venture in India that qualifies as a VIE. In connection with our investment, we do not have the power to direct matters that most significantly impact the activities of Prism and therefore we do not qualify as the primary beneficiary. Our carrying value in Prism was $156 million and $145 million as of June 30, 2016 and September 30, 2015, respectively.

Consolidated Variable Interest Entities: Our Consolidated Balance Sheets include amounts related to consolidated VIEs totaling $194 million in assets and $57 million in liabilities as of June 30, 2016, and $207 million in assets and $54 million in liabilities as of September 30, 2015. The consolidated VIEs’ revenues, expenses and operating income were not significant for all periods presented.
Income Taxes
Our effective income tax rate was 30.7% and 33.2% in the quarter and nine months ended June 30, 2016, respectively. Net discrete tax benefit of $13 million reduced the effective income tax rate by 2.1 percentage points in the quarter and net discrete tax expense of $8 million contributed 0.4 percentage points to the effective income tax rate in the nine months. The net discrete tax benefit in the quarter was principally related to the release of tax reserves upon the remeasurement of excess foreign tax credits associated with the reorganization of certain non-U.S. subsidiaries in the fourth quarter of 2015. The net discrete tax expense in the nine month period was principally related to a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation, partially offset by reserve releases.
Our effective income tax rate was 31.8% and 32.2% in the quarter and nine months ended June 30, 2015, respectively. Net discrete tax expense of $23 million in the nine months, taken together with restructuring and programming charges and a pension settlement loss, contributed 0.4 percentage points to the effective income tax rate. This net discrete tax expense was principally related to a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation, partially offset by reserve releases.

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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 June 30, 2016 and September 30, 2015:
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, 2016
 
 
 
 
 
 
 
Marketable securities
$
111

 
$
111

 
$

 
$

Derivatives
(4
)
 

 
(4
)
 

Total
$
107

 
$
111

 
$
(4
)
 
$

September 30, 2015
 
 
 
 
 
 
 
Marketable securities
$
100

 
$
100

 
$

 
$

Derivatives
(10
)
 

 
(10
)
 

Total
$
90

 
$
100

 
$
(10
)
 
$

 
 
 
 
 
 
 
 
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 $1.164 billion and $1.040 billion as of June 30, 2016 and September 30, 2015, respectively. At June 30, 2016, $752 million related to our foreign currency balances and $412 million related to future production costs. At September 30, 2015, $769 million related to our foreign currency balances and $271 million related to future production costs.
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 and television programming 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  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2016
 
2015
 
2016
 
2015
Media Networks
$
2,513

 
$
2,597

 
$
7,459

 
$
7,703

Filmed Entertainment
621

 
479

 
1,888

 
1,858

Eliminations
(27
)
 
(18
)
 
(85
)
 
(81
)
Total revenues
$
3,107

 
$
3,058

 
$
9,262

 
$
9,480

 
 
 
 
 
 
 
 
 

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

Adjusted Operating Income/(Loss)
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2016
 
2015
 
2016
 
2015
Media Networks
$
872

 
$
1,114

 
$
2,734

 
$
3,121

Filmed Entertainment
(26
)
 
48

 
(308
)
 
(11
)
Corporate expenses
(60
)
 
(58
)
 
(163
)
 
(176
)
Eliminations
2

 
1

 
2

 
3

Equity-based compensation
(19
)
 
(21
)
 
(71
)
 
(72
)
Restructuring and programming charges

 

 

 
(784
)
Loss on pension settlement

 

 

 
(24
)
Operating income
769

 
1,084

 
2,194

 
2,057

Interest expense, net
(156
)
 
(166
)
 
(466
)
 
(492
)
Equity in net earnings of investee companies
19

 
28

 
85

 
103

Other items, net
3

 

 
(1
)
 
(30
)
Earnings before provision for income taxes
$
635

 
$
946

 
$
1,812

 
$
1,638

 
 
 
 
 
 
 
 
 
Total Assets
June 30,
2016
 
September 30,
2015
(in millions)
 
Media Networks
$
16,669

 
$
17,088

Filmed Entertainment
6,476

 
5,914

Corporate/Eliminations
(540
)
 
(859
)
Total assets
$
22,605

 
$
22,143

 
 
 
 

