Third, we are diversifying beyond our core business. We are extending the context requires otherwise.
We were organized as a Delaware corporation in 2005 in connection with our separation from CBS Corporation (“CBS”), which was effective January 1, 2006. Our principal offices are located at 1515 Broadway, New York, New York 10036. Our telephone number is (212) 258-6000 and our website is www.viacom.com. Information included on or accessible through our website is not intended to be incorporated into this report. References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries, unless the context requires otherwise.
MEDIA NETWORKS
Overview
Our Media Networks segment provides entertainment content, services and related branded products for consumers in targeted demographics attractive to advertisers, content distributors and retailers. We create, acquire, distribute and sell programming and other content for our audiences worldwide, distributed through cable, satellite and broadband services, on linear, streaming, on-demand and transactional bases, for viewing on a wide range of devices such as televisions, PCs, tablets, smartphones and other connected devices. The Media Networks segment is comprisedalso delivers advertising and marketing services under our advanced marketing solutions portfolio, which both utilizes advanced addressable video inventory to allow dynamic ad insertion and advanced targeting, and provides our marketing partners with a variety of three brand groups - Music & Entertainment, Kids & Familyconsulting and creative services and associated activations. The Media Networks segment also licenses its brands and properties for consumer products and recreation experiences, produces live events and creates original programming for third-party distributors.
Globally, our Media Networks segment reaches approximately 4.4 billion cumulative television subscribers in more than 180 countries and 46 languages, via 314 locally programmed and operated television channels, including our multimedia brands Nickelodeon®, MTV®, BET Networks - that operate as®, Comedy Central®,Paramount Network®, Nick Jr.®, VH1®, TV Land®, CMT® and Logo®. Outside of the United States (the “U.S.”), Viacom Media Networks. ViacomInternational Media Networks (“VIMN”) operates the international extensions of our media networks businessesmultimedia brands and our program services created specifically for international audiences, such as British public service broadcaster (“PSB”) Channel 5® and Milkshake!™ in the United StatesKingdom (“UK”), Telefe® in Argentina, Colors® in India and internationally.Paramount Channel™. In fiscal year 2018, our Media Networks segment launched 9 new channels, including in the UK, Japan, Italy and Portugal. “Cumulative television subscribers” is an aggregation of the total subscribers to (or viewers of, in the case of our free-to-air channels) each Viacom owned-and-operated, joint venture and licensee channel.
In fiscal year 2018, we launched our cross-Viacom studio production initiative in the form of a global network of production studios to produce premium episodic and film content. Domestically, this initiative is driven by studios housed under Nickelodeon, MTV and Comedy Central, and focused on utilizing our considerable intellectual property library to create long-form episodic content for third-party platforms. Internationally, this initiative is organized under Viacom International Studios (“VIS”), leveraging our international brands and platforms, including at Telefe in Argentina, Porta dos Fundos in Brazil and Elephant House Studios in the UK. VIS has produced several Spanish- and Portuguese-language shows for Netflix, Amazon, Fox and others.
Our Media Networks brands develop and operate an extensive portfolio of online, mobile and OTT experiences, including “TV Everywhere” and subscription apps that offer audiences long and short-form video content, games and interactive features, across shows, events, news, music, community, culture and, for our younger audiences, educational and learning activities. During the quarter ended September 30, 2018, our Media Networks online properties, in the aggregate, averaged approximately 37.1 million unique visitors per month domestically, and according to internal data, 612 million content streams each month.
In November 2017, we launched Viacom Digital Studios (“VDS”), to accelerate the production of original programming for consumption across the leading social platforms to build loyalty for, and engagement with, our flagship brands. In fiscal year 2018, VDS led a significant increase in the volume of original online content from MTV, BET, Comedy Central and Nickelodeon, with more than 600 hours of content published domestically, entered into partnerships with Snap Inc. and Twitter, and completed new talent deals. In fiscal year 2018, VDS programming included Nickelodeon’s new animated series The JoJo and BowBow Show Show; MTV’s Basic to Bougie; Snapchat shows Promposal, Girl Code and Cribs; BET’s Excess; and Comedy Central’s Mini-Mocks on Facebook Watch. VDS also launched successful franchises from our brands such as Wild ‘N Out and Jersey Shore on dedicated YouTube channels. Through the widespread dissemination of VDS-generated content across a variety of platforms, in the quarter ended September 30, 2018, VDS drove year-over-year increases in our branded programming’s aggregate number of social video views and minutes viewed by 108% and 194%, respectively.
In August 2018, we launched Viacom Digital Studios International (“VDSI”) with a focus on creating, distributing and monetizing digital content for our flagship brands outside of the U.S. VDSI currently has three production hubs, in New York City, Buenos Aires and London.
In February 2018, we acquired VidCon, an innovative conference and festival celebrating online video, to drive additional growth at VDS and our live events business. In June 2018, we hosted our first Viacom-owned VidCon US. The flagship event drew attendance of over 74,000 and participation from an extensive array of online video platforms, creators, fans, industry executives and brands. VidCon is also growing internationally, including the second-annual VidCon Australia event in August 2018 and an upcoming expansion to London in February 2019.
Media Networks Properties
Our most significant Media Networks properties are discussed below. Unless otherwise indicated, the domestic cumulative television subscriber numbers are according to Nielsen Company (US), LLC (“Nielsen”), the Internet monthly unique visitor data is according to comScore, Inc. (“comScore”) Media Metrix (U.S. data only), the content video stream data is according to internal data (U.S. data only) and the international reach statistics and the cumulative social media followers are derived from internal data coupled with external sources when available.
Nickelodeon, now in its 39th year, is a diverse, global business and a recognized leader in kids and family entertainment. Nickelodeon has been the number-one-rated ad-supported basic cable network for 23 consecutive years, featuring leading original and licensed series for kids across animation, live-action and preschool genres. Nickelodeon produces and distributes television programming worldwide. Nickelodeon is a key part of Viacom’s global consumer products licensing business and licenses its brands for recreation experiences such as hotels and theme parks, as well as live events.
Programming highlights in fiscal year 2018 included the return of the Nick classic Double Dare; the reimagined Rise of the Teenage Mutant Ninja Turtles; returning hits The Loud House, Henry Danger, I am Frankie, Hunter Street, Lip Sync Battle Shorties, Alvinnn!!! and the Chipmunks, The Thundermans and SpongeBob SquarePants; and tentpole events such as Kids’ Choice Awards, Kids’ Choice Sports, The HALO Awards and Worldwide Day of Play.
Internationally, we have introduced new content models that have led to Nickelodeon’s first internationally originated, globally distributed, non-preschool, animated program Pony; our first Chinese-originated, animated program Deer Run; and a new telenovela Noobees, a VIS co-production with Mediapro, which premiered in Latin America in September 2018.
During the evening and overnight hours, Nick at Nite airs on the same linear cable channel on which Nickelodeon airs during the daytime, and features licensed contemporary family comedies, such as Friends, Mom, George Lopez, The Goldbergs and Full House.
NOGGIN is Nickelodeon’s advertising-free, direct-to-consumer, OTT preschool video subscription service, featuring over 1,000 full-length library episodes, plus interactive play-along videos and short-form educational content. In May 2018, NOGGIN was added to Amazon’s Prime Video Channels lineup, expanding the digital footprint of Nickelodeon’s preschool programming.
In fiscal year 2018, Nickelodeon launched its SlimeFest music festival in Chicago, IL, and announced its plans to build an indoor Nickelodeon theme park within the Mall of China, in Chongqing, China. Other live and recreation initiatives include increased international recreation-related partnerships; multiple PAW Patrol live tours around the world; and the live Broadway production of SpongeBob SquarePants, which in 2018 was nominated for 12 Tony Awards and won 4 Outer Critics Circle Awards, including “Outstanding New Broadway Musical,” and is currently on tour in the U.S.
Nickelodeon Movies continues to deepen its partnership with Paramount, working together to develop a slate of branded films based on some of Nick’s most iconic franchises and characters.
In October 2018, as part of its initiative to work with a wider array of marquee creative talent, Nickelodeon entered into an exclusive first-look deal with comedian, actor and television personality Kevin Hart. Through his production entity, HartBeat Productions, Kevin Hart will develop and produce live-action, scripted kids’ content for Nickelodeon.
In September 2018, Nickelodeon and Nick at Nite reached approximately 601 million cumulative television subscribers in 177 countries worldwide, excluding branded programming blocks.
In the quarter ended September 30, 2018, our Nick online properties in the aggregate averaged 2.0 million monthly unique visitors domestically and, according to internal data, 47 million content video streams each month. Nickelodeon has approximately 295 million cumulative followers across social media platforms.
MTV is a global youth culture brand that creates original music and pop culture content. MTV Play, a multi-platform video streaming offering for adults available in approximately 29 countries and territories, provides on-demand access to fans’ favorite shows and live streaming of the MTV linear channel in support of our TV Everywhere partnerships.
| • | Programming highlights in fiscal year 2018 included Teen Mom, Teen Mom II, Teen Mum, Ridiculousness, Are You The One?, Siesta Key and The Challenge franchise. New series launches in fiscal year 2018 included Ex on the Beach, Floribama Shore and Teen Mom: Young and Pregnant. In April 2018, MTV launched Jersey Shore: Family Vacation, a new installment of the signature MTV hit Jersey Shore, which broke records as the most-watched unscripted debut on cable since 2012, with more than 10 million viewers tuning in over its premiere weekend. The Jersey Shore format has been adapted for our international audiences, with multiple versions around the world, including as Geordie Shore in the UK (now in its 18th season) and Acapulco Shore in Mexico, while the Are You the One? format has been adapted by MTV’s local channels in Brazil and Mexico. In addition, we have imported our international programming formats to the U.S., such as Ex on the Beach,which originated in the UK and has become a global franchise with 14 local adaptations airing worldwide. We have also expanded our music franchises Yo! MTV Raps and MTV Unplugged internationally, and debuted new international shows, including True Love or True Lies? in the UK. |
| • | MTV’s signature programming event is the MTV Video Music Awards, which in 2018 drew 5.2 million viewers across its live linear simulcast. The VMAs video streams doubled between fiscal year 2017 and 2018 and reached 285 million viewers in 2018. MTV’s additional annual tentpole programming events included the MTV European Music Awards, MTV Movie and TV Awards, MTV MIAWs (celebrating the best in Latin music and the digital world of the millennial generation) and MTV Fandom Awards. In June 2018, MTV hosted its 12th annual Isle of MTVMalta concert and Malta Music Week events. |
In September 2018, MTV reached approximately 987 million cumulative television subscribers in 180 countries worldwide.
In the quarter ended September 30, 2018, our MTV online properties in the aggregate averaged approximately 7.6 million monthly unique visitors domestically and, according to internal data, approximately 55 million content video streams each month. MTV has approximately 252 million cumulative followers across social media platforms.
BET is a leading consumer brand in the urban marketplace, and the nation’s leading provider of entertainment, music, news and public affairs programming to African-American audiences. BET Play, a direct-to-consumer OTT offering for adults available in approximately 99 countries and territories, provides hundreds of hours of content, including BET original series, awards shows, stand-up comedy, reality shows and documentaries.
Programming highlights in fiscal year 2018 included the premieres of the miniseries The Bobby Brown Story,The Mane Event,In Contempt, Hit the Floor (formerly on VH1) and The Grand Hustle; returning favorites such as Tales and Being Mary Jane; and acquisitions such as A Different World, House of Payne and Martin. BET’s tentpoles and live events in 2018 included the sixth annual BET Experience, BET’s weekend-long celebration of music, entertainment and Black culture and featured the 2018 BET Awards, which included an award category for Best International Act for the first time; Black Girls Rock; BET Hip Hop Awards; the first-ever BET Social Awards; and Soul Train Awards. BET’s programming received nine NAACP Image Awards nominations and two wins in fiscal year 2018.
BET has a comprehensive, multi-year content partnership with award-winning writer, director, producer, actor and playwright Tyler Perry, that extends through 2024 and encompasses television, film and short-form video. In 2019,
Tyler Perry will begin production on approximately 90 episodes annually of original drama and comedy series for BET and other Viacom networks, and we will have exclusive licensing rights on this programming, as well as exclusive distribution rights to Tyler Perry’s short-form video content.
In September 2018, BET reached approximately 220 million cumulative television subscribers in 75 countries worldwide.
In the quarter ended September 30, 2018, our BET online properties in the aggregate averaged approximately 8.8 million monthly unique visitors domestically and, according to internal data, 10 million content video streams each month. BET has approximately 47 million cumulative followers across social media platforms.
Comedy Central is a leading destination for comedic talent and all things comedy, featuring award-winning late night, sketch, scripted, animated and stand-up series and specials.
| • | Connecting with comedy fans through multiple touchpoints, Comedy Central also produces nationwide stand-up events and festivals, operates a Grammy Award-winning record label (Comedy Central Records), produces a global podcast network and operates Comedy Central Radio on SiriusXM. |
Programming highlights in fiscal year 2018 included The Daily Show with Trevor Noah, South Park and Drunk History, all of which have received Emmy Award nominations for outstanding series in their respective categories in the past; the series premiere of Corporate; new seasons of returning favorites such as Broad City, Tosh.0, Detroiters, Nathan For You and Jeff Ross Presents: Roast Battle; international versions of Drunk History and Roast Battle; specials such as the Roast of series; and acquisitions such as BoJack Horseman, Archer, The Office and King of the Hill.
In 2016, Comedy Central launched the digital series Trevor Noah’s Between the Scenes, featuring videos from The Daily Show in which Trevor Noah engages with the audience between segments. The series has received two Emmy Award nominations for Outstanding Short Form Variety Series in each of 2017 and 2018, winning the Emmy Award in 2017.
In June 2018, Comedy Central hosted its second Clusterfest, a three-day festival in San Francisco that featured an unprecedented mix of world-class standup comedy, live music and experiential activities. Comedy Central Latin America hosted Comedy Central Fests in Mexico, Argentina and Colombia, featuring stand-up, lip sync battles and open mic events, among other formats. In September 2018, we launched our first-ever UK comedy festival, CC Live, which hosted thousands of fans over three days.
The Daily Show’s Donald J. Trump Presidential Twitter Library, a critically-acclaimed pop-up exhibit that debuted in New York in July 2017, has since toured or is touring Chicago, San Francisco, Los Angeles and Miami. A book based on the exhibit was published in July 2018 and has become a New York Times best-seller.
In March 2018, Viacom entered into a strategic partnership with Day Zero Productions, an international production and distribution company led by Trevor Noah. Under the long-term deal, we will have exclusive “first-look” rights on all projects developed by Trevor Noah and Day Zero Productions in all media, including television, feature films, digital and short-form video content.
In September 2018, Comedy Central reached approximately 377 million cumulative television subscribers in 149 countries worldwide.
In the quarter ended September 30, 2018, our Comedy Central online properties in the aggregate averaged approximately 2.6 million monthly unique visitors domestically and, according to internal data, approximately 13 million content video streams each month. Comedy Central has approximately 145 million cumulative followers across social media platforms.
In January 2018, we launched the Paramount Network, a premier general entertainment brand targeting adults 18 to 49. Paramount Network aims to leverage the best in our original scripted and non-scripted programming, and feature high-quality original and third-party programming, movies and documentaries, and combat sports.
Since its launch, Paramount Network programming has featured Yellowstone, a drama starring Kevin Costner and written and directed by critically-acclaimed screenwriter Taylor Sheridan, which was one of the most-watched scripted cable series of 2018 and the most-watched drama series premiere on ad-supported cable television since 2016, and which garnered more than 63 million social views and an average of 5.1 million weekly linear viewers during its nine-episode first season. The network also featured Emmy Award-nominated Waco, a drama focused on the Branch Davidians; the documentary Rest in Power: The Trayvon Martin Story; and new episodes of Ink Master, Ink Angels, Bar Rescue,Bellator MMA and the multi-platform global hit Lip Sync Battle.
In September 2018, Paramount Network reached approximately 81 million cumulative television subscribers in the U.S. In addition, Paramount Network also operates in the UK, Spain and Andorra.
In the quarter ended September 30, 2018, our Paramount Network online properties in the aggregate averaged approximately 864,000 monthly unique visitors domestically and, according to internal data, 7.9 million content video streams each month. Paramount Network has approximately 22 million cumulative followers across social media platforms.
In July 2018, we acquired AwesomenessTV Holdings, a leading digital-first destination for original programming serving global Gen-Z audiences, with a network of more than 8 million cumulative followers across social media platforms. The acquisition expanded Viacom’s portfolio of premiere entertainment brands, and further accelerated the digital transformation efforts within VDS.
Awesomeness creates programming for various social and subscription video-on-demand (“SVOD”) platforms and produces premium original series and films through its Emmy Award-winning dedicated television and film studios. The Awesomeness portfolio is strengthened by a branded content sales team, a creator network, a creative agency and a roster of talent relationships. According to Netflix, in 2018, Awesomeness film production To All the Boys I’ve Loved Before became one of its most viewed original films with strong repeat viewing. Awesomeness’s fiscal year 2019 slate includes Light as a Feather and Pen 15 on Hulu, season four of Foursome and the premiere of Overthinking with Kat & June on YouTube Premium, and the returning hit Growing Up Ellen on the brand’s YouTube channel.
Nick Jr. seeks to educate and entertain preschoolers, providing kids an opportunity to engage with characters they love while building their imaginations, gaining key cognitive and social-emotional skills and learning about the world around them. Nick Jr. offers parents and their kids entertaining and enriching activities geared toward their interests, ages and developmental levels.
Programming highlights in fiscal year 2018 included the new series Top Wing; returning hits such as Nella the Princess Knight, PAW Patrol, Blaze and The Monster Machines, Shimmer and Shine and Rusty Rivets; and licensed originals such as Peppa Pig, Teletubbies and Max & Ruby.
In September 2018, Nick Jr. reached approximately 226 million cumulative television subscribers in 150 countries worldwide.
In the quarter ended September 30, 2018, our Nick Jr. online properties in the aggregate averaged 2.1 million monthly unique visitors domestically and, according to internal data, 446 million content video streams each month. Nick Jr. has approximately 14 million cumulative followers across social media platforms.
VH1 is a leading lifestyle brand with pop culture, celebrities and lifestyle topics, including original series, exclusive events and entertainment news.
Programming highlights in fiscal year 2018 included the critically-acclaimed original program RuPaul’s Drag Race, which had the most-watched season in its 10-season history, received 12 Emmy Award nominations and won five Emmy Awards in 2018; the premiere of Love & Hip Hop: Miami, part of our Love & Hip Hop franchise; Basketball Wives, Black Ink Crew, Hip Hop Squares, Martha and Snoop's Potluck Dinner Party, Safeword and Baller Wives; and VH1’s premier tentpole event Hip Hop Honors. In fiscal year 2019, VH1 will relaunch in the UK as a lifestyle and general entertainment channel, featuring the UK debut of its popular U.S. programming.
In September 2018, VH1 reached approximately 275 million cumulative television subscribers in 109 countries worldwide.
In the quarter ended September 30, 2018, our VH1 online properties in the aggregate averaged approximately 2.8 million monthly unique visitors domestically and, according to internal data, 28 million content video streams each month. VH1 has approximately 51 million cumulative followers across social media platforms.
TV Land features a mix of original programming, classic and contemporary television shows and specials that appeal to adults aged 25 to 54. The channel is split into two dayparts - TV Land Classic airs during weekdays with beloved series like M*A*S*H*, and TV Land airs in the evening hours and on weekends, focusing on content that appeals to adults aged 40 and older.
Programming highlights in fiscal year 2018 included returning original favorite Younger, which in 2018 experienced its highest-rated season to date, and licensed favorites such as Everybody Loves Raymond, Two and a Half Men and The King of Queens.
In September 2018, TV Land reached approximately 85 million cumulative television subscribers, airing only in the U.S.
In the quarter ended September 30, 2018, our TV Land online properties in the aggregate averaged approximately 315,000 monthly unique visitors domestically and, according to internal data, 3.2 million content video streams each month. TV Land has approximately 7 million cumulative followers across social media platforms.
CMT is a leading country music and lifestyle destination, offering a mix of original series, music events and specials. CMT also has a 24-hour linear music channel, CMT Music, and online radio station, CMT Radio.
Programming highlights in fiscal year 2018 included the premiere of Music City; returning favorites Steve Austin's Broken Skull Challenge and Dallas Cowboys Cheerleaders: Making the Team; and tentpole events and music programming such as the CMT Music Awards, CMT Artists of the Year and CMT Crossroads.
In September 2018, CMT reached approximately 109 million cumulative television subscribers in 6 countries worldwide.
In the quarter ended September 30, 2018, our CMT online properties in the aggregate averaged approximately 1.1 million monthly unique visitors domestically and, according to internal data, 1.5 million content video streams each month. CMT has approximately 13 million cumulative followers across social media platforms.
Logo is a leading entertainment brand inspired by the LGBTQ community. Logo features one-of-a-kind personalities, shows, specials and unique stories.
Programming highlights in fiscal year 2018 included three groundbreaking projects from Logo Documentary Films - Light in the Water, Quiet Heroes and When the Beat Drops - as well as licensed favorites such as Will & Grace. Logo Digital premiered Portrait of a Queen, as well as the digital series Out Of The Closet.
In September 2018, Logo reached approximately 43 million cumulative television subscribers, airing only in the U.S.
In the quarter ended September 30, 2018, our Logo online properties in the aggregate averaged approximately 1 million monthly unique visitors domestically and, according to internal data, 476,000 content video streams each month. Logo has approximately 3 million cumulative followers across social media platforms.
Channel 5, a free-to-air PSB in the UK, and its affiliated channels air a broad mix of popular content, including factual programming, entertainment, reality, sports, acquired and original drama, and preschool programming through its award-winning Milkshake! brand. In August 2018, Channel 5 was named “Best Channel of the Year” at the Edinburgh Television Festival.
Programming highlights in fiscal year 2018 included Michael Palin in North Korea, the Jeremy Vine Show, Cruising with Jane McDonald,whichwon a BAFTA award in the “Features” category, Britain by Bike, Blind Date and popular returning series such as The Yorkshire Vet, GPs: Behind Closed Doors and Paddington Station 24/7.
In September 2018, Channel 5 reached approximately 181 million cumulative television subscribers in the UK.
In the quarter ended September 30, 2018, according to internal data, our Channel 5 online properties in the aggregate averaged approximately 6 million monthly unique visitors and 78 million content streams each month. Channel 5 has approximately 1.3 million cumulative followers across social media platforms.
Telefe is a leading free-to-air channel and one of the biggest content producers in Argentina, with 11 studios and more than 3,500 hours of content produced each year. Telefe studios co-produced nine films in fiscal year 2018.
Programming highlights in fiscal year 2018 included national telenovelas such as 100 Days to Fall in Love, Sandro, Rhizoma Hotel and Straight to the Heart; unscripted programs, including Time to Talk (an original production), Por el mundo and Drunk History; international telenovelas, including El Sultan and Elif; and original reality series such as Family Food Fight, Bake Off, La Voz Argentina and the Susana Giménez specials.
In September 2018, Telefe reached approximately 25 million cumulative television subscribers in 22 countries worldwide.
In the quarter ended September 30, 2018, our Telefe online properties in the aggregate averaged approximately 2.6 million monthly unique visitors in Argentina and, according to internal data, 21 million content video streams each month. Telefe has approximately 16.8 million cumulative followers across social media platforms.
Paramount Channel is a 24-hour movie channel featuring classic and contemporary films from the Paramount library and other Hollywood studios as well as domestic and international television series. Paramount Channel is available free-to-air in Italy, and on basic cable television in France, Hungary, Russia, Romania, Poland, various countries in South East Asia and various Latin American countries, including Brazil, Mexico, Chile and Argentina.
In September 2018, Paramount Channel reached approximately 110 million cumulative television subscribers in 112 countries worldwide.
Paramount+ is an advertising-free, premium video-on-demand service, featuring films from Paramount Pictures and hundreds of television episodes from Viacom’s library. Available as an authenticated service or to customers of select subscription service providers, as of September 2018, Paramount+ was available in Sweden, Denmark, Norway and Finland.
Colors is a highly-rated Hindi-language general entertainment pay television channel operated by our Viacom18 joint venture in India. Colors is available in India and over 60 additional countries, including the U.S., Canada, the UK, parts of Europe, the Middle East and North Africa, Asia Pacific and South-East Asia. Colors is available in the U.S. as Aapka Colors. The Colors brand is also extended to the English language through Colors Infinity, an English general entertainment channel, and to six Indian regional languages through regional general entertainment channels that feature fiction shows, reality programming and feature films.
In addition, our Viacom18 joint venture operates two Hindi language channels under its brand Rishtey, which is a free-to-air Hindi general entertainment channel, and a pay television Hindi movie channel, Rishtey Cineplex. Viacom18 also owns and operates Voot, a digital video-on-demand platform featuring original and television content and children’s programming, as well as content from MTV, Nickelodeon and Colors.
Viacom18 Studios, Viacom18’s filmed entertainment business, includes Viacom18 Motion Pictures, a fully-integrated motion pictures studio, and Tipping Point, a digital content unit. In fiscal year 2018, Viacom18 Motion Pictures delivered critically and commercially successful films, such as Padmaavat, which set Bollywood box office records, and Manto, which received critical acclaim from several major International film festivals, including the Toronto International Film Festival, BFI London Film Festival and Busan International Film Festival. Viacom18 Motion Pictures also partners with Paramount to market and distribute Paramount films for theatrical exhibition in the Indian sub-continent, including Mission: Impossible - Fallout.
| • | Programming highlights in fiscal year 2018 included the 19th annual International Indian Film Academy Awards, Filmfare, Bigg Boss and Naagin on Colors and Enga Vittu Mapillai, Alloy Bhubon Bora, Agni Sakshi, Lakshmi Baramma, Ghadge and Sun and Sur Nava Dhyas Nava on Colors’ regional channels. |
In September 2018, Colors and Rishtey reached approximately 614 million cumulative television subscribers in 107 countries worldwide.
In addition, our Media Networks properties include:
______
______
TeenNick appeals to kids ages 6 to 11 and features Nickelodeon original live action hits, signature originals and The Splat, a programming block targeting millennials with iconic Nick library content from the 1990s.
Nicktoons is a leading cartoon destination for kids featuring signature franchises and fan favorites, as well as the Nick Sports block.
Nick Music is a 24-hour music video destination featuring a Nickelodeon-curated lineup which gives kids their favorite Top 40 hits from breakout artists and ever-popular hit-makers.
______
______
MTV2 is a music and lifestyle destination with content targeting male millennials aged 12 to 34 and featuring original music and irreverent lifestyle programming.
MTV Classic features a mix of fan-favorite series and music programming from MTV’s history, with a special focus on the 1990s and early 2000s.
MTV Live is a music-centric high-definition television channel.
______
______
BET Her is the first network designed for black women, reflecting the lifestyle of today’s African-American and multicultural adult viewer and delivering a variety of culturally relevant movies, series, music, live performances, specials and reality programming.
BET Gospel features gospel music and spiritual programming.
BET Hip Hop spotlights hip hop music programming and performances.
Media Networks Revenues
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 includeactivities such as 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.products. In fiscal year 2015,2018, advertising revenues, affiliate feesrevenues and ancillary revenues were approximately 48%47%, 47%46% and 5%7%, respectively, of total revenues for the Media Networks segment.
Revenues from the Media Networks segment accounted for 77%, 76% and 79% of our revenues for the fiscal years 2018, 2017 and 2016, respectively, after the elimination of intercompany revenues.
Advertising Revenues
Our Media Networks segment generates revenues from the sale of advertising and from marketing services. Our advertising revenues generally depend on the number of viewers and viewership demographics. Ratings and demographic information for advertising purposes are determined by third-party research companies such as The Nielsen Company (US), LLC (“Nielsen”), and by a combination of third- and first-party data.
Ratings and demographic information for advertising purposes are determined by third-party research companies such as Nielsen and comScore, sometimes also including third- and first-party data.
Our Media Networks properties appeal to various key audiences attractive to advertisers. For example, MTV appeals to young adults, Nickelodeon appeals to kids and their families and BET appeals to African-American audiences. We also drive additional demand for our advertising services through integrated sales of multi-platform advertising and marketing opportunities and through our integrated marketing services, providing unique branded entertainmentcontent and custom sponsorship opportunities to our advertisers.
Domestically, we sell a certain amount of our advertising inventory in advance each year in the upfront market, and other inventory in the scatter market closer to the time a program airs. Upfront sales and pricing for each new cable broadcast year are largely established in our third fiscal quarter and reflected in advertising revenue principally beginning in the first quarter of our subsequent fiscal year as marketing plans are finalized and orders are fulfilled to deliver advertising across various programs and dayparts. Pricing for advertising within our program servicesprogramming is generally established based on projected impression delivery, which may be guaranteed on a fixed price per impression unit basis. For advertising sold based on impression guarantees, audience deficiency may result in an obligation to deliver subsequent additional units, thereby reducing inventory available for scatter sales. Scatter advertising is sold throughout the year at pricing reflecting market conditions at the time of sale and customization of services delivered. Most scatter advertising is also sold based on impression guarantees. To the extent we do not satisfy contracted audience ratings,impression delivery, we record deferred revenue until such time that the audience ratingimpression guarantee has been satisfied.
Internationally, advertising markets vary from jurisdiction toby jurisdiction; however, we do not typically sell our inventory in advance in an upfront market. The majority of our international inventory is sold in the equivalent of the U.S. scatter market, and in a number of markets we are represented by third-party sales houses. The terms of these relationships vary. InFor example, in the United Kingdom, for example,UK, which is our largest market outside the U.S., we are represented by a third party to whom we sell the inventory on our television channels in the form of commercial impacts at a pre-agreed price. Thisprice calculated in accordance with a pre-arranged pricing metric, and the third party then resells those impacts to UK agencies and advertisers. In Argentina, our inventory is sold to advertisers either directly or through advertising agencies.
We continue to expand our product offerings to enable our customers and partners to better target and more broadly activate their advertising campaigns. Our Advanced Marketing Solutions portfolio consists of two main categories - Addressable Video and Brand Solutions.
Addressable Video consists of pools of inventory that we are aggregating and enabling within both multichannel video programming distributor (“MVPD”) and OTT environments, to allow for advanced targeting to fulfill the demand for next generation video ad products. This inventory generally resides in 1) our owned and operated websites and apps, which are distributed either on a stand-alone basis, or via connected device platforms such as Roku, Amazon Fire, or AppleTV; 2) MVPD apps, which are controlled by our distribution partners, who license Viacom content into their platforms and grant us ad insertion rights; or 3) advanced set top boxes, where addressable units are trafficked through the set-top box infrastructure against video-on-demand and live linear television feeds.
Our Viacom Vantage platform combines data from multiple sources, which may include both first- and third-party data, in a predictive environment to deliver enhanced consumer targeting and campaign measurement. In addition, we license our proprietary targeting and data science software underpinning Vantage to third parties to enable them to engage in linear optimization across their networks.
Brand Solutions consists of a bundle of consulting, creative services, and media activation, under four different product types: 1) Influencer Marketing, an end-to-end creative product distributed across social platforms and optimized for the mobile platform, which we take to market under the recently acquired WhoSay brand; 2) Shopper Marketing, which leverages Viacom’s intellectual property and extends reach to physical stores, providing Viacom access to trade and promotion budgets; 3) Branded Programming, which offers advertisers a range of executions, from off the shelf sponsorship of our digital-first productions, to custom content, sometimes taking the form of an original custom series underwritten by an advertiser; and 4)
Experiential, which began with the BET Experience and has now grown to include several other properties including Comedy Central’s Clusterfest, Nickelodeon’s Slimefest and the recently acquired VidCon.
Our consortium with Fox Networks Group, NBCU, Turner and Univision - OpenAP - is the television industry’s first open platform for cross-publisher audience targeting. OpenAP enables advertisers and agencies to define and customize the audiences they want to reach beyond traditional age/gender segments, across member networks, with consistent standards of measurement and independent third-party posting for advertising campaigns.
Our advertising revenues may be affected by the strength of advertising markets and general economic conditions, and may fluctuate depending on the success of our programming, as measured by viewership, at any given time. Audience measurement ratingsMeasured viewership may vary due tobased on the success of our programming (due to, among other things, the timing of availability of new episodes ofrelated to our popular programming and the performance of competing programs and other entertainment alternatives for viewers, as well asalternatives), the platforms on which our programming is available, and variations related to the methods used by third parties to measure ratings.viewership. Advertising revenues may also fluctuate due to seasonal variations, the timing of holidays and significant programming events such as awards shows orand premieres. Typically, advertising revenues are highest in the first and fourth quartersquarter of our fiscal year.
Our affiliate revenues are generated through fees from distributors of our programming and advanced analytics that enable our customers to better targetprogram services, such as cable television operators, direct-to-home satellite television operators, mobile networks and measure the impact of their advertising. Viacom VantageTM combines our first-party data with third-party data from multiple sources in a predictive environment to deliver enhanced consumer targetingSVOD and campaign measurement. Viacom EchoTM offers enhanced measurement for advertisers looking to tap into our significant social reach. Customized programs and proprietary analytics provide a strategic perspective on engagement across multiple social platforms including Facebook, Twitter, Snapchat and Tumblr.
Our agreements with multichannel television service providers are generally multi-year carriage agreements with set rate increases that provide us with a reasonably stable source of revenues.increases. The amount of the fees we receive is generally a function of the number of subscribers and the rates we receive per subscriber. Expirations of these affiliate agreements are staggered.
Under certainSVOD and other distributionsimilar OTT agreements, we make multiplecertain programs available for distribution on one or more dates, and our revenue under these arrangements mayOTT agreements is recognized when the content has been delivered by us and is available for use by the licensee; therefore, revenue will fluctuate depending on the initial availabilitytiming of when programming is delivered and made available throughout the programs licensed.license period.
Ancillary Revenues
OurMedia Networks ancillary revenues are principally derived from (i) our consumer products activities, which include licensing our brands and brand licensing, including the licensingintellectual property, as well as creation and publishing of popular characters from our programs and digital properties for consumer products (such as toys and apparel), interactive games and publishing across allvarious platforms (including mobile devices, PCs and console)consoles), and(ii) recreation experiences (such as hotels, theme parks and live entertainment), (ii) distributionevents, (iii) viewing of our programming in the home entertainment marketon a transactional basis through the licensing of content for download-to-owntransactional video-on-demand (“TVOD”) and download-to-rentthrough electronic sell-through services and the sale of DVDs and Blu-ray discs and (iii)(iv) television syndication. syndication of our content.
Our ancillary revenues vary based on consumer spending, the popularity of our programming and intellectual property, and the volume of content available during a particular period and acceptance of our or our partners’ products.
 | ||
 | ||
 | ||
 | ||
 | ||
 | ||
 | ||
  | ||
 | ||
 | ||
 | ||
 | ||
 | ||
   | ||
 | ||
 | ||
 | ||
 | ||
 | ||
Media Networks Competition
Our media networks generally compete with other widely distributed cable networks, the broadcast television networks and digital programming services and platforms. Our media networks compete for advertising revenue with other cable and broadcast television networks, social media platforms, other connected outlets such as websites, apps social media and other online experiences, radio programming and print media. Each programming service also competes for audience share with competitors’other programming services that target or include the same audience. For example, Nickelodeon’s programming and services compete for younger viewers, and BET’s programming and services compete for consumers of African-American culture, with other entertainment services, and platforms for younger viewers; and BET competes with African-American oriented content onincluding cable and broadcast networks, content delivered by digital distributorsdistribution outlets and other content and platforms that include African-Americans in their audiences.platforms. We also compete with other cable networks for affiliate fees and distribution. Our networks compete with other content creators for directors, actors, writers, producers and other creative talent and for new program ideas and the acquisition of popular programming. Competition from these sources other entertainment offerings and/or audience leisure time may affect our revenues and costs.
FILMED ENTERTAINMENT
Overview
Our Filmed Entertainment segment develops, produces, finances, acquires and distributes motion pictures,films, television programingprogramming and other entertainment content under thethrough its Paramount Pictures®, Paramount Vantage,PlayersTM, Paramount Classics,Animation® and Paramount Animation, Insurge Pictures,TelevisionTM divisions, in various markets and media worldwide. It partners on various projects with key Viacom brands, including Nickelodeon Movies, MTV Films and Paramount Television brands. Motion picturesBET Films.
Films produced, acquired and/or distributed by the Filmed Entertainment segment are generally first exhibited theatrically domestically and internationally,in domestic and/or international markets and then released in various ways such as download-to-own,markets through airlines and hotels, electronic sell-through, DVDs and Blu-ray discs, transactional video-on-demand,TVOD, pay television, subscription video-on-demand, basicSVOD, cable television,and free television, free video-on-demand and, in some cases, by airlines and hotels.
television. In fiscal year 2015,2018, the Filmed Entertainment segment released 119 films theatrically, including Mission: Impossible - Fallout, A Quiet Place, Daddy’s Home 2 and Book Club.
Paramount Pictures is a major global producer and distributor of filmed entertainment and has an extensive library consisting of approximately 1,200 film titles produced by Paramount, acquired rights to approximately 2,200 additional films and a number of television programs. Paramount’s library includes many Academy Award winners, including Titanic, Braveheart, Forrest Gump, The Godfather, The Godfather Part II and Wings, which won the first Academy Award ever awarded for Best Picture in 1929, and other Academy Award Best Picture nominees such as Arrival, Fences, The Big Short, Selma and The Wolf of Wall Street. The Paramount library also includes classics such as The Ten Commandments, Breakfast at Tiffany’s and Sunset Boulevard and a number of successful franchises such as Mission: Impossible, Transformers, Star Trek and Paranormal Activity.
Paramount Players aims to expand Paramount’s slate of films by partnering with our Media Networks flagship brands to develop, produce and release distinctive feature films in order to bring more of our leading brands to movie audiences around the domestic theatrical market. Paramount’s film strategyworld. These co-branded films are distributed by Paramount with a unique emphasis on marketing campaigns and integrations benefiting from the global reach of our flagship networks. Paramount Players also focuses on releasessmaller budget films for specific genres and target audiences. Nobody’s Fool, Tyler Perry’s first feature film with Paramount Players and BET Films, was released in November 2018, and Paramount Players expects to theatrically release three additional films in fiscal year 2019, including What Men Want and Dora the Explorer, a live-action adaption of the classic Nickelodeon series that represent a mix of franchise films and smaller productions, acquired films and distribution arrangements. Paramount’s film slate is designed to represent a variety of genres, styles and levels of investment and risk -being co-produced with the goal of creating entertainment for both worldwide appeal and niche audiences. Nickelodeon Movies.
Paramount Animation
Paramount Animation produces high qualitycreates high-quality animated films and expectsaims to release one orto two theatrical filmstitles per year. Together with Nickelodeon Movies, Upcoming releases include Wonder Park, a film about the adventures of a young girl in a magical amusement park, expected to be released in 2019, and Spongebob 3 and Monster on the Hill, both expected to be released in 2020. We anticipate that Wonder Park will be followed by a Wonder Park television series on Nickelodeon.
Paramount Animation released its first theatrical film -Television develops and finances a wide range of original, premium television content across all types of media platforms for distribution worldwide. Paramount Television’s productions include The SpongeBob Movie:Alienist Sponge Out of Waterfor TNT, Tom Clancy’s Jack Ryan - infor Amazon, 13 Reasons Why and Maniac for Netflix and Berlin Station and The Contender for EPIX. Paramount Television’s fiscal year 2015.2019 slate includes The Haunting of Hill House for Netflix, Catch-22 for Hulu, Boomerang for BET and First Wives Club for Paramount expects to increase its total film slate, includingNetwork. In 2018, Paramount Animation films, to 15 theatrical releases in fiscal year 2016.Television’s programming received nine Emmy Award nominations.
 |  |  |  |  |  |  |
Paramount produces many of the motion picturesfilms it releases. Itreleases and also acquires films for distribution from third parties and distributes films and other content on behalf of third parties. In some cases, Paramount co-finances and/or co-distributes films with third parties, including other studios. Paramount distributes some motion pictures worldwide, and may engage a third-party distributor for certain pictures in certain territories. Paramount also enters into filmfilm-specific financing and slate financing arrangements from time to time under which third parties participate in the financing of the production costs of a film or slategroup of films, typically in exchange for a partial copyright interest. Paramount distributes films worldwide or in select territories or media, and may engage third-party distributors for certain pictures in certain territories.