Revenues by Component
Quarter Ended  
 June 30,
 
Nine Months Ended 
 June 30,
(in millions)
2016
 
2015
 
2016
 
2015
Advertising
$
1,216

 
$
1,223

 
$
3,659

 
$
3,762

Affiliate fees
1,148

 
1,244

 
3,396

 
3,522

Feature film
580

 
433

 
1,760

 
1,712

Ancillary
190

 
176

 
532

 
565

Eliminations
(27
)
 
(18
)
 
(85
)
 
(81
)
Total revenues
$
3,107

 
$
3,058

 
$
9,262

 
$
9,480

 
 
 
 
 
 
 
 
NOTE 13. RELATED PARTY TRANSACTIONS
National Amusements, directly and indirectly, is the controlling stockholder of both Viacom and CBS Corporation (“CBS”). Note 6 to the Consolidated Financial Statements sets forth a detailed description of the relationships among National Amusements, the SMR Trust, Viacom, Mr. Redstone, Ms. Redstone and other directors of Viacom and National Amusements. In addition, Mr. Redstone serves as Chairman Emeritus of CBS and Ms. Redstone serves as non-executive Vice Chair of CBS.
Transactions between Viacom and related parties are overseen by our Governance and Nominating Committee.
Viacom and National Amusements Related Party Transactions
National Amusements licenses films in the ordinary course of business for its motion picture theaters from all major studios, including Paramount. During the nine months ended June 30, 2016 and 2015, Paramount earned revenues from National Amusements in connection with these licenses in the aggregate amounts of approximately $5 million and $6 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.

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VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

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 $60 million to CBS during the nine months ended June 30, 2016. 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)
2016
 
2015
 
2016
 
2015
Consolidated Statements of Earnings
 
 
 
 
 
 
 
Revenues
$
26

 
$
32

 
$
91

 
$
124

Operating expenses
$
39

 
$
42

 
$
127

 
$
190

 
 
 
 
 
 
 
 
  
 
 
 
 
June 30,
2016
 
September 30,
2015
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
2

 
$
5

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$

 
$
1

Participants’ share and residuals, current
 
 
 
 
64

 
77

Program obligations, current
 
 
 
 
60

 
62

Program obligations, noncurrent
 
 
 
 
40

 
55

Other liabilities
 
 
 
 
2

 
2

Total due to CBS
 
 
 
 
$
166

 
$
197

 
 
 
 
 
 
 
 


16

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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)
2016
 
2015
 
2016
 
2015
Consolidated Statements of Earnings
 
 
 
 
 
 
 
Revenues
$
37

 
$
24

 
$
67

 
$
82

Operating expenses
$
23

 
$
9

 
$
39

 
$
30

Selling, general and administrative
$
(5
)
 
$
(5
)
 
$
(11
)
 
$
(11
)
 
 
 
 
 
 
 
 
  
 
 
 
 
June 30,
2016
 
September 30,
2015
Consolidated Balance Sheets
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
$
85

 
$
60

Other assets
 
 
 
 
1

 
1

Total due from other related parties
 
 
 
 
$
86

 
$
61

 
 
 
 
 
 
 
 
Accounts payable
 
 
 
 
$
6

 
$
5

Other liabilities
 
 
 
 
59

 
55

Total due to other related parties
 
 
 
 
$
65

 
$
60

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

17


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, 2015, as filed with the Securities and Exchange Commission (“SEC”) on November 12, 2015 (the “2015 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, 2016, compared with the quarter and nine months ended June 30, 2015. 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, 2016, compared with the nine months ended June 30, 2015, and of our outstanding debt, commitments and contingencies existing as of June 30, 2016.
OVERVIEW
Summary
We are home to premier global media brands that create compelling television programs, motion pictures, short-form content, apps, games, consumer products, social media experiences and other entertainment content for audiences in 180 countries. Our media networks, including Nickelodeon®, COMEDY CENTRAL®, MTV®, VH1®, SPIKE®, BET®, CMT®, TV Land®, Nick at Nite®, Nick Jr.®, Channel 5® (UK), Logo®, Nicktoons®, TeenNick® and Paramount Channel™, reach 510 million households worldwide. Viacom Media Networks also provides extensive online, mobile and app experiences. Paramount Pictures® is a major global producer and distributor of filmed entertainment. Paramount Television™ develops and produces programming for television and video-on-demand platforms. In February 2016, the Company announced that it initiated a process to explore opportunities for a significant strategic minority equity investment in Paramount Pictures.
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, 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 earnings before provision for income taxes, adjusted provision for income taxes, 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, earnings before provision for income taxes, provision for income taxes, 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”.
Media Networks
Our Media Networks segment generates revenues in three categories: (i) the sale of advertising and marketing services, (ii) affiliate fees from cable television operators, direct-to-home satellite television operators, mobile networks, 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.

18

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


Media Networks segment expenses consist of operating expenses, selling, general and administrative (“SG&A”) expenses and depreciation and amortization. Operating expenses are comprised of costs related to original and acquired programming, including programming amortization, expenses associated with the distribution of home entertainment products and consumer products licensing, 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, transactional video-on-demand and download-to-own services, (iii) licensing of film and television exhibition rights to pay and basic cable television, free television, subscription video-on-demand and free 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, theme parks and other uses, and distribution of content specifically developed for digital platforms.
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. 
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, 2016 and 2015.
  
Quarter Ended  
 June 30,
 
Better/(Worse)
 
Nine Months Ended 
 June 30,
 
Better/(Worse)
(in millions, except per share amounts)
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
GAAP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
3,107

 
$
3,058

 
$
49

 
2
 %
 
$
9,262

 
$
9,480

 
$
(218
)
 
(2
)%
Operating income
769

 
1,084

 
(315
)
 
(29
)
 
2,194

 
2,057

 
137

 
7

Net earnings attributable to Viacom
432

 
591

 
(159
)
 
(27
)
 
1,184

 
1,038

 
146

 
14

Diluted earnings per share
1.09

 
1.47

 
(0.38
)
 
(26
)
 
2.98

 
2.54

 
0.44

 
17

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating income
$
769

 
$
1,084

 
$
(315
)
 
(29
)%
 
$
2,194

 
$
2,865

 
$
(671
)
 
(23
)%
Adjusted net earnings attributable to Viacom
419

 
591

 
(172
)
 
(29
)
 
1,192

 
1,596

 
(404
)
 
(25
)
Adjusted diluted earnings per share
1.05

 
1.47

 
(0.42
)
 
(29
)
 
3.00

 
3.91

 
(0.91
)
 
(23
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* See "Factors Affecting Comparability" section below for a reconciliation of our reported results to our adjusted results, which are calculated on a non-GAAP basis.
Factors Affecting Comparability
The Consolidated Financial Statements reflect our results of operations, financial position and cash flows reported in accordance with GAAP. Our results have been affected by certain items identified as affecting comparability. Accordingly, when applicable, we use non-GAAP measures, including consolidated adjusted operating income, adjusted earnings before provision for income taxes, adjusted provision for income taxes, adjusted net earnings attributable to Viacom and adjusted diluted EPS, 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

19

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


as our management. These measures of performance are calculated on a basis other than GAAP and should not be considered in isolation of, or as a substitute for, operating income, earnings before provision for income taxes, provision for income taxes, 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.
The following tables reconcile our reported results (GAAP) to our adjusted results (non-GAAP). There were no adjustments to our results for the quarter ended June 30, 2015.
(in millions, except per share amounts)
 
Quarter Ended  
 June 30, 2016
 
Operating Income
 
Earnings Before Provision for Income Taxes
 
Provision for Income Taxes *
 
Net Earnings
Attributable to 
Viacom
 
Diluted EPS
Reported results (GAAP)
$
769

 
$
635

 
$
195

 
$
432

 
$
1.09

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Discrete tax benefit

 

 
13

 
(13
)
 
(0.04
)
Adjusted results (Non-GAAP)
$
769

 
$
635

 
$
208

 
$
419

 
$
1.05

 
 
 
 
 
 
 
 
 
 
(in millions, except per share amounts)
 
Nine Months Ended  
 June 30, 2016
 
Operating Income
 
Earnings Before Provision for Income Taxes
 
Provision for Income Taxes *
 
Net Earnings
Attributable to 
Viacom
 
Diluted EPS
Reported results (GAAP)
$
2,194

 
$
1,812

 
$
602

 
$
1,184

 
$
2.98

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Discrete tax expense

 