Paramount has several multi-picture production, distribution and financing relationships, including its recently extended agreement with Skydance Productions (“Skydance”) and a new overall deal with Hasbro Inc. (“Hasbro”). Under the Skydance agreement, Paramount and Skydance will continue to work together to produce and finance certain Paramount films, and Paramount has a first look on Skydance-initiated projects, including animated films. Paramount’s agreement with Hasbro involves the production, financing and distribution of live action and animated films based on Hasbro’s expansive list of properties. Paramount and Hasbro will also continue to work together on the Transformers and G.I. Joe franchises, including the first Transformers spinoff - Bumblebee - which is scheduled for theatrical release in December 2018.
Domestically, Paramount generally performs its own marketing and distribution services for theatrical releases and its own sales and marketing services for its home entertainment releases. Paramount has agreements in place with Warner Bros. Home Entertainment Inc. to distribute physical DVD and Blu-ray discs relating to approximately 700 Paramount catalog titles for which Paramount retains all digital rights, andan agreement with Universal Studios Inc. ("Universal") to providefor certain back-office and distribution services for all physical DVD and Blu-ray discs distributedreleased by Paramount. Under an agreement that runs through June 2017,Paramount in the U.S. and Canada. Paramount also distributes CBS’s library of television and other library content on DVD and Blu-ray disc on a worldwide basis. basis under an agreement that runs through 2020.
Internationally, Paramount through its international affiliates, generally distributes its theatrical releases through its own distribution operationsinternational affiliates or, in some territories where it does not have an operating presence, through United International Pictures, a company that Paramount andjoint venture with Universal own jointly.Studios, or third-party distributors. For international home entertainment releases, in February 2015, Paramount announced that it had entered into a five-year agreement with Universal Pictures Home Entertainment (“UPHE”) for UPHE to distribute Paramount’s physical DVD and Blu-ray discs are distributed in certain international territories. UPHE has commenced providing servicesterritories by Universal Pictures Home Entertainment and in certain territories and other territories will be phased in over time. Certain other territories are handled by Paramount licensees.
Paramount also distributes films domestically and internationally on download-to-own, transactional video-on-demand, subscription video-on-demandelectronic sell-through, TVOD, SVOD and television platforms. In the first domestic pay television distribution window, Paramount’s feature films initially theatrically released in the United StatesU.S. are generally exhibited on EPIX.EPIX, a multi-platform premium entertainment service.
Producing, marketing and distributing motion picturesfilms and other contenttelevision programming can involve significant costs, and the timing of a film’s release can also cause our financial results to vary depending on the timing of a motion picture’s release.vary. For example, marketing costs are generally incurred before and throughout the theatrical release of a film and, to a lesser extent, other distribution windows, to generate public interest in our films, and are expensed as incurred. Therefore,As a result, we typically incur losses with respect to a particular film prior to and during the film’s theatrical exhibition, and recoupment of investment as well as profitability for the film may not be realized until well after its theatrical release. Therefore, the results of the Filmed Entertainment segment can be volatile as films work their way through the various distribution windows.
Filmed Entertainment Revenues
Our Filmed Entertainment segment generates revenues in four categories: (i) the release and/or distribution of films theatrically, (ii) the release and/or distribution of film and television product through home entertainment, (iii) the licensing of film and television product to television and digital platforms and (iv) other ancillary activities. In fiscal year 2018, theatrical revenues, home entertainment revenues, licensing revenues and ancillary revenues were approximately 23%, 20%, 50% and 7%, respectively, of total revenues for the Filmed Entertainment segment.
Revenues from the Filmed Entertainment segment accounted for 23%, 24% and 21% of our revenues for the fiscal years 2018, 2017 and 2016, respectively, after the elimination of intercompany revenues.
Theatrical Revenues
Paramount generates revenues worldwide from the theatrical distribution of films, primarily from audience ticket sales, including 3D and/or IMAX tickets that are generally sold at premium pricing. Our theatrical release strategy generally aims to develop films designed to appeal specifically to a targeted audience or to broad audiences, with appropriate budgets and projected revenue.
Each film is a separate and distinct product with its revenues, and ultimate profitability, dependent upon many factors, among which domestic and international audience response is of fundamental importance. Theatrical revenues may also be affected by the number, timing and mix of releases and competitive offerings in any given period, consumer tastes and consumption habits, and overall economic conditions, including trends in discretionary spending. The theatrical success of a film is a significant factor in determining the revenues it is likely to generate in home entertainment markets and licensing arrangements for television and other platforms. Revenues from theatrical film releases tend to be cyclical with increases in the summer months during our fourth quarter.
In fiscal year 2018, Paramount theatrically released in domestic and/or international markets Mission: Impossible - Fallout, A Quiet Place, Daddy’s Home 2, Book Club, Sherlock Gnomes, Annihilation, Downsizing, Action Point, Same Kind of Different as Me and Suburbicon. In addition to Nobody’s Fool and Overlord, which were released in November 2018, Paramount’s key 2015fiscal year 2019 slate is expected to include Instant Family, Bumblebee, What Men Want, Wonder Park, Pet Sematary, Rocketman and Dora the Explorer.
Home Entertainment Revenues
Home entertainment revenues are derived from the worldwide sales and distribution of DVDs and Blu-ray discs relating to the films released theatrically by Paramount and programming of other Viacom brands such as Nickelodeon, MTV, Comedy Central and BET, as well as certain acquired films and content distributed on behalf of third parties such as CBS. Home entertainment revenues are also derived from the viewing of our films on a transactional basis through TVOD and electronic sell-through services around the world, for a fee and/or on a revenue-sharing basis.
Our home entertainment revenues may be affected by the number, timing and mix of releases are discussed below.
and competitive offerings in any given period, consumer tastes and consumption habits, the prominence given by distributors and retailers to our releases compared to those of our competitors, and overall economic conditions, including trends in discretionary spending.
Licensing Revenues
Paramount generates fees by licensing, around the world on a territory-by-territory basis, films and television programs produced, acquired or distributed by Paramount, for a fee or on a revenue-sharing basis, to SVOD, pay and basic cable television, free television and free video-on-demand services.
ViacomViacommunity is deeply committed tothe global umbrella covering all of Viacom’s social impact and purpose-driven initiatives. By leveraging its global stageViacom’s culture of diversity and audience connectionscreativity, Viacommunity offers programs that empower, engage and inspire our employees, audiences and company to make a positive impact ondifference in the global communities we serve. Our social responsibility efforts are an integral part of our day-to-day operations, inextricably linked to our core business. Through volunteerism, philanthropic investments, initiatives and strategic partnerships, we aim to inspire stakeholders to take action. Viacom’s social responsibility work is overseen by Viacommunity, Viacom’s social action umbrella, and driven by the Viacom Corporate Responsibility Council (VCRC), comprised of leaders across every brand and business.
13
Viacom educates, engages and empowers audiences around the world with a vast array of programs in the areas of healthy living, education, building inclusive societies and pioneering social change. A full list of and detailed information on each of our social responsibility initiatives is available at www.viacommunity.com. Following are just a few examples:
examples of our efforts:
Viacommunity Day, our global day of service, offers over 100 opportunities for thousands of employees across Viacom, in 25 countries, to join together to volunteer in our communities each year. From beautifying local parks to mentoring youth in schools to assembling kits for those in need and promoting many other types of volunteer activities, Viacommunity Day has long been a tradition for Viacom employees, celebrating its 22nd year in 2018.
In partnership with Viacom, Get Schooled leverages the power of pop culture to inspire and empower students to graduate from high school and succeed in college. Get Schooled partners with over 2,000 middle and high schools, and engages close to two million students, nationwide and has been recognized by Fast Company as a “Most Innovative Company.”
The VH1 Save The Music Foundation is a nonprofit organization dedicated to restoring instrumental music education programs in America’s public schools, and raising awareness about the importance of music as part of each child’s complete education. Founded in 1997, VH1 Save The Music has donated more than $56 million worth of new musical instruments to 2,100 public schools in 261 school districts around the country, impacting the lives of more than three million public school students.
Nickelodeon encourages kids to get up and get active on its annual Worldwide Day of Play by suspending programming for three hours in the afternoon across its platforms while thousands of local partners nationwide host activities focused on “just” playing. The Road to Worldwide Day of Play campaign, underway throughout each summer, travels to communities where kids are hometown heroes making play happen.
14
Net NeutralityChildren’s Programming In March 2015,Our business is subject to various regulations, both in the U.S. and abroad, applicable to children’s programming. Since 1990, federal legislation and rules of the U.S. Federal Communications Commission (the “FCC”) adopted “net neutrality” rules that, subject to certain exceptions, prohibit broadband Internet Service Providers (“ISPs”) from blocking lawful content, applications, services and devices and engaging in certain kinds of unreasonable practices, including some discriminatory behavior. The FCC also adopted enhanced "transparency" rules that require ISPs to disclose their network management practices. However, the FCC concluded that ISPs are not prohibited from taking action to address unlawful activity such as copyright theft (see more on copyright theft below). The FCC also declined to adopt net neutrality regulations applicable to Internet “edge providers” like Viacom. The rules follow a January 2014 decision by the United States Court of Appeals for the District of Columbia Circuit largely invalidating similar rules promulgated by the FCC in 2010. The FCC’s failure to prohibit all forms of broadband discrimination could affect the market for streaming content to consumers by increasing the cost for use of bandwidth, which could have a negative impact on the consumption of our content.Children’s ProgrammingSince 1990, federal legislation and FCC rules have limited the amount and content of commercial matter that may be shown on cable channels during programming designed for children 12 years of age and younger. Inyounger, and since 2006 the FCC amended its rules to limithas limited the display of certain commercial website addresses during children’s programming. SomeIn July 2018, the FCC initiated rulemaking to revise its children’s programming rules. We are participating in that process. In addition, some policymakers have sought limitations on food and beverage marketing in media popular with children and teens. In April 2011,For example, restrictions on the U.S. federal Interagency Working Group on Food Marketed to Children requested comment on proposed nutritional restrictions for foodtelevision advertising of foods high in fat, salt and beverage marketing directedsugar (“HFSS”) to children aged 15 and teens.under have been in place in the UK since 2007. The proposed guidelines were not finalized. In 2013, the White House hostedUK government is currently considering tighter controls, including a summitban on all HFSS advertising before 9:00 p.m. Various laws with similar objectives have also been enacted in Ireland, Turkey, Mexico, Chile, Peru, Taiwan and South Korea, and significant pressure for similar restrictions continues to encourage voluntary efforts to limit food marketing to children. Ifbe felt globally, most acutely in Australia, Brazil, Canada, Colombia, India, Slovenia, South Africa and France. The implementation of these or other similar guidelines are implemented by foodlimitations and beverage marketers, theyrestrictions could have a negative impact on our Media Networks advertising revenues, particularly for our networks with programming targeted tofor children and teens. OFCOM,Children’s PrivacyVariousIn addition, we are subject to other laws and regulations intended specifically to protect the interests of children, are applicable to our businesses, including measures designed to protect the privacy of minors online. The U.S. Children’s Online Privacy Protection Act (“COPPA”) limits the collection by operators of websites or online services of personal information online from children under 13 years of age. In addition to COPPA, the EU’s GDPR also limits our ability to process data from children under the age by operators of websites or online services. Effective July 1, 2013, the Federal Trade Commission adopted revisions to regulations under COPPA to further expand the scope of the regulations.16. We have been required to limit some functionality on our websites and apps as a result of these regulations. Such regulations also limitrestrict the types of advertising we are able to sell on these sites and apps and impose strict liability on us for certain actions of Viacom, advertisers and other third parties, which could affect advertising demand and pricing. State and federal policymakers are also considering regulatory and legislative methods to protect consumer privacy on the Internet, and these efforts have focused particular attention on children and teens.Program AccessCompliance with enhanced data protection laws requires additional resources and efforts on our part, and noncompliance with personal data protection regulations could result in increased regulatory enforcement and significant monetary fines.UnderEU Commission’s Digital Single Market Strategy
15
become subject to the program access rules, our flexibility to negotiate the most favorable terms available for our content and our ability to offer cable television operators exclusive programming could be adversely affected.Chinese market.
EU Commission’s Digital Single Market strategyOn May 6, 2015, the European Commission (the “EC”) published its Digital Single Market (DSM) strategy, which contains a broad range of high-level proposals designed to create a more complete EU-wide marketother companies for digital goods and services, several of which are likely to impact Viacom’s businesses. Among these proposals, the EC has stated its intention to introduce legislation to make as yet unspecified changes to EU copyright law to enable (i) portability of and (ii) cross-border access to paid-for online content while respecting the value of rights in the audiovisual sector. It is expected to publish legislative proposals before the end of 2015. In August 2015, the EC also launched a reviewpurposes of the Satelliteprogram access rules, and Cable Directive, which facilitatestherefore the cross-border clearancebusinesses and conduct of rights for satellite broadcasting and cable retransmission, to consider whetherCBS could have the same principles might be applied to online services. In September 2015, the EC published a consultation on the difficulties encountered by users and businesses when they access or provide information, and shop or sell, across borders in the EU, and stated its intention to prepare legislative proposals in the first halfeffect of 2016 to end ‘unjustified’ geo-blocking, which may involve changesmaking us subject to the EU e-Commercerules. If Viacom or Services Directives.
Restrictions on Film DistributionIn additionits programming agreements were to become subject to the regulations regarding territorial licensing inprogram access rules, our flexibility to negotiate the EU discussed above, numerous countries around the world impose restrictions on the numbermost favorable terms available for our content and nature of films that mayour ability to offer cable television operators exclusive programming could be distributed in that country. Such regulations in China have the greatest impact, as only 34 foreign films can be distributed annually on a revenue share basis based on box office performance. Those films are selected by relevant authorities in China.adversely affected.Annulment of the U.S. - EU Safe HarborOn October 6, 2015, the Court of Justice of the European Union (“CJEU”) invalidated the U.S. - EU Safe Harbor (“Safe Harbor”), a framework permitting the transfer of data from the EU to the U.S. for companies that comply with the framework’s requirements. The Safe Harbor framework is one of the mechanisms by which data may be transferred from the EU to the U.S. in compliance with the EU Data Protection Directive (the “Directive”) even though the EU asserts that U.S. law does not provide an adequate level of privacy protection under the Directive. Apart from the Safe Harbor, data transfers are also permitted if contractual arrangements between transferring parties include EU-specified model clauses, if proper consent has been obtained, or, for intra-corporate transfers, if appropriate binding corporate rules have been implemented and approved by the data protection authority of the applicable EU member state. Viacom was first certified under the Safe Harbor in 2011. The CJEU’s decision will affect the legal framework within which Viacom may transfer data from the EU to the U.S., requiring us to rely on alternative mechanisms including consent, model clauses or binding corporate rules.
16
ThroughOur Filmed Entertainment segment, through in-house, affiliated and third-party production service companies, our Filmed Entertainment division engages the services of writers, directors, performers, musicians and various crew members who are subject to certain industry-wide and/or specially negotiated collective bargaining agreements. The Alliance of Motion Picture and Television Producers is a multi-employer trade association, which, along with and on behalf of hundreds of member companies including Paramount Pictures, negotiates the industry-wide collective bargaining agreements with these parties. The agreements with the writers, directors and performers will expire in 2017, and agreements with the unions representing musicians and crew members employed in the U.S. and British Columbia, and with unions representing performers, directors and other covered classifications employed in British Columbia, will expire in 2017 and 2018. Negotiations are ongoing with the union representing the performers who are employed outside of British Columbia in Canada. Certain collective bargaining agreements that apply to specific companies have been successfully negotiated orin the past, and we expect will be negotiated as the need arises in the future.ThroughOur Media Networks segment, through in-house and third-party production service companies, in connection withengages for certain of our productions our Media Networks division engages the services of writers, directors, performers, musicians and various crew members who are subject to certain specially negotiated collective bargaining agreements or one-off letter agreements. Since these agreements are entered into on a per-channel or per-project basis, negotiations happenoccur on various agreements throughout the year. The collective bargaining agreements covering various crew members on certain of our Media Networks productions are due to expire December 31, 2015 and are currently in negotiation.FINANCIAL INFORMATION ABOUT SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONSFinancial and other information by reporting segment and revenues by geographic area for fiscal years 2015, 2014 and 2013 are set forth in Note 19 to our Consolidated Financial Statements.
17
TableInformation about each of Contentsour executive officers is set forth below.
Consumer acceptance of ourOur ability to maintain attractive brands and generate popular entertainment content, successful tentpole events and retailconsumer products, recreation and live events offerings isare key to the success of our business and our ability to generate revenues. The production and distribution of programming, motion picturesfilms and other entertainment content is inherently risky because the revenues we derive from various sources primarily depend on our content’s acceptance by the public, which is difficultability to predict. Consumer acceptancesatisfy consumer tastes and expectations in a consistent manner. The popularity of our content is affected by our ability to maintain or develop strong brand awareness and target key audiences, the quality and acceptanceattractiveness of competing entertainment content and the availability of alternative forms of entertainment and leisure time activities, including online, mobile and other offerings. Audience tastes change frequently and it is a challenge to anticipate what offerings will be successful at any point in time. We invest substantial capital in our content, including in the production of original content on our networks, in our films and in our theatrical releases,television production business, before learning the extent to which it will garner consumer acceptance. In addition, general economic conditions affect our audience’s acceptance of our content.critical success and popularity with consumers.Traditionally,
In our Media Networks business, our advertising revenues typically are a product of measured audience size and pricing, which reflect market conditions and measurement difficulties. Depending on the success of our programming at any given time, one or more of our cable networks can experience ratings fluctuations that negatively affect our advertising revenues. The use of new ratings technologies and measurements, and viewership on new platforms or devices that is not being measured, could have an impact on our program ratings. For example, while C-3, a current television industry ratings system, measures live commercial
18
viewing plus three days of DVR and video-on-demand playback, the growing viewership occurring on subsequent days of DVR and video-on-demand playback is excluded from C-3 ratings. Poor ratings can lead to a reduction in pricing and advertising spending. Low audience ratings can also negatively affect the affiliate fees we receive and/or limit a network’s distribution potential.Changes in Consumer Behavior Resulting from New Technologies and Distribution Platforms May Affect Our Viewership and Profitability in Unpredictable WaysTechnology and business models in our industry continue to evolve rapidly. Consumer behavior related to changes in content distribution and technological innovation affect our economic model and viewership in ways that are not entirely predictable.Consumers are increasingly viewing content on a time-delayed or on-demand basis from traditional distributors, from connected apps and websites and on a wide variety of screens, such as televisions, tablets, mobile phones and other devices. Time-shifting technologies that enable users to fast-forward or skip programming, including commercials, affect the attractiveness of our offerings to advertisers and could therefore adversely affect our revenues. Similarly, new advertising blocking technologies that enable consumers to circumvent online advertisements could also adversely affect our advertising revenues as they impact the attractiveness of our digital offerings to advertisers. In addition, the evolution of consumer preferences away from rental and purchase services towards subscription services may have an economic impact on our revenues that is not completely predictable.New technologies and distribution platforms are having other effects on the marketplace. Some distributors have taken steps to limit our direct access to consumers or taken positions that they have more expansive rights than we believe we have granted, which, if they prevail, could limit our revenue opportunities. All of these factors create uncertainty in the marketplace, and there can be no assurance that the strategies we develop to address them will be effective.Our Businesses Operate in Highly Competitive IndustriesCompanies in the cable network, motion picture and digital industries depend on audience acceptance of content, appeal to advertisers and solid distribution relationships. Competition for content, audiences, advertising and distribution is intense and comes from broadcast television, other cable networks (including our own), online and mobile properties, movie studios and independent film producers and distributors, other entertainment outlets and platforms, as well as from search, social networks, program guides and “second screen” applications. Competition also comes from pirated content.Our ability to compete successfully depends on a number of factors, including our ability to create or acquire high quality and popular programs and films, adapt to new technologies and distribution platforms, and achieve widespread distribution for our content. More content consumption options increase competition for viewers as well as for programming and creative talent, which can decrease our audience ratings, and therefore potentially our advertising revenues, as well as increase our costs. In addition, our competitors include market participants with interests in multiple media businesses that are often vertically integrated, whereas our Media Networks businesses generally rely on distribution relationships with third parties. As more cable and satellite operators, ISPs, other content distributors, aggregators and search providers create or acquire their own content, they may have significant competitive advantages, which could adversely affect our ability to negotiate favorable terms or otherwise compete effectively in the delivery marketplace. Our competitors could also have preferential access to important technologies, customer data or other competitive information. There can be no assurance that we will be able to compete successfully in the future against existing or potential competitors, or that competition will not have a material adverse effect on our business, financial condition or results of operations.Advertising Market Conditions Could Cause Our Revenues and Operating Results to Decline Significantly in Any Given Period or in Specific MarketsWe derive substantial revenues from the sale of advertising on a variety of platforms, and a decline in advertising expenditures could have a significant adverse effect on our revenues and operating results in any given period. The strength of the advertising market can also fluctuate in response to the economic prospects of specific advertisers or industries, advertisers’ current spending priorities and the economy in general, and this may adversely affect our advertising revenues. Natural and other disasters, acts of terrorism, political uncertainty or hostilities could lead to a reduction in advertising expenditures as a result of disrupted programming and services, uninterrupted news coverage and economic uncertainty. Our ability to generate advertising revenue is also dependent on demand for our content, the consumers in our targeted demographics, advertising rates and results observed by advertisers. In addition, theThe pricing and volume of advertising may be affected by shifts in spending toward online and mobile offerings from more traditional media, or toward new ways of purchasing advertising, such as
19
Advertising expendituresThese factors could have an adverse effect on our business, financial condition or results of operations.