 
(8
)
 
8

 
0.02

Adjusted results (Non-GAAP)
$
2,194

 
$
1,812

 
$
594

 
$
1,192

 
$
3.00

 
 
 
 
 
 
 
 
 
 
(in millions, except per share amounts)
 
Nine Months Ended  
 June 30, 2015
 
Operating Income
 
Earnings Before Provision for Income Taxes
 
Provision for Income Taxes *
 
Net Earnings
Attributable to 
Viacom
 
Diluted EPS
Reported results (GAAP)
$
2,057

 
$
1,638

 
$
528

 
$
1,038

 
$
2.54

Factors Affecting Comparability:
 
 
 
 
 
 
 
 
 
Restructuring and programming charges
784

 
784

 
264

 
520

 
1.27

Loss on pension settlement
24

 
24

 
9

 
15

 
0.04

Discrete tax expense

 

 
(23
)
 
23

 
0.06

Adjusted results (Non-GAAP)
$
2,865

 
$
2,446

 
$
778

 
$
1,596

 
$
3.91

 
 
 
 
 
 
 
 
 
 
*Represents amount calculated by applying the tax rates applicable to the adjustments presented.
Discrete taxes: The net discrete tax benefit in the quarter ended June 30, 2016 was principally related to the release of tax reserves upon the remeasurement of excess foreign tax credits associated with the reorganization of certain non-U.S. subsidiaries in the fourth quarter of 2015. The net discrete tax expense in each of the nine months ended June 30, 2016 and 2015 was principally related to a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation, partially offset by reserve releases.
Restructuring and programming charges: The nine months ended June 30, 2015 reflect a pre-tax charge of $784 million recognized in connection with a company-wide review across our worldwide Media Networks, Filmed Entertainment operations and corporate functions. The company-wide review resulted in the implementation of significant strategic and operational improvements aimed at addressing the ratings challenges experienced by our networks and enhancing the effectiveness and efficiency of our operations, including a new programming strategy shifting focus away from repeated acquired programming and toward fresher, first-run original programming specifically targeted to appeal to our youth and family-oriented demographics.

20

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


As a result of the review, we reorganized our operating segments and the newly structured operating segment management performed a comprehensive strategic review of existing programming, resulting in the identification of programming not aligned with the Company’s new strategy. Decisions were made to cease airing certain programs, alter future airing patterns of certain other programs, and move some programming to secondary networks that would not generate sufficient revenues to support their carrying value.
The charge consisted of $578 million of programming charges and a $206 million restructuring charge associated with workforce reductions. See “Segment Results of Operations” for additional discussion of the impact of the restructuring and programming charges on segment expenses.
Loss on pension settlement: The pre-tax non-cash charge of $24 million in the nine months ended June 30, 2015 was driven by the settlement of pension benefits of certain participants of our funded pension plan.
Revenues
Worldwide revenues increased $49 million, or 2%, to $3.107 billion in the quarter ended June 30, 2016. Media Networks revenues decreased $84 million, or 3%, principally reflecting lower affiliate revenues. Filmed Entertainment revenues increased $142 million, or 30%, primarily reflecting higher license fees and theatrical revenues.
Worldwide revenues decreased $218 million, or 2%, to $9.262 billion in the nine months ended June 30, 2016. Media Networks revenues decreased $244 million, or 3%, principally reflecting lower affiliate and advertising revenues. Filmed Entertainment revenues increased $30 million, or 2%, primarily driven by higher license fees, partially offset by lower home entertainment revenues.
Expenses
Total expenses increased $364 million, or 18%, to $2.338 billion in the quarter ended June 30, 2016, reflecting higher segment expenses. Total expenses decreased $355 million, or 5%, to $7.068 billion in the nine months ended June 30, 2016, primarily due to $784 million of restructuring and programming charges and a $24 million loss on pension settlement in the prior year, partially offset by higher segment expenses in the current year. Media Networks expenses increased $158 million, or 11%, in the quarter and $143 million, or 3%, in the nine months, reflecting higher operating and SG&A expenses. Filmed Entertainment expenses increased $216 million, or 50%, in the quarter and $327 million, or 17%, in the nine months, driven by higher operating expenses.
Operating
Operating expenses increased $323 million, or 26%, to $1.575 billion in the quarter and declined $109 million, or 2%, to $4.822 billion in the nine months. Consolidated operating expenses included a programming charge of $578 million in the prior year nine month period, as described in more detail in the “Factors Affecting Comparability” discussion above. Media Networks operating expenses increased $92 million, or 10%, in the quarter and $101 million, or 3%, in the nine months. Filmed Entertainment operating expenses increased $239 million, or 73%, in the quarter and $370 million, or 24%, in the nine months.
Selling, General and Administrative
SG&A expenses increased $42 million, or 6%, to $708 million in the quarter and declined $38 million, or 2%, to $2.080 billion in the nine months. Media Networks SG&A expenses increased $67 million, or 13%, in the quarter and $42 million, or 3%, in the nine months. Filmed Entertainment SG&A expenses decreased $22 million, or 24%, in the quarter and $42 million, or 15%, in the nine months. Consolidated SG&A expenses included a $24 million loss on pension settlement in the prior year nine month period, as described in more detail in the “Factors Affecting Comparability” discussion above.
Operating Income
Operating income decreased $315 million, or 29%, to $769 million in the quarter ended June 30, 2016, reflecting the operating results discussed above. Media Networks adjusted operating income decreased $242 million, or 22%, reflecting an increase in expenses and revenue declines. Filmed Entertainment adjusted operating results decreased $74 million principally reflecting distribution costs for our release of Teenage Mutant Ninja Turtles: Out of the Shadows. In addition, corporate expenses increased $2 million, or 3%, principally resulting from expenses associated with corporate governance matters and transaction related costs.
Operating income increased $137 million, or 7%, to $2.194 billion in the nine months ended June 30, 2016, reflecting the operating results discussed above. Excluding the items discussed in “Factors Affecting Comparability”, adjusted operating income decreased $671 million, or 23%, to $2.194 billion in the nine months. Media Networks adjusted operating income decreased $387 million, or 12%, principally reflecting revenue declines as well as an increase in programming expenses. Filmed Entertainment adjusted operating loss increased $297 million, reflecting lower contribution from current year films in

21

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


release across the distribution windows. In addition, corporate expenses decreased $13 million, or 7%, principally due to lower employee-related costs.
Income Taxes
Our effective income tax rate was 30.7% and 33.2% in the quarter and nine months ended June 30, 2016, respectively. Discrete tax benefit of $13 million reduced the effective income tax rate by 2.1 percentage points in the quarter and discrete tax expense of $8 million contributed 0.4 percentage points to the effective income tax rate in the nine months. Excluding the impact of discrete tax items, our adjusted effective income tax rate was 32.8% in both the quarter and nine months.
Our effective income tax rate was 31.8% and 32.2% in the quarter and nine months ended June 30, 2015, respectively. Discrete tax expense of $23 million in the nine months, taken together with the other factors affecting comparability discussed above, as applicable, contributed 0.4 percentage points to the effective income tax rate in the nine months. Excluding the impact of discrete tax items, our adjusted effective income tax rate was 31.8% in the nine months.
Net Earnings Attributable to Viacom
Net earnings attributable to Viacom decreased $159 million, or 27%, to $432 million in the quarter, principally due to the decline in tax-effected operating income described above, partially offset by the impact of net earnings attributable to noncontrolling interests. Net earnings attributable to Viacom increased $146 million, or 14%, to $1.184 billion in the nine months, principally due to the increase in tax-effected operating income described above and the impact of net earnings attributable to noncontrolling interests. Excluding the items noted above under “Factors Affecting Comparability”, adjusted net earnings attributable to Viacom decreased $172 million, or 29%, to $419 million in the quarter and $404 million, or 25%, to $1.192 billion in the nine months.
Diluted Earnings Per Share
Diluted EPS decreased $0.38 per diluted share to $1.09 in the quarter and increased $0.44 per diluted share to $2.98 in the nine months, reflecting the impact of net earnings. Excluding the items noted above under “Factors Affecting Comparability”, adjusted diluted EPS decreased $0.42 per diluted share to $1.05 in the quarter and $0.91 per diluted share to $3.00 in the nine 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 and television programming exhibition rights by Media Networks.
Media Networks
  
Quarter Ended  
 June 30,
 
Better/(Worse)  
 