Global Economic Conditions May Havebusiness and may have an Adverse Effect on Our BusinessesGlobal economic conditions affect a number of aspects of our businesses worldwide, in particular revenues in both domestic and international markets derived from advertising sales, theatrical releases, home entertainment sales, television licensing and sales of consumer products. Global economic conditions can impact the businesses of our partners who purchase advertisingadverse effect on our networks and reduce their spending on advertising.
20
An increase in content acquisition costsThese factors could have an adverse effect on our business, financial condition or results of operations.
The Loss of Affiliation Agreements, Renewal on Less Favorable Terms or Adverse Interpretations Could Cause Our Revenues to Decline in Any Given Period or in Specific MarketsWe are dependent upon our agreements with cable television, direct-to-home satellite television and telecommunications operators, subscription and advertising supported video-on-demand services, and other distributors of our programming and program services. We have agreements in place with the major cable and satellite distributors and several online content distributors, but there can be no assurance that these agreements will be renewed in the future on terms, including pricing, acceptable to us, or at all. While many consumers have a choice of distributors from which to access our content, the loss of carriage on the most widely available cable and satellite programming tiers could reduce the distribution of our programming and program services and decrease the potential audience for our programs, thereby negatively affecting our growth prospects
21
and revenues from advertising and affiliate fees. Further, the loss of favorable packaging and positioning opportunities with any distributor could reduce revenues from subscriber fees. In addition, as these affiliate agreements have grown in complexity, the number of disputes regarding the interpretation, and even validity, of the agreements has grown, resulting in greater uncertainty and, from time to time, litigation seeking to circumscribe enforcement of our rights or to seek damages under competition and other laws. For more information about one such lawsuit, see “Item 3. Legal Proceedings.”Consolidation among cable, satellite and telecommunications service providers and the development of alternative offerings for consumers could have an adverse effect on our revenue and profitabilityConsolidation among cable and satellite distributors and telecommunications service providers could give the largest operators considerable leverage and market power in their relationships with programmers. We currently have agreements in place with the major U.S. cable and satellite operators and continued consolidation could affect our ability to maximize the value of our content through those distributors. In addition, many of the countries and territories in which we distribute our networks also have a small number of dominant distributors. Continued consolidation within the industry could reduce the number of distributors that carry our programming, subject our affiliate fee revenue to greater volume discounts, and further increase the negotiating leverage of the cable and satellite television system operators, which could have an adverse effect on our financial condition or results of operations.In addition, in response to perceived consumer demand, distributors of programming and program services are continuing to develop alternative offerings for consumers. These alternative packages of networks are generally smaller than the traditional cable package, and some allow the consumer to customize its package of networks to a certain extent. Although our affiliation agreements effectively limit these alternative packages in a variety of ways, to the extent these alternative packages are widely accepted by consumers in lieu of traditional cable packages, we could experience a decline in subscribers to certain of our networks, which could lead to lower affiliate revenues and advertising revenues.Changes in U.S. or Foreign Communications Laws, Laws Affecting Intellectual Property Rights or Other Regulations May Have an Adverse Effect on Our BusinessOur program services and online, mobile and app properties are subject to a variety of laws and regulations, including those relating to intellectual property, content regulation, user privacy, data protection and consumer protection, among others. For example, there are various laws and regulations intended to protect the interests of children, including limits on the amount and content of advertising that may be shown during children’s programming and measures designed to protect the privacy of minors, which affect our Nickelodeon businesses in particular. In addition, the U.S. Congress, the FCC and foreign governments currently have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters that could directly or indirectly affect the operations or ownership of our media properties. For example, Canada recently adopted "pick-and-pay" regulations. If the U.S. were to demand that our programming services be offered on an “á la carte” or tiered basis, we could experience high costs, reduced distribution of our program services, perhaps significantly, and loss of viewers on some or all of our channels. Further, Congress has initiated hearings to consider significant changes in copyright law. Our businesses could be adversely affected by any such new laws and regulations, or the threat that additional laws or regulations may be forthcoming.In addition, the interpretation of existing laws by courts and regulators can have a significant effect on our business. Our businesses are also impacted by the laws and regulations of the foreign jurisdictions in which we, or our partners, operate, including quotas, tax regimes, currency restrictions and data protection regimes. We could incur substantial costs to comply with new laws and regulations or substantial penalties or other liabilities if we fail to comply. We could also be required to change or limit certain of our business practices, which could impact our ability to generate revenues. For example, the EU recently invalidated the U.S. - EU Safe Harbor framework for data transfer from the EU to the U.S. This decision will affect the legal framework within which we may transfer data from the EU to the U.S. and could have adverse effects on our business practices. Furthermore, laws in some non-U.S. jurisdictions differ in significant respects from those in the United States, and the enforcement of such laws can be inconsistent and unpredictable. This could impact our ability to expand our operations and undertake activities that we believe are beneficial to our business.We Face Continually Evolving Cybersecurity and Similar Risks, Which Could Result in the Disclosure of Confidential Information, Disruption of Our Programming and Motion Picture Services, Damage to Our Brands and Reputation, Legal Exposure and Financial LossesOur online, mobile and app offerings, as well as our internal and certain partners’ systems, involve the storage and transmission of our and our users’ proprietary and personal information, and we and our partners rely on various technology systems in
22
connection with the production and distribution of our programming and motion pictures. Although we monitor our security measures regularly, they may be breached due to employee error, computer malware, viruses, hacking and phishing attacks, natural or other disasters, terrorist attacks, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees or users to disclose sensitive or confidential information in order to gain access to our data or our users’ data. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Moreover, the development and maintenance of these preventative measures is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. In addition, we provide confidential, proprietary and personal information to third parties when it is necessary to pursue business objectives. While we obtain assurances that these third parties will protect this information and, where appropriate, monitor the protections employed by these third parties, there is a risk the confidentiality of data held by third parties may be compromised. Any such breach or unauthorized access could result in a loss of our or our users’ proprietary information, a disruption of our services or a reduction of the revenues we are able to generate from such services, damage to our brands and reputation, a loss of confidence in the security of our offerings and services, and significant legal and financial exposure, including from regulatory or consumer actions related to consumer data collection and other data privacy concerns, each of which could potentially have an adverse effect on our business and operating results.We Could Be Adversely Affected by Strikes and Other Union ActivityWe and our suppliers engage the services of writers, directors, actors and other talent, trade employees and others who are subject to collective bargaining agreements. Some of our collective bargaining agreements are industry-wide agreements, and we may lack practical control over the negotiations and terms of the agreements. In addition, any labor disputes may disrupt our operations and reduce our revenues, and we may not be able to negotiate favorable terms for a renewal, which could increase our costs.The Loss of Key Talent Could Disrupt Our Business and Adversely Affect Our RevenuesOur business depends upon the continued efforts, abilities and expertise of not only our corporate and divisional executive teams, but also the various creative talent and entertainment personalities with whom we work. For example, we employ or contract with several entertainment personalities with loyal audiences and we produce motion pictures with highly regarded directors, producers, writers, actors and other talent. These individuals are important to achieving the success of our programs, motion pictures and other content. There can be no assurance that these individuals will remain with us or will retain their current appeal, or that the costs associated with retaining this and new talent will be reasonable. If we fail to retain these individuals on current terms or if our entertainment personalities lose their current appeal or we fail to attract new talent, our revenues and profitability could be adversely affected.International Political and Economic Risks Could Harm Our Financial ConditionOur businesses operate and have customers and partners worldwide, and we are focused on expanding our international operations in key markets, some of which are emerging markets. Inherent risks of doing business in international markets include, among other risks, changes in the economic and regulatory environment, export and market access restrictions, censorship, restrictions on foreign ownership or investment, currency exchange controls and/or fluctuations, regulations regarding repatriation of profits, taxation rules and procedures, tariffs or other trade barriers, permit requirements, longer payment cycles, corruption and, in some markets, increased risk of political instability, conflict and sanctions preventing us from accessing those markets. In particular, foreign currency fluctuations against the U.S. Dollar affect our results both positively and negatively, which may cause results to fluctuate. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased, which could have an adverse effect on our results of operations and net asset balances. There is no assurance that downward trending currencies will rebound or that stable currencies will remain unchanged in any period or for any specific market. Furthermore, some foreign markets where we and our partners operate may have weaker economic conditions than the United States. For example, certain European countries have experienced significant economic downturns and related political turmoil in recent years and our operations in those regions could be significantly impacted by, among other things, reduced sales of our retail products and sharp foreign exchange movements. We also may incur substantial costs as a result of changes in the existing economic or political environment in the regions where we do business, including the imposition of new restrictions and sanctions. In addition, acts of terrorism or other hostilities, or other financial, political, economic or other uncertainties, could lead to a reduction in revenue or loss of investment, which could adversely affect our business, financial condition or results of operations.
23
We Could be Subject to Material Liabilities as a Result of Changes in Tax Laws, Regulations and PoliciesWe are subject to taxation in the U.S. and numerous international jurisdictions. Our tax rates are impacted by the tax laws, regulations and policies in federal, state and local and international territories where our businesses operate, and may be subject to significant change. In addition, our tax returns are routinely audited and litigation or settlements may occur. Such changes, audit settlements or litigation may result in the recognition of an additional charge to our income tax provision in the period and may adversely affect our effective income tax rate or cash payments and may therefore affect our operating results, cash flows and financial condition.The Failure, Destruction and/or Breach of Satellites and Facilities that We Depend Upon to Distribute Our Programming Could Adversely Affect Our Business and Results of OperationsWe use satellite systems to transmit our program services to cable television operators and other distributors worldwide. The distribution facilities include uplinks, communications satellites and downlinks. Notwithstanding certain back-up and redundant systems, transmissions may be disrupted as a result of local events, such as extreme weather, that impair on-ground uplinks or downlinks, or as a result of an impairment of a satellite. Currently, there are a limited number of communications satellites available for the transmission of programming. If a disruption occurs, we may not be able to secure alternate distribution facilities in a timely manner. Failure to do so could have a material adverse effect on our business and results of operations. There can be no assurance that such failure or breach would not have an adverse effect on our financial condition.Our Obligations Related to Guarantees, Litigation and Joint Ventures Could Adversely Impact Our Financial ConditionWe have both recorded and potential liabilities and costs related to discontinued operations and former businesses, including, among other things, potential liabilities to landlords if Famous Players Inc. defaults on certain theater leases. We have also made certain investments in joint ventures and have future funding obligations, which may not be recouped until well after our initial investment, if at all. We are also involved in pending and threatened legal proceedings from time to time, the outcome of which is inherently uncertain and difficult to predict. It is uncertain at what point any of these or new liabilities may affect us, and there can be no assurance that our reserves are sufficient to cover these liabilities in their entirety or any one of these liabilities when it becomes due. Therefore, there can be no assurance that these liabilities will not have an adverse effect on our financial condition.Mr. Redstone,National Amusements, directly and indirectly, is the controlling stockholder of both Viacom and CBS. 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 NAI, serves as our Executive Chairman and Founder.National Amusements, through the Sumner M. Redstone National Amusements Trust (the “SMR Trust”), which owns shares in National Amusements representing 80% of the 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, is the President and a director of NAI and serves as the non-executive Vice Chair of ourViacom’s Board of Directors. Philippe Dauman, ourDirectors, the non-executive Vice Chair of CBS’s board of directors, and the President and Chief Executive Officer, is a directormember of NAI, and George Abrams, onethe Board of our directors, is a directorDirectors of NAI. NAI also controls CBS Corporation, withNational Amusements. The shares of National Amusements held by the SMR Trust are voted solely by Mr. Redstone servinguntil such time as its Executive Chairman and Founder andhis incapacity or death. Upon Mr. Redstone’s incapacity or death, Ms. Redstone servingwill also become a trustee of the SMR Trust and the shares of National Amusements held by the SMR Trust will be voted by the trustees of the SMR Trust. The current trustees include Mr. Redstone and David R. Andelman, both of whom are also members of the Board of Directors of National Amusements. In addition, Mr. Redstone serves as its non-executive Vice Chair. Frederic Salerno, oneChairman Emeritus of our directors, is also a director of CBS Corporation.CBS.
24
TableOur Certificate of ContentsIncorporation Could Prevent Us from Benefiting from Corporate Opportunities that Might Otherwise Have Been Available to Us
We, NAIOur certificate of incorporation and the certificate of incorporation of CBS both contain provisions related to corporate opportunities that may be of interest to both us and to CBS. Our certificate of incorporation provides that in the event that a director, officer or controlling stockholder of Viacom who is also a director, officer or controlling stockholder of CBS acquires knowledge of a potential corporate opportunity for both Viacom and CBS, Corporation,such director, officer or controlling stockholder may present such opportunity to Viacom or CBS or both, as such director, officer or controlling stockholder deems appropriate in his or her sole discretion, and that by doing so such person will have satisfied his or her fiduciary duties, and shall not be liable, to Viacom or its stockholders. In addition, Viacom’s certificate of incorporation provides that Viacom renounces any interest in any such opportunity presented to CBS. These provisions create the possibility that CBS could have access to corporate opportunities from which Viacom could benefit in addition to, or instead of, CBS, which could have an adverse effect on our business, financial condition or results of operations.Viacom Media Networks
We have entered into a 12-year lease for approximately 180,000 square feet of office space at Columbia Square, 1575 North Gower Street, Los Angeles, California. Upon expected occupancy in late 2016, this facility will serve as the West Coast Headquarters for VMN and BET and will replace the current Santa Monica facilities.owned land.BET's headquarters at One BET Plaza in Washington, D.C. containsInternationally, we occupy approximately 192,000 square feet of office and studio space, the majority of which is leased pursuant to ground leases that expire in 2024 (with renewal options for an additional 35 years), and the balance of which is owned.
25
Internationally, VIMN occupies approximately 126,000140,000 square feet of space at itsour owned and leased Hawley Crescent facilities in London, and leasesTelefe occupies approximately 84,000496,000 square feet of office, studio and production space, transmission facilities and for other ancillary uses at its owned and leased facilities in Buenos Aires.Litigation is inherently uncertain and always difficult to predict. However, based on our understanding and evaluation of the relevant facts and circumstances, we believe that the legal matters described below and other litigation to which we are a party are not likely, in the aggregate, to have a material adverse effect on our results of continuing operations, financial position or operating cash flows.None.In July 2015, the Directorate-General for Competition (“DG Comp”) of the EC issued a Statement of Objections (the “SO”) to the six major Hollywood film studios, including Paramount Pictures, 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 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 are 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. Paramount has responded to the SO. If the SO directed at Paramount is not closed or resolved by settlement and the EC decides that violations have in fact occurred, it has the power to impose fines. Any such decision by the EC could be subject to judicial review in the EU’s General Court and, thereafter, the CJEU. The full process, including appeals, could last several years. We believe that Paramount’s licensing practices in the EU are consistent with the region’s competition and other rules, and the objections presented by the EC are without merit. We will vigorously defend against the claims made by the EC.On November 5, 2015, Robert J. Casey, II, a Viacom shareholder, commenced a shareholder derivative action in the Court of Chancery of the State of Delaware naming, as defendants, all of the members of our Board of Directors, our Chief Financial Officer and our Controller. The complaint alleged breaches of fiduciary duties and unjust enrichment in connection with (i) our decision to recognize a pre-tax charge in the second quarter of fiscal 2015, reflecting the impact of write-downs of underperforming programming, costs associated with workforce reductions and the accelerated amortization of programming expenses, as we publicly announced on April 6, 2015, (ii) our decision to temporarily pause our stock repurchase program in order to stay within our target leverage ratio, also as publicly announced on April 6, 2015, and (iii) the matters relating to the European Statement of Objections, as discussed above. The complaint was filed following communication to Mr. Casey’s counsel that the Board unanimously determined not to authorize commencement of a civil action against members of management in connection with the above matters, as requested by Mr. Casey’s counsel in previous demand letters. We believe the complaint is meritless and intend to oppose the action vigorously on behalf of the Board members and the named officer defendants.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. On October 16, 2015, Cablevision and Viacom announced that the litigation had been settled.
Revenue from the licensing of film and television exhibition rights is recognized upon availability for airing by the licensee and will fluctuate depending on the number and mix of available titles in any given territory.
Licensing revenues in fiscal year 2018 were generated from licensing of films, includingThe Cloverfield Paradox, Transformers: The Last Knight, Mission Impossible: Rogue Nation, Daddy’s Home 2, Daddy’s Home and Baywatch, and from distribution of Paramount Television titles, including Jack Ryan, 13 Reasons Why, The Alienist, Shooter and Berlin Station.
Ancillary Revenues
Paramount generates ancillary revenues by providing production and facilities services to third parties, primarily at Paramount’s studio lot. Paramount also generates ancillary revenues by licensing its brands for consumer products, themed restaurants, hotels and resorts, live stage plays, film clips and theme parks and other location-based entertainment projects.
Filmed Entertainment Competition
Our Filmed Entertainment segment competes for audiences for its motion pictures, television programming and other entertainment content with the motion pictures and content released by other major motion picture studios, independent film producers and television producers, as well as with other forms of entertainment and consumer spending outlets. Oursegment’s competitive position primarily depends on the amount and quality of the content produced,it produces, its distribution and marketing success and public response. It competes for audiences for its films, television programming and other entertainment content with releases by other major film studios, television producers and OTT services. It also competes with other forms of entertainment and consumer spending outlets. We also compete for creative talent, including producers, actors, directors and writers, and scripts for motion pictures,new film and television projects, all of which are essential to our success. Our motion picturefilm brands also compete with studios and other producers of entertainment content for distribution of motion pictures through the various distribution windows (such as televisionon third-party platforms. Competition from these sources may affect our revenues and home video) and on digital platforms.costs.
SOCIAL RESPONSIBILITY
 | |||
 | ||
 | ||
 | ||
 | ||
 | ||
 | ||
 | ||
 | ||
 | ||
  Paramount has a long and proud tradition of giving back with a corporate social responsibility program focused on four key initiatives: supporting public education; protecting the environment; combating HIV/AIDS; and promoting volunteerism. By offering employee engagement opportunities, coupled with financial and in-kind contributions, Paramount supports numerous local, national, and global non-profit organizations. Kindergarten to Cap & Gown - Paramount’s signature education program - mentors students through their educational experience, targeting four partner schools in Paramount’s Los Angeles neighborhood.  Talent for Good, our skills-based employee volunteering program, leverages the knowledge and power of Viacom’s workforce to assist organizations striving to impact social change. In partnership with Catchafire (a nonprofit skills-based volunteer matching service), the program offers employees the opportunity to hone their skills and forge lasting relationships both across Viacom and with local organizations, while giving back to worthy causes. To date, Talent for Good has engaged more than 700 Viacom employees domestically and assisted many nonprofit organizations across the U.S.  In August 2018, Paramount Network launched its first-ever Stories Matter - Storytelling Lab initiative, which aims to install filmmaking and editing equipment in schools across underrepresented communities in the U.S. Paramount Network plans to bring the best of the Storytelling Lab stories to its audiences, online and on television, to amplify these untold stories.  VIMN’s multi-award-winning MTV Staying Alive Foundation engages in fighting the stigma, spread and threat of the HIV and AIDS epidemic globally by creating engaging media content such as MTV Shuga and funding youth-led, grassroots prevention projects.  MTV’s Emmy Award-winning “Look Different” campaign helps America’s youth better recognize and challenge hidden racial, gender and anti-LGBT biases, empowering them to create a more equal future. | ||
REGULATION AND PROTECTION OF OUR INTELLECTUAL PROPERTY
We are, fundamentally, a media content company, so the trademark, copyright, patent and other intellectual property laws that protect our brands and entertainment content are of paramount importance to us. See the section entitled “INTELLECTUAL PROPERTY” below for more information on our brands. Our businesses and the intellectual property they create or acquire are subject to and affected by laws and regulations of U.S. federal, state and local governmental authorities, and our international rights and operations are subject toas well as laws and regulations of local countries other than the U.S. and pan-national bodies such as the European Union
(“EU”). The laws and regulations affecting our businesses are constantly subject to change as are the protections that those laws and regulations afford us. The discussion below doesdescribes certain, but not describe all, present and proposed laws and regulations affecting our businesses and other factors could arise or increase in importance.businesses.
Certain Regulations Affecting Our Business
Global Data Protection Laws and Children’s Privacy Laws
A number of data protection laws impact, or may impact, the independent regulatormanner in which Viacom collects, processes and competition authoritytransfers personal data. Most notably, the EU’s General Data Protection Regulation (“GDPR”), which went into effect in May 2018, expands data protection compliance obligations and authorizes significantly increased fines for noncompliance, requiring additional compliance resources and efforts on our part. Further, a number of other regions where we do business, including the U.S., Asia, and Latin America, have enacted or are considering new data protection regulations that may impact our business activities that involve the processing of personal data. In addition, some of the mechanisms Viacom relies upon for the United Kingdom (UK) communications industries, has restricted television advertising for foods and drinks high in fat, salt and sugar in and around programmingtransfer of significant appealpersonal data from the EU to children and teens ages 15 years and under,the U.S., such as utilizing standard contractual clauses approved by the European Commission (“EC”), have been subject to legal challenges, and the UK governmentEU-U.S. Privacy Shield framework, which permits the transfer of personal data from the EU to the U.S., is currently considering further possible restrictions. Other governmentssubject to review by the relevant EU and U.S. authorities. The outcomes of these proceedings are considering or have already implemented restrictions similaruncertain and may require changes to those in the UK currently, including Ireland, Peru, Chile, Brazil, Mexico, Singapore and Australia.our international data transfer mechanisms.
The EC continues to pursue its Digital Single Market (“DSM”) Strategy, which contains a broad range of proposals designed to create a more complete EU-wide market for digital goods and services, several of which are likely to impact Viacom’s businesses. The territorial nature of copyright has been identified by the U.S. Communications ActEC as one of 1934, as amended, vertically integrated cable programmersthe main barriers to a single European market, and there has been strong pressure from politicians to undermine content owners’ commercial freedom to distribute exclusively on a territorial basis.
The EC published DSM-related legislative proposals in each of May 2016 and September 2016. Several of these proposals are generally prohibitedof particular relevance to Viacom’s business practices in Europe given their impact on content owners’ exclusive control over distribution decisions for film and television productions. In June 2017, the Portability Regulation went into effect, requiring
online content providers to ensure that their subscribers can access content while temporarily in another EU country. Another regulation currently under consideration by the EU Parliament and Council seeks to extend the EU Satellite and Cable Directive to permit EU-wide licenses for rights included in broadcasters’ online ancillary services, with the aim of making it easier for platforms to respond to passive sales requests for those services from entering into exclusive distribution arrangements or offering different prices, terms or conditionsother EU countries without contravening copyright law. A further proposal would entitle talent to competing multichannel video programming distributors unlessseek additional non-contractual compensation through the differentialcourts for highly-successful works, which would raise our operating expenses.
The EC has adopted a number of reforms to the Audio-Visual Media Services Directive, which sets content and advertising rules for European broadcasters. The revised Directive is justifiedexpected to become effective at the end of 2018, followed by a 21-month implementation period for states to adopt the regulations at the national level. A liberalization of advertising minutage restrictions on linear channels could cause shifts of advertising spending between broadcasters with an adverse impact on some of our international channels in certain permissible factors set forthEU countries. In addition, changes to the operation of the ‘country of origin’ rule, which allows pan-EU broadcasters to be regulated in a single EU jurisdiction, could increase scrutiny of our licensing location decisions, and allow countries to impose levies on services licensed outside of their jurisdiction.
Restrictions on Content Distribution
In addition to the regulations regarding territorial licensing in the EU discussed above, numerous countries around the world impose restrictions on the amount and nature of content that may be distributed in that country.
Such regulations promulgatedin China have the greatest impact, as only 34 foreign films, as selected by relevant authorities in China, may be distributed annually on a revenue share basis based on box office performance. In addition, in September 2018, China’s film and television regulator, the FCC. Our wholly-owned program services are not currently subjectNational Administration of TV and Radio, published proposed regulations that would severely limit the streaming and broadcasting of foreign film and television content in China, further reducing foreign access to the program access rules. Because we and CBS Corporation are under common control, each company’s businesses, as well as the businesses of any other commonly controlled company, may be attributable to the other companies for purposes of the program access rules, and therefore the businesses and conduct of CBS Corporation could have the effect of making us subject to the rules. If we were to
UK Regulations Affecting Channel 5 Business
As a public service broadcaster (“PSB”)PSB in the UK, Channel 5 is subject to certain OFCOM broadcasting regulations that impose detailed obligations including mandating the proportion of total programming and programming during peak hours that must be original productions; the hours devoted to news and current affairs; and the proportion of commissioned programming that must be made by independent producers. Channel 5 has also undertaken to air a minimumcertain amount of UK-originated children’s programming. Like all UK broadcasters, Channel 5 has tomust abide by the OFCOM Broadcasting Code, which contains content and scheduling regulations surrounding such issues asrelating to harm and offense, protection of individuals under the age of 18, privacy, fairness and product placement;placement, and by OFCOM’s Code on the Scheduling of Television Advertising, which contains regulations surroundingon the amount and scheduling of advertising. In addition,
Program Access
Under the U.S. Communications Act of 1934, as a PSB, Channel 5 has faced threats relatedamended, vertically integrated cable programmers are generally prohibited from entering into exclusive distribution arrangements or offering different prices, terms or conditions to competing MVPDs unless the differential is justified by certain permissible factors set forth in the regulations promulgated by the FCC. Our wholly-owned program services are not currently subject to these program access rules. Because we and CBS are under common control, each company’s businesses, as well as the businesses of any other commonly controlled company, may be attributable to the unauthorized Internet re-transmission of linear programming, but the applicable law in this area remains unsettled.
Protecting our Content from Copyright Theft
The unauthorized reproduction, distribution, exhibition or exhibitionother exploitation of copyrighted material interferes with the market for copyrighted works and disrupts our ability to create, distribute and monetize our content. The theft of motion pictures,films, television and other entertainment content presents a significant challenge to our industry, and we take a number of steps to address this concern. Where possible, we make use of technological protection tools, such as encryption, to protect our content. We are actively engaged in enforcement and other activities to protect our intellectual property, includingincluding: monitoring online destinations that distribute or otherwise infringe our content and sending takedown or cease and desist notices in appropriate circumstances; using filtering technologies employed by some user-generated content sites; and pursuing litigation and referrals to law enforcement againstwith respect to websites and other online servicesplatforms that distribute or facilitate the distribution and exploitation of
our content without authorization. WeThrough partnerships with various organizations, we also are actively engagedinvolved in educational outreach to the creative community, labor unions, state and federal government officials and other stake holders in an effort to marshal greater resources to combat copyright theft. Additionally, we participate in various industry-wide enforcement initiatives, public relations programs and legislative activityactivities on a worldwide basis. We have had notable success with site-blocking efforts in Europe and Asia, which can be effective in diverting consumers from piracy platforms to legitimate platforms.
Notwithstanding these efforts and the many legal protections that exist to combat piracy, the proliferation of content theft and technological tools with which to carry it out continue to escalate.be a challenge. The failure to obtainmaintain enhanced legal protections and enforcement tools and to update those tools as threats evolve could make it more difficult for us to adequately protect our intellectual property, which could negatively impact its value and further increase the costs of enforcing our rights as we continue to expend substantial resources to protect our content.
INTELLECTUAL PROPERTY
We create, own and distribute intellectual property worldwide. It is our practice to protect our motion pictures,films, programs, content, brands, formats, characters, games, publications and other original and acquired works, and ancillary goods and services. The following brands, logos, trade names, trademarks and related trademark families are a few of those strongly identified with the product lines they represent and are significant assets of the Company: Viacom®, Comedy Central®, MTV®, MTV2®, VH1®, VH1 Classic™, SPIKE®, CMT®, Logo®, mtvU®, Palladia®, Nickelodeon®, Nick Jr.®, TV LandMTV®, TeenNickBET®, NicktoonsComedy Central®, Paramount Network®, Nick at Nite®, BETNicktoons®, TeenNick®, MTV2®, MTV Classic®, VH1®, CMT®, TV Land®, Logo®, Channel 5® (UK), Milkshake!TM, Telefe® (Argentina), Colors®, SPIKE®, Paramount Channel™, MTV LiveTM, BET Networks®, CENTRICBET Her®TM, BET Gospel®, BET Hip Hop®, BET.com®, BET Mobile®, Channel 5® (UK), Paramount Channel™, Tr3s®, VIVA™, Paramount Pictures®, Paramount Players™, Paramount Animation®, Paramount Television™, Paramount Vantage®, Paramount Classics®, Paramount Animation®, Insurge Pictures®, MTV Films®, Nickelodeon Movies™, Paramount Television™SLIME®, AwesomenessTV®, WhoSay®, VidCon®, Viacom Digital Studios™, Viacom Vantage™, Viacom Velocity™ and other domestic and international program services and digital properties.
EMPLOYEES AND LABOR MATTERS
As of September 30, 2015,2018, we employed approximately 9,20010,400 full-time and part-time employees worldwide, and had approximately 490960 additional project-based staff on our payroll. We also use many other temporary employees in the ordinary course of our business.
Any labor dispute with the labor organizations that represent any of these parties could disrupt our operations and reduce our revenues.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy and information statements and other information with the Securities and Exchange Commission (the “SEC”). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the SEC pursuant to the Securities Exchange Act of 1934, as amended, will be available free of charge on our website at www.viacom.com (under “Investor Relations”) as soon as reasonably practicable after the reports are filed with the SEC. These documents are also available on the SEC’s website at www.sec.gov.www.sec.gov.
OUR EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each person who serves as a Viacom executive officer.
| Name | Age | Position |
| Robert M. Bakish | 54 | President and Chief Executive Officer; Director |
| Christa A. D’Alimonte | 49 | Executive Vice President, General Counsel and Secretary |
| Wade Davis | 46 | Executive Vice President, Chief Financial Officer |
| DeDe Lea | 54 | Executive Vice President, Global Government Affairs |
| Robert M. Bakish | Mr. Bakish has been our President and Chief Executive Officer and a member of our Board of Directors since December 2016, having served as Acting President and Chief Executive Officer beginning November 2016. Mr. Bakish joined the predecessor of Viacom in 1997 and has held leadership positions throughout the organization, including as President and Chief Executive Officer of Viacom International Media Networks and its predecessor company, MTV Networks International (“MTVNI”), from 2007 to 2016; President of MTVNI; Executive Vice President, Operations and Viacom Enterprises; Executive Vice President and Chief Operating Officer, MTV Networks Advertising Sales; and Senior Vice President, Planning, Development and Technology. Before joining Viacom’s predecessor, Mr. Bakish was a partner with Booz Allen Hamilton in its Media and Entertainment practice. Mr. Bakish has served as a director of Avid Technology, Inc. since 2009. |
| Christa A. D’Alimonte | Ms. D’Alimonte has been our Executive Vice President, General Counsel and Secretary since April 2017. Prior to that, she was Senior Vice President, Deputy General Counsel and Assistant Secretary beginning November 2012. Prior to joining Viacom, Ms. D’Alimonte was a partner of Shearman & Sterling LLP, where she was Deputy Practice Group Leader of the Firm’s Global Mergers & Acquisitions group. She first joined Shearman & Sterling in 1993 and became a partner in 2001. |
| Wade Davis | Mr. Davis has been our Executive Vice President, Chief Financial Officer since November 2012. Prior to that, he served as Executive Vice President, Strategy and Corporate Development beginning August 2009, as Senior Vice President, Mergers & Acquisitions and Strategic Planning from January 2007 to August 2009 and as Senior Vice President of Mergers & Acquisitions beginning January 2006. Prior to joining Viacom, Mr. Davis was an investment banker in the technology and media sectors for more than a decade. |
| DeDe Lea | Ms. Lea has been our Executive Vice President, Global Government Affairs since January 2013, having previously served as Executive Vice President, Government Relations beginning November 2005. Prior to that, she was Senior Vice President, Government Relations of the predecessor of Viacom beginning September 2005. Prior to that, she served as Vice President of Government Affairs at Belo Corp. from 2004 to 2005 and as Vice President, Government Affairs of Viacom’s predecessor from 1997 to 2004. |
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” contains both historical and forward-looking statements. All statements that are not statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements reflect our current expectations concerning future results, objectives, plans and goals, and involve known and unknown risks, uncertainties and other factors that are difficult to predict and which may cause future results, performance or achievements to differ. These risks, uncertainties and other factors are discussed in “Item 1A. Risk Factors” below. Other risks, or updates to the risks discussed below, may be described in our news releases and filings with the SEC, including but not limited to our reports on Form 10-Q and Form 8-K. The forward-looking statements included in this document are made only as of the date of this document, and we do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.
Item 1A. Risk Factors.
A wide range of risks may affect our business, and financial condition andor results of operations, now and in the future. We consider the risks described below to be the most significant. There may be other currently unknown or unpredictable economic, business, competitive, regulatory or other factors that could have material adverse effects on our future results.business, financial condition or results of operations.
Changes in Consumer Behavior, as Well as New Technologies, Distribution Platforms and Packaging, May Negatively Affect Our Business, Financial Condition or Results of Operations
Technology and business models in our industry continue to evolve rapidly, and new distribution platforms, as well as increased competition from new entrants and emerging technologies, have added to the complexity of maintaining predictable revenue streams.
Technological advancements have driven changes in consumer behavior and empowered consumers to seek more control over when, where and how they consume content and have affected the options available to advertisers for reaching their target audiences. For example, the evolution of consumer preferences away from linear pay television, away from physical towards digital services, and away from rental and purchased services towards subscription services, and the substantial increase in availability of programming without advertising or adequate methodologies for audience measurement, may continue to have an adverse effect on our business, financial condition or results of operations. In addition, consumers are increasingly using time-shifting and advertising-blocking technologies that enable users to fast-forward or circumvent advertisements, and substantial use of these technologies could impact the attractiveness of our programming to advertisers, adversely affecting our advertising revenue.
In response to perceived consumer demand, distributors of programming and program services are continuing to develop alternative offerings for consumers, including smaller, often customizable programming packages known as “skinny bundles,” which are delivered at lower costs than traditional offerings; SVOD services; ad-supported, free video-on-demand services; and original programming hosted on social media platforms. If these alternative offerings continue to gain traction and our networks and brands are not included in those packages and services, or if consumers increasingly favor alternative offerings over traditional cable subscriptions, we may experience a decline in viewership and ultimately demand for our programming, which could lead to lower affiliate and advertising revenues. These changing distribution models may also impact our ability to negotiate carriage deals on terms favorable to us, thereby having an adverse effect on our business, financial condition or results of operations.
In order to respond to these developments, we regularly consider and from time to time implement changes to our business models and strategies to remain competitive, and there can be no assurance that we will successfully anticipate or respond to these developments, that we will not experience disruption as we respond to the developments, or that the business models we develop will be as profitable as our current business models. Our inability to protect and exploit the value of our content, while adapting to and developing new technology and business models to take advantage of advancements in technology and the latest consumer preferences, could have an adverse effect on our business, financial condition or results of operations.
Our Businesses Operate in an Industry That Is Highly Competitive and Swiftly Consolidating
Companies in the television programming, film, digital, consumer products, live events and recreation businesses depend on the popularity of content and other offerings, appeal to advertisers and widespread distribution of their content. We compete with other media companies to attract creative talent and produce high quality content, and for distribution on a variety of third-party platforms to draw large audiences. Competition for talent, content, audiences, advertising and distribution is intense and comes
from broadcast television, other cable networks (including our own), OTT distributors, social media platforms, film studios and independent film producers and distributors, consumer products companies and other entertainment outlets and platforms, as well as from search, social networks, program guides and “second screen” applications. Further, competition from additional entrants into the market for development and production of original programming, such as Apple, Facebook, YouTube, Netflix, Amazon and Hulu, continues to increase.
Our Successability to obtain widespread distribution on favorable terms, which contributes to our ability to attract audiences and, in turn, advertisers, is Dependent upon Public Acceptanceadversely affected by the consolidation of programmers, distributors (including telecom companies) and television service providers. This consolidation reduces the number of distributors with whom we negotiate and increases the negotiating leverage and market power of the combined companies. In addition, consolidation in the film business may adversely affect the distribution of our films on various platforms.
In addition, our competitors include market participants with interests in multiple media businesses that are often vertically integrated, whereas our Media Networks business generally relies on distribution relationships with third parties. As more cable and satellite operators, Internet service providers, telecom companies and other content distributors, aggregators and search providers create or acquire their own content, they may have significant competitive advantages, which could adversely affect our ability to negotiate favorable terms for distribution or otherwise compete effectively in the delivery marketplace. Our competitors could also have preferential access to important technologies, customer data or other competitive information, as well as significant financial resources.
This competition and consolidation could result in lower ratings and advertising, lower affiliate and other revenues, and increased content costs and promotional and other expenses, negatively affecting revenue and profitability for us. There can be no assurance that we will be able to compete successfully in the future against existing or new competitors, or that competition or consolidation in the marketplace will not have an adverse effect on our business, financial condition or results of operations.
Our Success Depends on Our Ability to Maintain Attractive Brands and Produce Popular Programming, Motion PicturesFilms and Other Entertainment Content, which isWhich Is Difficult to Predict
In our Media Networks business, consumer acceptancethe popularity of our brands and programming has a significant impact on the revenues we are able to generate from advertising, affiliate fees, consumer products, home entertainment and other licensing activities. Our ability to successfully predict and adapt to changing consumer tastes and preferences outside the U.S. also impacts our ability to expand our presence internationally.
In our Filmed Entertainment business, the theatrical performance of a motion picturefilm affects not only the theatrical revenues we receive but also those from other distribution channels, such as home entertainment, television, various other platforms and apps and licensed consumer products.
As a result, a lack of consumer acceptancepopularity of our offerings could have a materialan adverse effect on our business, financial condition or results of operations in a particular period or over a longer term.
Our Advertising Revenues Have Been and May Continue to Be Adversely Impacted By Declines in Linear Television Viewing, Deficiencies in Audience Measurement and Advertising Market Conditions
We derive substantial revenues from the sale of advertising on Various Platforms Adversely Impacts Our Program Ratingsa variety of platforms, and Adversely Affects Our Advertising Revenuesa decline in advertising revenues could have a significant adverse effect on our business, financial condition or results of operations in any given period.
Consumers are increasingly turning to online sources for viewing and Affiliate Feespurchasing content, and an increasing number of companies offer SVOD services, including some that offer exclusive high-quality original video programming and programming delivered directly to consumers over the Internet. The increasing number of entertainment choices available to consumers has intensified audience fragmentation and reduced the viewing of content through traditional and virtual multichannel video providers, which has caused, and likely will continue to cause, audience ratings declines for our cable networks and may adversely affect the pricing and volume of advertising.
In addition, advertising sales are largely dependent on audience measurement, and the results of audience measurement techniques can vary for a variety of reasons, including the platforms on which viewing is measured and variations in the employed statistical sampling methods.methods used. While Nielsen’s statistical sampling method is the primary measurement technique used in our television advertising sales, we measure and monetize our campaign reach and frequency on and across digital platforms based on other third-party data as well as first-party data using a variety of methods, including the number of impressions served and demographics, as well as upon Nielsen information.demographics. In addition, multi-platform campaign verification remains in its infancy, and viewership on tablets, smartphones and other mobile devices, which is growingcontinues to grow rapidly, still is not measured by any one consistently applied method. These variations and changes could have a significant effect on our advertising revenues.
through automated purchasing dynamic advertising insertion, third parties selling local advertising spots and advertising exchanges, some or all of which may not be as advantageous to the Companyus as current advertising methods.