Nine Months Ended 
 June 30,
 
Better/(Worse)  
(in millions)
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Revenues by Component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
$
1,216

 
$
1,223

 
$
(7
)
 
(1
)%
 
$
3,659

 
$
3,762

 
$
(103
)
 
(3
)%
Affiliate fees
1,148

 
1,244

 
(96
)
 
(8
)
 
3,396

 
3,522

 
(126
)
 
(4
)
Ancillary
149

 
130

 
19

 
15

 
404

 
419

 
(15
)
 
(4
)
Total revenues by component
$
2,513

 
$
2,597

 
$
(84
)
 
(3
)%
 
$
7,459

 
$
7,703

 
$
(244
)
 
(3
)%
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
$
1,036

 
$
944

 
$
(92
)
 
(10
)%
 
$
2,989

 
$
2,888

 
$
(101
)
 
(3
)%
Selling, general and administrative
564

 
497

 
(67
)
 
(13
)
 
1,612

 
1,570

 
(42
)
 
(3
)
Depreciation and amortization
41

 
42

 
1

 
2

 
124

 
124

 

 

Total expenses
$
1,641

 
$
1,483

 
$
(158
)
 
(11
)%
 
$
4,725

 
$
4,582

 
$
(143
)
 
(3
)%
Adjusted Operating Income
$
872

 
$
1,114

 
$
(242
)
 
(22
)%
 
$
2,734

 
$
3,121

 
$
(387
)
 
(12
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
Worldwide revenues decreased $84 million, or 3%, to $2.513 billion and $244 million, or 3%, to $7.459 billion in the quarter and nine months ended June 30, 2016, respectively. Domestic revenues decreased 7% to $2.028 billion and 4% to $6.034

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


billion in the quarter and nine months, respectively. International revenues increased 13% in the quarter to $485 million and 3% in the nine months to $1.425 billion. Foreign exchange had a 5-percentage point and 6-percentage point unfavorable impact on international revenues in the quarter and nine months, respectively.
Advertising
Worldwide advertising revenues decreased $7 million, or 1%, to $1.216 billion in the quarter and $103 million, or 3%, to $3.659 billion in the nine months. Domestic advertising revenues decreased 4% in both the quarter and nine months. While pricing increased, reduced unit loads and softer ratings at certain of our networks caused lower audience delivery, reducing impressions and associated revenue. International advertising revenues increased 13% in the quarter and 3% in the nine months. Excluding foreign exchange, which had a 6-percentage point and 7-percentage point unfavorable impact, international advertising revenues increased 19% and 10% in the quarter and nine months, respectively, driven by growth in Europe.
Affiliate Fees
Worldwide affiliate fee revenues decreased $96 million, or 8%, to $1.148 billion in the quarter and $126 million, or 4%, to $3.396 billion in the nine months. Domestic affiliate revenues decreased 10% in the quarter and 5% in the nine months, principally reflecting a difficult comparison with product made available under certain distribution agreements in the prior year quarter. Excluding the impact from the timing of product available under certain distribution agreements, domestic affiliate revenues declined in the low single digits in the quarter and were substantially flat in the nine months due to a modest decline in subscribers and the impact of a rate adjustment with a major distributor, partially offset by rate increases across the remaining subscriber base. For the full fiscal year 2016, we expect domestic affiliate revenues to decline at a low- to mid-single-digit rate. Due to continuing uncertainty around the timing of completion of a significant distribution agreement, domestic affiliate revenues could decline at a mid- to high-single-digit rate. International affiliate revenues increased 9% in the quarter and 2% in the nine months. Excluding the impact of foreign exchange, which had a 3-percentage point unfavorable impact, international affiliate revenues increased 12% in the quarter, driven by the completion of certain distribution agreements. Excluding the impact of foreign exchange, which had a 6-percentage point unfavorable impact, international affiliate revenues increased 8% in the nine months, driven by new channel launches, increased subscribers, rate increases and the completion of certain distribution agreements.
Ancillary
Worldwide ancillary revenue increased $19 million, or 15%, to $149 million in the quarter, principally driven by higher consumer product revenue. Worldwide ancillary revenue decreased $15 million, or 4%, to $404 million in the nine months, principally reflecting lower television syndication revenue.
Expenses