Because We Derive a Significant Portion of Our Revenues from a Limited Number of Distributors, the Loss of Affiliation Agreements, Renewal on Less Favorable Terms or Adverse Interpretations Could Have a Significant Adverse Effect on Our Business, Financial Condition or Results of Operations
A significant portion of our revenues are attributable to agreements with a limited number of cable television, direct-to-home satellite television and telecommunications operators, subscription and advertising supported video-on-demand services, and other distributors of our programming and program services. Our affiliation agreements generally have fixed terms that vary by market and distributor, and there can be no assurance that these agreements will be renewed in the future, or renewed on favorable terms, including but not limited to those related to pricing and programming tiers. We may also be affected by political, socialunable to modify existing agreements with terms that have over time become less favorable. The loss of favorable packaging and positioning, the loss of carriage on the most widely available cable and satellite programming tiers or technological change.the failure to renew our agreements with any distributor, or renew or modify them on favorable terms, could reduce the distribution of our programming and program services and decrease the potential audience for our programs, thereby negatively affecting our growth prospects and revenues from both advertising and affiliate fees.
Similarly, our revenues are dependent on the compliance of major distributors with the terms of our affiliation agreements. As these agreements have grown in complexity, the number of disputes regarding the interpretation, and even validity, of the agreements has grown, resulting in greater uncertainty and, from time to time, litigation with respect to our rights and obligations. For example, Federal legislatorssome of our distribution agreements contain “most favored nation” (“MFN”) clauses, which provide that if we enter into an agreement with a distributor and regulators have proposed voluntary guidelines on advertisingsuch agreement includes specified terms that are more favorable than those held by a distributor holding an MFN right, we must offer some of those terms to children in an effortthe distributor holding the MFN right. These clauses are generally complex and may lead to combat unhealthy eatingdisagreement over interpretation and childhood obesity, and have considered imposing limitationsapplication of such clause. Disagreements with a distributor on the marketinginterpretation or validity of certain moviesan agreement could adversely impact our revenues from both advertising and regulating product placementaffiliate fees, as well as our relationship with that distributor.
These factors could have an adverse effect on our business, financial condition or results of operations.
Service Disruptions or Failures of, or Cybersecurity Attacks Upon, Our or Our Vendors’ Networks, Information Systems and Other Technologies Could Result in the Disclosure of Confidential or Valuable Business or Personal Information, Disruption of Our Businesses, Damage to Our Brands and Reputation, Legal Exposure and Financial Losses
Networks, information systems and other program sponsorship arrangements.technologies, including technology systems used in connection with the production and distribution of our programming and films by us or our third-party vendors (“Systems”), are critical to our business activities, and shutdowns or service disruptions of, and cybersecurity attacks upon, these Systems pose increasing risks. Such shutdowns, disruptions and attacks may be caused by third-party hacking of computers and systems; dissemination of computer viruses, worms, malware, ransomware and other destructive or disruptive software; denial of service attacks and other bad acts; human error; and power outages, natural disasters, extreme weather, terrorist attacks or other similar events. Shutdowns,
disruptions and attacks from such events could have an adverse impact on us, our business partners, our employees, our audiences and users of our online, mobile and app offerings, including degradation or disruption of service, loss of data and damage to equipment and data. System redundancy may be ineffective or inadequate, and our disaster recovery and business continuity planning may not be sufficient to cover everything that could happen. Significant events could result in a disruption of our operations, reduced revenues, the loss of or damage to the integrity of data used by management to make decisions and operate our businesses, viewer or advertiser dissatisfaction or a loss of viewers or advertisers, and damage to our reputation or brands. We may not have adequate insurance coverage to compensate us for any losses associated with such events.
We are also subject to risks caused by the misappropriation, misuse, falsification or intentional or accidental release or loss of business or personal data or programming content maintained in our or our third-party vendors’ Systems, including proprietary and personal information (of third parties, employees and users of our online, mobile and app offerings), business information including intellectual property, or other confidential information. Outside parties may attempt to penetrate our Systems or those of our third-party vendors or fraudulently induce employees, business partners or users of our online, mobile and app offerings to disclose sensitive or confidential information in order to gain access to our data or our users’ data, or our programming. The number and sophistication of attempted and successful information security breaches in the U.S. and elsewhere have increased in recent years. If a material breach of our Systems or those of our third-party vendors occurs, the market perception of the effectiveness of our information security measures could be harmed, we could lose advertisers and other business partners as well as users of our online, mobile and app offerings and viewers, and our reputation, brands and credibility could be damaged. In addition, privacy regulations make it difficultif a material breach of our Systems occurs, we could be required to measure viewershipexpend significant amounts of money and other resources to repair or replace such Systems or to comply with notification requirements. We could also be subject to actions by children. regulatory authorities and claims asserted in private litigation in the event of a breach of our or our third-party vendors’ Systems.
Because the techniques used to obtain unauthorized access to, or disable, degrade or sabotage, these Systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques, implement adequate preventative measures or remediate any intrusion on a timely or effective basis. Moreover, the development and maintenance of these preventative and detective measures is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Despite our efforts, the possibility of these events occurring cannot be eliminated.
Each of these factors could have an adverse effect on our reputation, business, financial condition or results of operations.
The threatFailure, Destruction and/or Breach of regulatory actionSatellites and Facilities that We Depend Upon to Distribute Our Programming Could Adversely Affect Our Business, Financial Condition or increased scrutinyResults of Operations
We use satellite systems, fiber and other methods to transmit our program services to cable television operators and other distributors worldwide. The distribution facilities include uplinks, communications satellites and downlinks. Notwithstanding certain back-up and redundant systems, transmissions may be disrupted as a result of power outages, natural disasters, extreme weather, terrorist attacks, cyber attacks, failures or impairments of communications satellites or on-ground uplinks or downlinks used to transmit programming or other similar events. Currently, there are a limited number of communications satellites available for the transmission of programming, and if a disruption occurs, we may not be able to secure alternate distribution facilities in a timely manner. There can be no assurance that deters certain advertisers from advertising could adversely affect advertising sales and revenue.such failure or disruption would not have an adverse effect on our business, financial condition or results of operations.
Theft of Our Content, Including Digital Copyright Theft and Other Unauthorized Exhibitions of Our Content, May Decrease Revenue Received from Our Programming, Motion PicturesFilms and Other Entertainment Content and Adversely Affect Our Businesses and ProfitabilityBusiness, Financial Condition or Results of Operations
The success of our businesses depends in part on our ability to maintain and monetize our intellectual property rights toin our entertainment content. We are fundamentally a content company and theft of our brands, motion picturesfilms and home entertainment product,products, television programming, digital content and other intellectual property affects us and the value of our content. Copyright theft is particularly prevalent in many parts of the world that lack effective copyright and technical protective measures similar to those existing in the United StatesU.S. and Europe and/or that lack effective enforcement of such measures. Such foreign copyright theft often results in Internet viewership increates a supply of pirated content for major markets as well. The interpretation of copyright, piracy and other laws as applied to our content, and our piracy detection and enforcement efforts, remain in flux, and some methods of copyright enforcement have encountered political opposition. The failure to appropriately enforce and/or the weakening of existing intellectual property laws could make it more difficult for us to adequately protect our intellectual property and negatively affect its value.
Content theft is made easier by the wide availability of higher bandwidth and reduced storage costs, as well as tools that undermine encryption and other security features and enable infringers to cloak their identities online. In addition, we and our numerous production and distribution partners operate various technology systems in connection with the production and distribution of our programming and motion pictures,films, and intentional or unintentional acts could result in unauthorized access to our content. The increasing usecontinuing proliferation of digital formats and technologies heightens this risk. For example, new mobile broadcasting tools enable users to livestream any content, including copyrighted content, which can lead tonon-browser-based content theft through Internet-connected televisions, set-top boxes and could have an adverse impact on the monetization of ourmobile devices continues to increase and includes illegal re-transmission platforms, OTT subscription services, illicit video-on-demand/streaming services and pre-loaded hardware, providing more accessible, versatile and legitimate-looking environments for consuming pirated film and television content. Unauthorized access to our content could result in the premature release of motion picturesfilms or television shows as well as a reduction in legitimate audiences, which would likely have significant adverse effects on the value of the affected programming.programming and our ability to monetize our content.
Copyright theft has an adverse effect on our business because it reduces the revenue that we are able to receive from the legitimate sale and distribution of our content, undermines lawful distribution channels, reduces the public'spublic’s and some affiliate partners’ perceived value of our content and inhibits our ability to recoup or profit from the costs incurred to create such works.content. While legal protections exist, piracy and technological tools with which to engage in copyright theft continue to escalate, evolve and present challenges for enforcement. We are actively engaged in enforcement and other activities to protect our intellectual property, and it is likely that we will continue to expend substantial resources in connection with these efforts. Efforts to prevent the unauthorized reproduction, distribution and exhibition of our content may affect our profitability and may not be successful in preventing harm to our business.
Increased Costs for Programming, Motion PicturesFilms and Other Rights, as Well asand Judgments We Make on the Potential Performance of our Content, May Adversely Affect Our Profits and Balance SheetBusiness, Financial Condition or Results of Operations
In our Media Networks segment, we have historically produced a significant amount of original programming and other content, and continue toas part of our business strategy we invest significantlysignificant resources in this area. Theour flagship brands, in part with the aim of developing higher quality and quantity of original content. In our Filmed Entertainment segment’s core business, involveswe invest significant amounts in the production, marketing and distribution of motion pictures, the costs of which are significant. films and television series.
We also acquire programming, motion picturesfilms and television series, as well as a variety of digital content and other ancillary rights such as consumer and home entertainment product offerings, from other companies, and we pay license fees, royalties and/or contingent compensation in connection with these acquired rights. We also license various music rights from the major record companies, music publishers and performing rights organizations, and some of these sources are highly consolidated.
Our investments in original and acquired programming are significant and involve complex negotiations with numerous third parties. These costsparties, and rapid changes in consumer behavior have increased the risk associated with the success of all kinds of programming. Competition for popular content is intense, and we may nothave to increase the price we are willing to pay for talent and intellectual property rights, which may result in significantly increased costs. As such, there can be recoupedno assurance that we will recoup our investments in programming, films and other content when the content is broadcast or distributed and higher costs may lead to decreased profitability or potential write-downs. Increaseddistributed.
Further, increased competition from newadditional entrants into the market for development and production of original programming, such as Apple, Facebook, YouTube, Netflix, Amazon and Amazon,Hulu, increases our content costs as creating competing high quality, original content can require significant investment. Increasedthey introduce different ways of compensating talent and approaching production. In addition, as competition inwith these entrants for the creation and acquisition of quality programming may also leadcontinues to more complexescalate, the complexity of negotiations over acquired rights to the content and the value of the rights we aim to acquire or retain cannot be predicted with certainty inmay increase, leading to increased acquisition costs, and our ability to successfully acquire content of the future. Further, rapid changes in consumer behavior have increased the risk associated with all kinds of programming.highest quality may face greater uncertainty.
The accounting for the expenses we incur in connection with our programming, motion picturesfilms and other content requires that we make judgments about the potential success and useful life of the program or motion picture.film. If our estimates prove to be incorrect, weit may be forced to accelerate ourresult in decreased profitability and the accelerated recognition of the expense and/or write downwrite-down of the value of the asset. For example, weWe estimate the ultimate revenues of a motion picturefilm before it is released based on a number of factors. Upon a film’s initial domestic theatrical releasefactors, and performance, we then update our estimate of ultimate revenues, including following a film’s initial theatrical release, based on expected future and actual results. If a film is not received favorably, we may reduce our estimate of ultimate revenues, thereby acceleratingit may result in the amortizationaccelerations of capitalized film costs.cost amortization. Similarly, if we determine it is no longer advantageous for us to air a program on our media networks, we would accelerate our amortization of the program costs.
The Loss of Key Talent Could Adversely Affect Our Business, Financial Condition or Results of Operations
Our business depends upon the continued efforts, abilities and expertise of not only our corporate and divisional executive teams, but also affect our profits.the various creative talent and entertainment personalities with whom we work. For example, we license various music rights fromemploy or contract with several entertainment personalities with loyal audiences and we produce films with highly regarded directors, producers, writers, actors and other talent. These individuals are important to achieving the major record companiessuccess of our programs, films and music publishers, performing rights organizations and others. Some of these sources of music are highly consolidated and certain music costs are subject to adjudicatory procedures in courts or administrative agencies.other content. There can be no assurance that our cost-containment effortsthese individuals will remain with us or will retain their current appeal, or that the costs associated with retaining this and new talent will be reasonable. If we fail to retain these individuals on current terms or if our entertainment personalities lose their current appeal or we fail to attract new talent, our business, financial condition or results of operations could be adversely affected.
Political and Economic Conditions in a Variety of Markets around the World Could Have an Adverse Effect on Our Business, Financial Condition or Results of Operations
Our businesses operate and have customers, partners and audiences worldwide, and we are focused on expanding our international operations in key markets, some of which are emerging markets. For that reason, economic conditions in many different markets around the world affect a number of aspects of our businesses, in particular revenues in both domestic and international markets derived from advertising sales, theatrical releases, home entertainment distribution, television licensing and sales of consumer products. Economic conditions in each market can also impact our audience’s discretionary spending and therefore their willingness to access our content, as effectivewell as the businesses of our partners who purchase advertising on our networks, causing them to reduce their spending on advertising. In addition, as we would likehave expanded our international operations, our exposure to foreign currency fluctuations against the U.S. dollar (compared to, for example, the Argentinian peso, the British pound and the Euro, among others) has increased. Such fluctuations could have an adverse effect on our business, financial condition or results of operations, and there is no assurance that downward trending currencies will rebound or that stable currencies will remain stable in any period.
In addition, our businesses are exposed to certain political and economic risks inherent in conducting a global business. These include, among others retaliatory actions by governments reacting to changes in other countries, including in the U.S.; potential for longer payment cycles; issues related to the presence of corruption in certain markets and enforcement of anti-corruption laws and regulations; increased risk of political instability in some markets as well as conflict and sanctions preventing us from accessing those markets; wars, acts of terrorism or other hostilities; and other political, economic or other uncertainties.
The formal two-year process governing the UK’s departure from the EU (“Brexit”) began on March 29, 2017. Depending upon the ultimate terms of Brexit, the UK could lose access to the single EU market and to the global trade deals negotiated by the EU on behalf of its members. The effects of the Brexit vote and the perceptions as to the impact of the withdrawal of the UK from the EU may adversely affect business activity, political stability and economic and market conditions in the UK, the Eurozone, the EU and elsewhere and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the Euro and the British Pound. In addition, Brexit could lead to additional political, legal and economic instability and uncertainty in the EU, including changes in the regulatory environment, which could impact our ability to use UK law under “country of origin” rules for programming in the EU, potential trade barriers between the UK and the EU and between the UK and other countries, and potential content production quota regulations. Given that a portion of our business is conducted in the EU, including the UK, any of these effects of Brexit, and others we will recoupcannot anticipate, could have an adverse effect on our investmentsbusiness, financial condition or results of operations.
These political and economic risks could create instability in programmingany of the markets where our businesses derive revenues, which could result in a reduction of revenue or motion pictures,loss of investment that adversely affects our businesses, financial condition or results of operations.
Changes in U.S. or Foreign Laws or Regulations May Have an Adverse Effect on Our Business, Financial Condition or Results of Operations
Our program services, filmed entertainment and online, mobile and app properties are subject to a variety of laws and regulations, both in the U.S. and in the foreign jurisdictions in which we or our partners operate, including relating to intellectual property, content regulation, user privacy, data protection, anti-corruption, repatriation of profits, tax regimes, quotas, tariffs or other trade barriers, currency exchange controls, operating license and permit requirements, restrictions on foreign ownership or investment, export and market access restrictions, and exceptions and limitations on copyright and censorship, among others.
Laws in some non-U.S. jurisdictions differ in significant respects from those in the U.S., and the enforcement of such laws can be inconsistent and unpredictable, which could impact our ability to expand our operations and undertake activities that we believe are beneficial to our business.
The U.S. Congress and the FCC currently have under consideration, and may negativelyin the future adopt, new laws, regulations and policies regarding a wide variety of matters that could directly or indirectly affect the operations of our businesses. Our Nickelodeon business in particular is subject to a number of regulations regarding children. For example, privacy regulations make it difficult to measure viewership by children. In addition, federal legislators and regulators have proposed voluntary guidelines on advertising to children in an effort to combat unhealthy eating and childhood obesity, and have considered imposing limitations on the marketing of certain movies and regulating product placement and other program sponsorship arrangements. The threat of regulatory action or increased scrutiny that deters certain advertisers from advertising or reaching their intended audiences could adversely affect advertising revenue.
Our businesses are also subject to laws and regulations in the U.S. and internationally governing the collection, use, sharing, protection and retention of personal data, which has implications for how such data is managed. For example, GDPR expands the regulation of personal data processing throughout the EU and significantly increases penalties for non-compliance. Complying with these laws and regulations could be costly, require us to change our business practices, or limit or restrict aspects of our business in a manner adverse to our business operations. Many of these laws and regulations continue to evolve, and substantial uncertainty surrounds their scope and application. Our failure to comply could result in exposure to enforcement by U.S. or foreign governments, as well as significant negative publicity and reputational damage.
Our businesses could be adversely affected by new laws and regulations, changes in existing laws, changes in interpretations of existing laws by courts and regulators and the threat that additional laws or regulations may be forthcoming, as well as our ability to enforce our legal rights. We could be required to change or limit certain of our business practices, which could impact our ability to generate revenues. We could also incur substantial costs to comply with new and existing laws and regulations, or substantial fines and penalties or other liabilities if we fail to comply with such laws and regulations.
We Could Be Subject to Material Liabilities as a Result of Changes in Tax Laws, Regulations and Administrative Practices, Interpretations and Policies
We are subject to taxation in the U.S. and numerous international jurisdictions. Our tax rates are impacted by the tax laws, regulations and administrative practices, interpretations and policies in the federal, state and local and international territories where our businesses operate, and these rates may be subject to significant change. Our tax returns are routinely audited and litigation, adverse outcomes, or settlements may occur because tax authorities may disagree with certain positions we have taken, including our methodologies for intercompany arrangements. Further, the Tax Cuts and Jobs Act (the “Act”), which was enacted in December 2017, may expose us to tax risks as a result of the on-going issuance of interpretive guidance issued by the U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies as to how provisions of the Act are to be applied which could be different from our current interpretations. Such changes, litigation, adverse outcomes, or audit settlements may result in the recognition of an additional charge to our income tax provision in the period and may adversely affect our profitability.effective income tax rate or cash payments and may therefore adversely affect our business, financial condition or results of operations.
Volatility and Weakness in Capital Markets May Adversely Affect Our Credit Availability and Related Financing Costs
Bank and capital markets can experience periods of volatility and disruption. If the disruption in these markets is prolonged, our ability to refinance, and the related cost of refinancing, some or all of our debt could be adversely affected. Although we can currently access the bank and capital markets, there is no assurance that such markets will continue to be a reliable source of financing for us. In addition, our access to and cost of borrowing can be affected by our short- and long-term debt ratings assigned by ratings agencies. These factors, including the tightening of credit markets, or a decrease in our debt ratings, could adversely affect our ability to obtain cost‑effective financing.
Our Ongoing Investment in New Businesses, Products, Services and Technologies Through Acquisitions and Other Strategic Initiatives Present Many Risks, and We May Not Realize the Financial and Strategic Goals We Had Contemplated, Which Could Adversely Affect Our Business, Financial Condition or Results of Operations
We have acquired and invested, and expect to continue to acquire and invest, in new businesses, products, services and technologies as part of our ongoing efforts to transition to next-generation platforms and solutions and diversify beyond our core business. Such acquisitions and strategic initiatives may involve significant risks and uncertainties, including diversion of management attention from current operations; insufficient revenues from such investments to offset any new liabilities
assumed and expenses associated with the new investments; failure to achieve projected synergies, cost savings or cash flow from acquired businesses, which are based on projections that are inherently uncertain; unidentified issues not discovered in our due diligence that could cause us to fail to realize the anticipated benefits of such investments and incur unanticipated liabilities; difficulties in integrating the operations, personnel, technologies and systems of acquired businesses and, in the case of foreign acquisitions, integrating operations across different cultures and languages and addressing the particular currency, political and regulatory risks associated with specific countries; the potential loss of key employees or customers of acquired businesses; and a failure to successfully further develop an acquired business or technology.
Because new investments are inherently risky, and the anticipated benefits or value of these investments may not materialize, no assurance can be given that such investments and other strategic alternatives will not adversely affect our business, financial condition or results of operations.
We Could Be Adversely Affected by Strikes and Other Union Activity
We and our business partners engage the services of writers, directors, actors and other talent, trade employees and others who are subject to collective bargaining agreements. Some of our collective bargaining agreements are industry-wide agreements, and we may lack practical control over the negotiations and terms of the agreements. In addition, any labor disputes may disrupt our operations and reduce our revenues, and we may not be able to negotiate favorable terms for a renewal, which could increase our costs.
Our Revenues, Expenses and Operating Results May Vary Based on the Timing, Mix, Number and Availability of Our Motion PicturesFilms and Other Programming and on Seasonal Factors
Our revenues, expenses and operating results fluctuate due to the timing, mix, number and availability of our theatrical motion pictures,films, home entertainment releases and programs for licensing. For example, our operating results may increase or decrease during a particular period relative to the corresponding period in the prior year due to differences in the number and/or mix of films released and the timing of delivery of programming to television and digital distributors. Our operating results also fluctuate due to the timing of the recognition of marketing expenses, which are typically largely incurred prior to the release of motion pictures and home entertainment product,films, with the recognition of related revenues in later periods.
Our business also has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on audiences’ viewing habits and attendance. Typically, our revenue from advertising increasesis highest in the first quarter of our fiscal year due to the holiday season, among other factors, and revenue from motion pictures increasesfilms is highest in the summer and around holidays.summer. The effects of these variances make it difficult to estimate future operating results based on the results of any specific quarter.
Through NAI’sNational Amusements’ Voting Control of Viacom and CBS, Corporation, Certain Members of Management, Directors and Stockholders May Face Actual or Potential Conflicts of Interest, and NAINational Amusements is in a Position to Control Actions that Require, or May be Accomplished by, Stockholder Approval
The NAINational Amusements ownership structure and the common directors among National Amusements, Viacom and CBS could create, or appear to create, potential conflicts of interest when the management, directors and controlling stockholder of the commonly controlled entities face decisions that could have different implications for each entity. For example, potential conflicts of interest, or the appearance thereof, could arise in connection with the resolution of any dispute between us and CBS, Corporation. Potential conflicts of interest, or the appearance thereof, could also arise when we and CBS Corporation enter into any commercial arrangements with each other, despite review by our directors not affiliated with CBS Corporation. Our certificate of incorporation and the CBS Corporation certificate of incorporation both contain provisions related to corporate opportunities that may be of interest to us and to CBS Corporation, and these provisions create the possibility that a corporate opportunity of one company may be used for the benefit of the other company.CBS.
In addition, NAI’sNational Amusements’ voting control of us allows it to control the outcome of corporate actions that require, or may be accomplished by, stockholder approval, including the election and removal of directors, stockholder-proposed amendments to our bylaws, and transactions involving a change in control. For so long as NAINational Amusements retains voting control of us, our stockholders other than NAINational Amusements will be unable to affect the outcome of ourany corporate actions. The interests of NAINational Amusements may not be the same as the interests of our other stockholders, who must rely on our independent directors to represent their interests.
We, National Amusements and CBS, and our Respective Businesses, Are Attributable to Each Other for Certain Regulatory Purposes, Which May Limit Business Opportunities or Impose Additional Costs
So long as we, NAINational Amusements and CBS Corporation are under common control, each company’s businesses, as well as the businesses of any other commonly controlled company, may be attributable to the other companies for purposes of U.S. and non-U.S. antitrust rules and regulations, certain rules and regulations of the FCC, certain rules under the Employee Retirement Income Security Act of 1974 and certain rules regarding political campaign contributions in the United States,U.S., among others. The businesses of each company may continue to be attributable to the other companies for FCC and other purposes even after the companies cease to be commonly controlled, if the companies share common officers, directors, or attributable stockholders. As a result, the businesses and conduct of any of these other companies may have the effect of limiting the activities or strategic business alternatives available to us, including limitations to which we contractually agreed in connection with our separation from CBS, Corporation, or may impose additional costs on us.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our principal physical properties are described below. In addition, to the properties described below, we own and lease office, studio, production and warehouse space and broadcast, antenna and satellite transmission facilities throughout the United StatesU.S. and around the world for our businesses. We consider our properties adequate for our present needs.
Viacom
Our world headquarters is located at 1515 Broadway, New York, New York, where we lease approximately 1.4 million square feet for executive, administrative and business offices for the Company and certain of our operating divisions. The lease runs through June 2031, with two renewal options based on market rates at the time of renewal for ten years each thereafter.each.
In addition to occupying space at 1515 Broadway in New York, we lease the following major office facilities: (a) approximately 400,000 square feet at 345 Hudson Street, New York, New York, through 2022, (b) approximately 175,000 square feet at two facilities in Santa Monica, California, under leases that expire between 2016 and 2017 and (c) approximately 278,000 square feet at 1540 Broadway, New York, New York, through 2021. 2021, and (c) approximately 210,000 square feet of office space at 1575 North Gower Street, Los Angeles, California, through 2028.
Viacom Media Networks’ Network Operations Center in Hauppauge, New York contains approximately 65,000 square feet of floor space on approximately 9nine acres of land, and its Global Business Services Center in Franklin, Tennessee contains approximately 23,000 square feet of office space under a lease that expires in 2017.
The Nickelodeon Animation Studio at 231203-231 West Olive Avenue, Burbank, California contains approximately 72,000180,000 square feet of studio and office space. We have entered into a lease for an office building currentlyspace, leased under construction on property located at 203 West Olive Avenue, directly adjacent to the existing Animation Studio, which will contain approximately 103,000 square feet of office space. Thetwo leases for the existing and new facilities will be co-terminous, expiring 20 years from completion of the new building, anticipated to occur in late 2016. We also continue to occupy approximately 68,000 square feet of satellite office space in various Burbank locations under leases that will expire in late 2016.2036.
Nickelodeon’s Live Action Studio contains approximately 108,000 square feet of stage and office space at Burbank Studios, 3000 West Alameda Avenue, Burbank, California, under a lease expiring in 2024.
Viacom International Studios located at 50 NW 14th Street, Miami, Florida, contains approximately 60,000 square feet of sound stages, production facilities and office space, under a facilities license agreement expiring in 2018.2019.
CMT’s headquarters in Nashville, Tennessee occupies approximately 86,000 square feet of space for itsCMT’s executive, administrative and business offices and its studios, under leases expiring in 2020.
The Company maintains facilities for its Global Business Services Center at its offices in Budapest, Hungary where we lease approximately 44,200 square feet of space through 2023, and at its offices in BerlinWarsaw, Poland where we lease approximately 50,000 square feet of space through a lease expiring in 2017.2025.
Filmed Entertainment
Paramount owns the Paramount Pictures Studio situated at 5555 Melrose Avenue, Los Angeles, California, located on approximately 62 acres of land, and containing approximately 1.85 million square feet of floor space used for executive, administrative and business offices, sound stages, production facilities, theatres, equipment facilities and other ancillary uses. Paramount has embarked on a planned 25-year expansion and revitalization project for itsthe studio.
Paramount Pictures International has offices in Chiswick, West London, where it leases approximately 45,00033,000 square feet of space used for executive, administrative and business offices and a viewing cinema through 2017.2024.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Viacom Inc.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our voting Class A common stock and non-voting Class B common stock are listed and traded on The NASDAQ Global Select Market under the symbols “VIA” and “VIAB”, respectively.
| Sales Price | |||||||
| Low | High | ||||||
| Class A common stock – Fiscal 2015 | |||||||
| 4th Quarter | $ | 38.06 | $ | 65.55 | |||
| 3rd Quarter | $ | 64.27 | $ | 72.72 | |||
| 2nd Quarter | $ | 63.50 | $ | 76.29 | |||
| 1st Quarter | $ | 66.11 | $ | 78.08 | |||
| Class A common stock – Fiscal 2014 | |||||||
| 4th Quarter | $ | 76.65 | $ | 89.64 | |||
| 3rd Quarter | $ | 81.35 | $ | 88.47 | |||
| 2nd Quarter | $ | 78.70 | $ | 89.30 | |||
| 1st Quarter | $ | 79.01 | $ | 88.20 | |||
| Class B common stock – Fiscal 2015 | |||||||
| 4th Quarter | $ | 36.32 | $ | 65.47 | |||
| 3rd Quarter | $ | 63.98 | $ | 73.52 | |||
| 2nd Quarter | $ | 63.11 | $ | 76.29 | |||
| 1st Quarter | $ | 65.86 | $ | 78.00 | |||
| Class B common stock – Fiscal 2014 | |||||||
| 4th Quarter | $ | 76.52 | $ | 89.76 | |||
| 3rd Quarter | $ | 81.19 | $ | 88.50 | |||
| 2nd Quarter | $ | 78.43 | $ | 89.27 | |||
| 1st Quarter | $ | 78.83 | $ | 87.84 | |||
As of November 4, 2015,October 31, 2018, there were 1,4561,258 record holders of our Class A common stock and 21,90518,306 record holders of our Class B common stock.
Performance Graph
The following graph compares the cumulative total stockholderstockholders’ return of our Class A common stock and our Class B common stock with the cumulative total stockholderstockholders’ return of the companies listed in the Standard & Poor’s 500 Index and a peer group of companies comprised of The Walt Disney Company, Twenty-First Century Fox Inc. (News Corporation prior to June 2013), Time Warner Inc., CBS Corporation, and Discovery Communications, Inc. and(merged with Scripps NetworkNetworks Interactive Inc. in March 2018).
The performance graph assumes $100 invested on September 30, 20102013 in each of our Class A common stock, our Class B common stock, the S&P 500 Index and the stock of our peer group companies, including reinvestment of dividends, for the years ended September 30, 2011, 2012, 2013, 2014, 2015, 2016, 2017 and 2015.2018.
Total Cumulative StockholderStockholders’ Return
For the Years Ended September 30, 2011, 2012, 2013, 2014, 2015, 2016, 2017 and 20152018
| 9/30/10 | 9/30/11 | 9/30/12 | 9/30/13 | 9/30/14 | 9/30/15 | |||||||
| Class A Common | $100 | $122 | $140 | $219 | $204 | $121 | ||||||
| Class B Common | $100 | $109 | $154 | $243 | $227 | $131 | ||||||
| S&P 500 | $100 | $99 | $126 | $147 | $173 | $168 | ||||||
| Peer Group | $100 | $101 | $172 | $235 | $272 | $271 | ||||||
| 9/30/13 | 9/30/14 | 9/30/15 | 9/30/16 | 9/30/17 | 9/30/18 | |||||||
| Class A Common | $100 | $93 | $55 | $56 | $49 | $49 | ||||||
| Class B Common | $100 | $94 | $54 | $50 | $37 | $46 | ||||||
| S&P 500 | $100 | $117 | $114 | $129 | $150 | $173 | ||||||
| Peer Group | $100 | $118 | $127 | $127 | $136 | $172 | ||||||
Equity Compensation Plan Information
Information required by this item will be contained in the Proxy Statement for our 20162019 Annual Meeting of Stockholders under the heading “Equity Compensation Plan Information,” which information is incorporated herein by reference.
Item 6. Selected Financial Data.
The selected Consolidated Statement of Earnings dataData for the years ended September 30, 2015, 20142018, 2017 and 20132016 and the Consolidated Balance Sheet data as of September 30, 20152018 and 20142017 should be read in conjunction with the audited financial statements, Management’s Discussion and Analysis of Results of Operations and Financial Condition and other financial information presented elsewhere in this report. The selected Consolidated Statement of Earnings Data for the years ended September 30, 20122015 and 20112014 and the Consolidated Balance Sheet dataData as of September 30, 2013, 20122016, 2015 and 20112014 have been derived from audited financial statements not included herein.
CONSOLIDATED STATEMENT OF EARNINGS DATA
| Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||||||||||||||||||
| (in millions, except per share amounts) | 2015 | 2014 | 2013 | 2012 | 2011 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||
| Revenues | $ | 13,268 | $ | 13,783 | $ | 13,794 | $ | 13,887 | $ | 14,914 | $ | 12,943 | $ | 13,263 | $ | 12,488 | $ | 13,268 | $ | 13,783 | ||||||||||||||||||
| Operating income | $ | 3,112 | $ | 4,082 | $ | 3,836 | $ | 3,901 | $ | 3,710 | $ | 2,570 | $ | 2,489 | $ | 2,526 | $ | 3,112 | $ | 4,082 | ||||||||||||||||||
| Net earnings from continuing operations (Viacom and noncontrolling interests) | $ | 2,002 | $ | 2,464 | $ | 2,449 | $ | 2,385 | $ | 2,183 | $ | 1,728 | $ | 1,919 | $ | 1,471 | $ | 2,002 | $ | 2,464 | ||||||||||||||||||
| Net earnings from continuing operations attributable to Viacom | $ | 1,922 | $ | 2,392 | $ | 2,407 | $ | 2,345 | $ | 2,146 | $ | 1,688 | $ | 1,871 | $ | 1,436 | $ | 1,922 | $ | 2,392 | ||||||||||||||||||
| Net earnings from continuing operations per share attributable to Viacom: | ||||||||||||||||||||||||||||||||||||||
| Basic | $ | 4.78 | $ | 5.54 | $ | 4.95 | $ | 4.42 | $ | 3.65 | $ | 4.19 | $ | 4.68 | $ | 3.62 | $ | 4.78 | $ | 5.54 | ||||||||||||||||||
| Diluted | $ | 4.73 | $ | 5.43 | $ | 4.86 | $ | 4.36 | $ | 3.61 | $ | 4.19 | $ | 4.67 | $ | 3.61 | $ | 4.73 | $ | 5.43 | ||||||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||||||||||||||||||||
| Basic | 402.2 | 432.1 | 486.2 | 530.7 | 587.3 | 402.7 | 399.9 | 396.5 | 402.2 | 432.1 | ||||||||||||||||||||||||||||
| Diluted | 406.0 | 440.2 | 494.8 | 537.5 | 594.3 | 403.0 | 400.6 | 398.0 | 406.0 | 440.2 | ||||||||||||||||||||||||||||
| Dividends declared per share of Class A and Class B common stock | $ | 1.46 | $ | 1.26 | $ | 1.15 | $ | 1.05 | $ | 0.80 | $ | 0.80 | $ | 0.80 | $ | 1.40 | $ | 1.46 | $ | 1.26 | ||||||||||||||||||
CONSOLIDATED BALANCE SHEET DATA
| September 30, | September 30, | |||||||||||||||||||||||||||||||||||||
| (in millions) | 2015 | 2014 | 2013 | 2012 | 2011 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||
| Total assets | $ | 22,217 | $ | 23,047 | $ | 23,762 | $ | 22,213 | $ | 22,751 | $ | 23,783 | $ | 23,698 | $ | 22,508 | $ | 22,143 | $ | 22,985 | ||||||||||||||||||
| Total debt | $ | 12,285 | $ | 12,699 | $ | 11,818 | $ | 8,112 | $ | 7,315 | $ | 10,082 | $ | 11,119 | $ | 11,913 | $ | 12,285 | $ | 12,699 | ||||||||||||||||||
| Total Viacom stockholders' equity | $ | 3,538 | $ | 3,719 | $ | 5,193 | $ | 7,448 | $ | 8,644 | ||||||||||||||||||||||||||||
| Total Viacom stockholders’ equity | $ | 7,407 | $ | 6,035 | $ | 4,277 | $ | 3,538 | $ | 3,719 | ||||||||||||||||||||||||||||
| Total equity | $ | 3,599 | $ | 3,747 | $ | 5,190 | $ | 7,439 | $ | 8,633 | $ | 7,465 | $ | 6,119 | $ | 4,330 | $ | 3,599 | $ | 3,747 | ||||||||||||||||||
Item 7. 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 consolidated financial statements and related notes to enhance the understanding of our results of operations, financial condition and cash flows. 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 the management’s discussion and analysis of results of operations and financial condition section include:
| Page | ||
| • | Overview: The overview section provides a summary of Viacom and our | |
| • | Results of Operations: The results of operations section provides an analysis of our results on a consolidated and reportable segment basis for the three years ended September 30, | |
| • | Liquidity and Capital Resources: The liquidity and capital resources section provides a discussion of our cash flows for the three years ended September 30, | |
| • | Market Risk: The market risk section discusses how we manage exposure to market and interest rate risks. | |
| • | Critical Accounting Policies and Estimates: The critical accounting policies and estimates section provides detail with respect to accounting policies that are considered by management to require significant judgment and use of estimates and that could have a significant impact on our financial statements. | |
| • | Other Matters: The other matters section provides a discussion of related party transactions and agreements. | |
OVERVIEW
Summary
We operate through two reportingreportable segments: Media Networks and Filmed Entertainment. Our measure of segment performance is adjusted operating income/(loss).income. We define adjusted operating income/(loss)income for our segments as operating income/(loss),income, 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.
Media Networks
35
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Globally, our Media Networks segment reaches approximately 4.4 billion cumulative television subscribers in more than 180 countries and 46 languages, via 314 locally programmed and operated television channels, including our multimedia brands Nickelodeon, MTV, BET, Comedy Central, Paramount Network, Nick Jr., VH1, TV Land, CMT and Logo. Outside of the United States (the “U.S.”), Viacom International Media Networks (“VIMN”) operates the international extensions of our multimedia brands and our program services created specifically for international audiences, such as British public service broadcaster Channel 5 and Milkshake! in the United Kingdom (“UK”), Televisión Federal S.A. (“Telefe”) in Argentina, Colors in India and Paramount Channel. In fiscal year 2018, our Media Networks segment launched 9 new channels, including in the UK, Japan, Italy and Portugal. “Cumulative television subscribers” is an aggregation of the total subscribers to (or viewers of, in the case of our free-to-air channels) each Viacom owned-and-operated, joint venture and licensee channel.
Our Media Networks segment generates revenues in three categories: (i) the sale of advertising and marketing services, (ii) affiliate fees from distributors of our programming and program services and (iii) ancillary activities such as consumer products.
Advertising Revenues
Our Media Networks segment generates revenues from the sale of advertising and from marketing services. Our advertising revenues generally depend on the number of viewers and viewership demographics. Demand and pricing for our advertising depend on the attractiveness of our offerings to advertisers, viewership, and overall market conditions. We also drive additional demand for our advertising services through integrated sales of multi-platform advertising and marketing opportunities and through our integrated marketing services, providing unique branded content and custom sponsorship opportunities to our advertisers. Our advertising revenues may be affected by the strength of advertising markets and general economic conditions, and may fluctuate depending on the success of our programming, as measured by viewership, at any given time. Measured viewership may vary based on the success of our programming (due to, among other things, the timing of new episodes related to our popular programming and the performance of competing programs and other entertainment alternatives), the platforms on which our programming is available, and variations related to the methods used by third parties to measure viewership. Advertising revenues may also fluctuate due to the timing of holidays and significant programming events such as awards shows and premieres. Typically, advertising revenues are highest in the first quarter of our fiscal year.
We continue to expand our product offerings to enable our customers and partners to better target and more broadly activate their advertising campaigns. Our Advanced Marketing Solutions portfolio consists of two main categories - Addressable Video and Brand Solutions. Addressable Video consists of pools of inventory that we are aggregating and enabling within both multichannel video programming distributor (“MVPD”) and over-the-top (“OTT”) environments, to allow for advanced targeting to fulfill the demand for next generation video ad products. Brand Solutions consists of a bundle of consulting, creative services, and media activation.
Affiliate Revenues
Our affiliate revenues are generated through fees from distributors of our programming and program services, such as cable television operators, direct-to-home satellite television operators, mobile networks, subscription video-on-demand (“SVOD”) and other OTT services. Our agreements with multichannel television service providers are generally multi-year carriage agreements with set rate increases. The amount of fees we receive is generally a function of the number of subscribers and the rates we receive per subscriber. Expirations of these affiliate agreements are staggered. Under SVOD and other similar OTT agreements, we make certain programs available for distribution on one or more dates, and our revenue under these OTT agreements is recognized when the content has been delivered by us and is available for use by the licensee; therefore, revenue will fluctuate depending on the timing of when programming is delivered and made available throughout the license period.
Ancillary Revenues
Our Media Networks ancillary revenues are principally derived from (i) our consumer products activities, which include licensing our brands and intellectual property, as well as creation and publishing of interactive games across various platforms (including mobile devices, PCs and consoles), (ii) recreation experiences and live events, (iii) viewing of our programming on a transactional basis through transactional video-on-demand (“TVOD”) and through electronic sell-through services and the sale of DVDs and Blu-ray discs and (iv) television syndication of our content.
Our ancillary revenues vary based on consumer spending, the popularity of our programming and intellectual property, and the volume of content available during a particular period.
Media Networks segment expenses consist of operating expenses, selling, general and administrative (“SG&A”) expenses and depreciation and amortization.
36
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
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, participations and residuals, royalties, marketing services 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 develops, produces, finances, acquires and distributes films, television programming and other entertainment content through its Paramount Pictures, Paramount Players, Paramount Animation and Paramount Television divisions, in various markets and media worldwide. It partners on various projects with key Viacom brands, including Nickelodeon Movies, MTV Films and BET Films.
Films produced, acquired and/or distributed by the Filmed Entertainment segment are generally first exhibited theatrically in domestic and/or international markets and then released in various markets through airlines and hotels, electronic sell-through, DVDs and Blu-ray discs, TVOD, pay television, SVOD, cable and free television. Paramount Television draws on Paramount’s extensive library of film properties and develops original programming for television and digital platforms.
Producing, marketing and distributing films and television programming can involve significant costs and the timing of a film’s release can cause our financial results to vary. For example, marketing costs are generally incurred before and throughout the theatrical release of a film and, to a lesser extent, other distribution windows, and are expensed as incurred. As a result, we typically incur losses with respect to a particular film prior to and during the film’s theatrical exhibition, and recoupment of investment as well as profitability for the film may not be realized until well after its theatrical release. Therefore, the results of the Filmed Entertainment segment can be volatile as films work their way through the various distribution windows.
Our Filmed Entertainment segment generates revenues in four categories: (i) the release and/or distribution of films theatrically, (ii) the release and/or distribution of film and television product through home entertainment, (iii) the licensing of film and television product to television and digital platforms and (iv) other ancillary activities.
Theatrical Revenues
Paramount generates revenues worldwide from the theatrical distribution of films, primarily from audience ticket sales. Each film is a separate and distinct product with its revenues, and ultimate profitability, dependent upon many factors, among which domestic and international audience response is of fundamental importance. Theatrical revenues may also be affected by the number, timing and mix of releases and competitive offerings in any given period, consumer tastes and consumption habits, and overall economic conditions, including trends in discretionary spending. The theatrical success of a film is a significant factor in determining the revenues it is likely to generate in home entertainment markets and licensing arrangements for television and other platforms. Revenues from theatrical film releases tend to be cyclical with increases in the summer months during our fourth quarter.
Home Entertainment Revenues
Home entertainment revenues are derived from the worldwide sales and distribution of DVDs and Blu-ray discs relating to the films released theatrically by Paramount and programming of other Viacom brands such as Nickelodeon, MTV, Comedy Central and BET, as well as certain acquired films and content distributed on behalf of third parties such as CBS Corporation (“CBS”). Home entertainment revenues are also derived from the viewing of our films on a transactional basis through TVOD and electronic sell-through services around the world, for a fee and/or on a revenue-sharing basis. Our home entertainment revenues may be affected by the number, timing and mix of releases and competitive offerings in any given period, consumer tastes and consumption habits, the prominence given by distributors and retailers to our releases compared to those of our competitors, and overall economic conditions, including trends in discretionary spending.
Licensing Revenues
Paramount generates fees by licensing, around the world on a territory-by-territory basis, films and television programs produced, acquired or distributed by Paramount, for a fee or on a revenue sharing basis, to SVOD, pay and basic cable television, free television and free video-on-demand services. Revenue from the licensing of film and television exhibition rights is recognized upon availability for airing by the licensee and will fluctuate depending on the number and mix of available titles in any given territory.
37
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Ancillary Revenues
Paramount generates ancillary revenues by providing production and facilities services to third parties, primarily at Paramount’s studio lot. Paramount also generates ancillary revenues by licensing its brands for consumer products, themed restaurants, hotels and resorts, live stage plays, film clips and theme parks and other location-based entertainment projects.
Filmed Entertainment segment expenses consist of operating expenses, SG&A expenses and depreciation and amortization.
Operating expenses principally include the amortization of costs of our released feature films and television programming (including participations and residuals), print and advertising expenses and other distribution costs. SG&A expenses include employee compensation, facility and occupancy costs, professional service fees and other overhead costs. Depreciation and amortization expense principally consists of depreciation of fixed assets.
RESULTS OF OPERATIONS
Our summary of consolidated results of operations are presented below for the years ended September 30, 2018, 2017 and 2016.
| 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||||||||
| Year Ended September 30, | Better/(Worse) | Better/(Worse) | |||||||||||||||||||||||
| (in millions, except per share amounts) | 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||
| GAAP | |||||||||||||||||||||||||
| Revenues | $ | 12,943 | $ | 13,263 | $ | 12,488 | $ | (320 | ) | (2 | )% | $ | 775 | 6 | % | ||||||||||
| Operating income | 2,570 | 2,489 | 2,526 | 81 | 3 | (37 | ) | (1 | ) | ||||||||||||||||
| Net earnings from continuing operations attributable to Viacom | 1,688 | 1,871 | 1,436 | (183 | ) | (10 | ) | 435 | 30 | ||||||||||||||||
| Diluted EPS from continuing operations | 4.19 | 4.67 | 3.61 | (0.48 | ) | (10 | ) | 1.06 | 29 | ||||||||||||||||
| Non-GAAP* | |||||||||||||||||||||||||
| Adjusted operating income | $ | 2,795 | $ | 2,743 | $ | 2,732 | $ | 52 | 2 | % | $ | 11 | — | % | |||||||||||
| Adjusted net earnings from continuing operations attributable to Viacom | 1,659 | 1,511 | 1,465 | 148 | 10 | 46 | 3 | ||||||||||||||||||
| Adjusted diluted EPS from continuing operations | 4.12 | 3.77 | 3.68 | 0.35 | 9 | 0.09 | 2 | ||||||||||||||||||
| * 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 accounting principles generally accepted in the United States of America (“GAAP”). Our results have been affected by certain items identified as affecting comparability. Accordingly, when applicable, we use non-GAAP measures such as consolidated adjusted operating income, adjusted earnings from continuing operations before provision for income taxes, adjusted provision for income taxes, adjusted net earnings from continuing operations attributable to Viacom and adjusted diluted earnings per share (“EPS”) from continuing operations, among other measures, to evaluate our actual operating performance and for planning and forecasting of future periods. We believe that the adjusted results provide relevant and useful information for investors because they clarify our actual operating performance, make it easier to compare our results with those of other companies and allow investors to review performance in the same way as our management. Since these are not measures of performance calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”),GAAP, they should not be considered in isolation of, or as a substitute for, operating income, earnings from continuing operations before provision for income taxes, provision for income taxes, net earnings from continuing operations attributable to Viacom and diluted EPS from continuing operations as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies. For a reconciliation of
The following tables reconcile our reported results (GAAP) to our adjusted measuresresults (non-GAAP) for the years ended September 30, 2018, 2017 and discussion of2016.The tax impacts included in the items affecting comparability, refertables below have been calculated using the rates applicable to the section entitled “Factors Affecting Comparability”.adjustments presented.
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
| Year Ended September 30, 2018 | |||||||||||||||||||
| (in millions, except per share amounts) | Operating Income | Earnings from Continuing Operations Before Provision for Income Taxes | Provision for Income Taxes | Net Earnings from Continuing Operations Attributable to Viacom | Diluted EPS from Continuing Operations | ||||||||||||||
| Reported results (GAAP) | $ | 2,570 | $ | 1,997 | $ | 269 | $ | 1,688 | $ | 4.19 | |||||||||
| Factors Affecting Comparability: | |||||||||||||||||||
| Restructuring and related costs | 225 | 225 | 55 | 170 | 0.42 | ||||||||||||||
| Gain on asset sale | — | (16 | ) | — | (16 | ) | (0.04 | ) | |||||||||||
| Gain on extinguishment of debt | — | (25 | ) | (6 | ) | (19 | ) | (0.05 | ) | ||||||||||
| Investment impairment | — | 46 | 10 | 36 | 0.09 | ||||||||||||||
| Discrete tax benefit | — | — | 200 | (200 | ) | (0.49 | ) | ||||||||||||
| Adjusted results (Non-GAAP) | $ | 2,795 | $ | 2,227 | $ | 528 | $ | 1,659 | $ | 4.12 | |||||||||
Restructuring and other distributorsrelated costs: During 2018, we launched a program of cost transformation initiatives to improve our programmingmargins, including an organizational realignment of support functions across Media Networks, new sourcing and program services,procurement policies, real estate consolidation and (iii) ancillary revenues,technology enhancements. We recognized pre-tax restructuring and related costs of $225 million. The charges, as detailed in the table below, included severance charges, exit costs principally resulting from vacating certain leased properties and related costs principally comprised of third-party professional services. See Note 14 of the Consolidated Financial Statements for additional information.
Our cost transformation initiatives gave rise to approximately $100 million of savings in fiscal 2018 and are expected to result in approximately $300 million of run-rate savings, the benefit of which include consumer products licensing, brand licensing,will be phased in through fiscal 2020. In connection with completing our cost transformation initiatives, we expect to incur additional exit costs in the first half of fiscal 2019 of approximately $45 million and we may incur additional restructuring charges as we continue to evaluate cost transformation initiatives in fiscal 2019.
Restructuring and Related Costs (in millions) | Year Ended September 30, 2018 | ||||||||||||||
| Media Networks | Filmed Entertainment | Corporate | Total | ||||||||||||
| Severance | $ | 133 | $ | 4 | $ | 1 | $ | 138 | |||||||
| Exit Costs | 38 | — | — | 38 | |||||||||||
| Other related costs | 1 | — | 48 | 49 | |||||||||||
| Total | $ | 172 | $ | 4 | $ | 49 | $ | 225 | |||||||
Gain on asset sale: During 2018, we completed the 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.
Gain on extinguishment of debt: In 2018, we redeemed senior notes and general economic conditions, and may fluctuate depending ondebentures totaling $1.039 billion. As a result, we recognized a pre-tax extinguishment gain of $25 million included within Other items, net in the successConsolidated Statements of our programming, as measured by viewership, at any given time. Audience measurement ratings may vary due toEarnings.
Investment impairment:We recognized a $46 million impairment loss included within Other items, net in the successConsolidated Statement of our programming,Earnings in connection with the timingwrite-off of availability of new episodes of popular programming, and the performance of competing programs and other entertainment alternatives for viewers, as well as variationscertain cost method investments in 2018.
Discrete tax benefit: The net discrete tax benefit in 2018 was principally related to the methods used by third parties to measure ratings. Advertising revenues may also fluctuate due to seasonal variations, the timing of holidaysTax Cuts and significant programming events such as awards shows or premieres. Typically, advertising revenues are highest in the firstJobs Act and fourth quarters of our fiscal year.
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
2017
| Year Ended September 30, 2017 | |||||||||||||||||||
| (in millions, except per share amounts) | Operating Income | Earnings from Continuing Operations Before Provision for Income Taxes | Provision for Income Taxes | Net Earnings from Continuing Operations Attributable to Viacom | Diluted EPS from Continuing Operations | ||||||||||||||
| Reported results (GAAP) | $ | 2,489 | $ | 2,212 | $ | 293 | $ | 1,871 | $ | 4.67 | |||||||||
| Factors Affecting Comparability: | |||||||||||||||||||
| Restructuring and programming charges | 381 | 381 | 135 | 246 | 0.61 | ||||||||||||||
| Gain on asset sale | (127 | ) | (412 | ) | (116 | ) | (285 | ) | (0.71 | ) | |||||||||
| Loss on extinguishment of debt | — | 20 | 7 | 13 | 0.03 | ||||||||||||||
| Investment impairment | — | 10 | 4 | 6 | 0.01 | ||||||||||||||
| Discrete tax benefit | — | — | 340 | (340 | ) | (0.84 | ) | ||||||||||||
| Adjusted results (Non-GAAP) | $ | 2,743 | $ | 2,211 | $ | 663 | $ | 1,511 | $ | 3.77 | |||||||||
Restructuring and programming charges: We recognized a pre-tax charge of $381 million, reflecting $237 million of restructuring charges and $144 million of programming charges resulting from the execution of our flagship brand strategy and strategic initiatives at Paramount. See Note 14 of the Consolidated Financial Statements for additional information.
Gain on asset sales: In 2017, a consolidated entity completed the sale of broadcast spectrum in connection with the FCC’s broadcast spectrum auction. The sale resulted in a pre-tax gain of $127 million recorded within Operating income, with $11 million attributable to the noncontrolling interest. We also completed the sale of our 49.76% interest in EPIX in 2017, resulting in a pre-tax gain of $285 million recorded within non-operating gains and losses in the Consolidated Statement of Earnings.
Restructuring and Programming Charges (in millions) | Year Ended September 30, 2017 | ||||||||||||||
| Media Networks | Filmed Entertainment | Corporate | Total | ||||||||||||
| Severance | $ | 142 | $ | 50 | $ | 20 | $ | 212 | |||||||
| Asset impairment | 22 | — | — | 22 | |||||||||||
| Lease termination | — | 3 | — | 3 | |||||||||||
| Restructuring | 164 | 53 | 20 | 237 | |||||||||||
| Programming | 113 | 31 | — | 144 | |||||||||||
| Total | $ | 277 | $ | 84 | $ | 20 | $ | 381 | |||||||
Loss on extinguishment of debt: We redeemed senior notes and debentures totaling $3.3 billion in 2017, resulting in the recognition of a net pre-tax extinguishment loss of $20 million within Other Items, net in the Consolidated Statement of Earnings.
Investment impairment:We recognized a $10 million impairment loss included within Other items, net in the Consolidated Statement of Earnings in connection with the write-off of a cost method investment in 2017.
Discrete tax benefit: The net discrete tax benefit was principally related to the recognition of foreign tax credits realized during the fourth fiscal quarter of our fiscal year, and2017 on the distribution to Viacom’s U.S. group of certain securities, the reversal of a valuation allowance on capital loss carryforwards in connection with the summer months during our fourth quarter. Our home entertainment revenues may be affected by the number, timing and mix of home entertainment releases in any given period, consumer tastes and consumption habits, the prominence given by distributors and retailers to our releases compared to thosesale of our competitors,investment in EPIX and overall economic conditions, including consumer preference for rental or purchase and trends in discretionary spending. The mix of our revenues from home entertainment continues to shift away from physical home entertainment toward consumption through various platforms and apps.
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions, except per share amounts) | 2015 | 2014 | $ | % | ||||||||||
| Revenues | $ | 13,268 | $ | 13,783 | $ | (515 | ) | (4 | )% | |||||
| Operating income | 3,112 | 4,082 | (970 | ) | (24 | ) | ||||||||
| Adjusted operating income | 3,920 | 4,125 | (205 | ) | (5 | ) | ||||||||
| Net earnings from continuing operations attributable to Viacom | 1,922 | 2,392 | (470 | ) | (20 | ) | ||||||||
| Adjusted net earnings from continuing operations attributable to Viacom | 2,210 | 2,376 | (166 | ) | (7 | ) | ||||||||
| Diluted EPS from continuing operations | 4.73 | 5.43 | (0.70 | ) | (13 | ) | ||||||||
| Adjusted diluted EPS from continuing operations | $ | 5.44 | $ | 5.40 | $ | 0.04 | 1 | % | ||||||
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
2016
| Year Ended September 30, 2016 | |||||||||||||||||||
| (in millions, except per share amounts) | Operating Income | Earnings from Continuing Operations Before Provision for Income Taxes | Provision for Income Taxes | Net Earnings from Continuing Operations Attributable to Viacom | Diluted EPS from Continuing Operations | ||||||||||||||
| Reported results (GAAP) | $ | 2,526 | $ | 1,990 | $ | 519 | $ | 1,436 | $ | 3.61 | |||||||||
| Factors Affecting Comparability: | |||||||||||||||||||
| Restructuring | 206 | 206 | 75 | 131 | 0.33 | ||||||||||||||
| Discrete tax benefit | — | — | 102 | (102 | ) | (0.26 | ) | ||||||||||||
| Adjusted results (Non-GAAP) | $ | 2,732 | $ | 2,196 | $ | 696 | $ | 1,465 | $ | 3.68 | |||||||||
Restructuring: We recognized a pre-tax restructuring charge of $206 million in connection with the separation of certain senior executives. The restructuring charge includes the cost of separation payments of $138 million and the acceleration of equity-based compensation expense of $68 million. See Note 14 of the Consolidated Financial Statements for additional information.
Discrete tax benefit: The net discrete tax benefit was principally related to a tax accounting method change granted by the Internal Revenue Service, the release of tax reserves with respect to certain effectively settled tax positions and the recognition of capital loss carryforwards, partially offset by a reduction in qualified production activity tax benefits as a result of retroactively reenacted legislation.
YEAR ENDED SEPTEMBER 30, 2018 vs. 2017
Consolidated Results of Operations
Revenues
Worldwide revenues decreased $320 million, or 2%, to $12.943 billion in the year ended September 30, 2018. Filmed Entertainment revenues decreased $248 million, or 8%, reflecting the number and mix of released theatrical and home entertainment titles in each year, partially offset by increased revenues from Paramount Television product. Media Networks revenues decreased $85 million, or 1%, driven by lower advertising and affiliate revenues, partially offset by an increase in ancillary revenues.
Expenses
Total expenses decreased $528 million, or 5%, to $10.373 billion in the year ended September 30, 2018. Filmed Entertainment expenses decreased $489 million, or 14%, primarily reflecting lower operating expenses. Media Networks expenses increased $86 million, or 1%, principally driven by higher operating expenses. The year ended September 30, 2018 included restructuring and related costs of $225 million, compared with $381 million of restructuring and programming charges in the prior year.
Operating
Operating expenses decreased $557 million, or 7%, to $6.879 billion in the year ended September 30, 2018. Consolidated operating expenses included a programming charge of $144 million in the prior year, as described in more detail in “Factors Affecting Comparability”. Filmed Entertainment operating expenses decreased $511 million, or 16%, and Media Networks operating expenses increased $83 million, or 2%.
Selling, General and Administrative
SG&A expenses increased $51 million, or 2%, to $3.056 billion in the year ended September 30, 2018, reflecting higher segment expenses of $36 million. SG&A costs include a 2-percentage point benefit of cost savings from our cost transformation initiatives. Filmed Entertainment SG&A expenses increased $27 million, or 8%and Media Networks SG&A expenses were substantially flat at $2.401 billion.
41
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Restructuring and Related Costs
As discussed in “Factors Affecting Comparability”, restructuring and related costs of $225 million and $237 million were recognized in the years ended September 30, 2018 and 2017, respectively.
Gain on Asset Sale
As discussed in “Factors Affecting Comparability”, the year ended September 30, 2017 includes a gain of $127 million on the sale of broadcast spectrum.
Operating Income
Operating income increased $81 million, or 3%, to $2.570 billion in the year ended September 30, 2018, reflecting the operating results discussed above. Excluding the items discussed in “Factors Affecting Comparability”, adjusted operating income increased $52 million to $2.795 billion in the year ended September 30, 2018. Filmed Entertainment adjusted operating results improved $241 million, or 86%, and Media Networks adjusted operating income decreased $171 million, or 5%. Corporate expenses increased $17 million, or 8%, in the year ended September 30, 2018 reflecting increased employee-related costs and fees for professional services.
Income Taxes
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The currently relevant provisions of the Act provide for a reduction of the federal corporate income tax rate from 35% to 21% and a “transition tax” to be levied on the deemed repatriation of indefinitely reinvested earnings of international subsidiaries. As a result of these factors, as well as our fiscal year-end, the federal statutory tax rate decreased from 35% to a prorated rate of 24.5% for fiscal 2018. While the Act includes many provisions, those applicable to Viacom will be phased in and will not have full effect until fiscal 2019.
Our effective income tax rate was 13.5% in the year ended September 30, 2018. The net discrete tax benefit of $200 million, taken together with the discrete tax impact of the other factors affecting comparability, reduced the effective income tax rate by 10.2 percentage points. Excluding the impact of discrete tax items, our adjusted effective income tax rate was 23.7% in 2018, a decline of 6.3 percentage points from the prior year, principally related to the enactment of the Act.
Our effective income tax rate was 13.2% in the year ended September 30, 2017. The net discrete tax benefit of $340 million, taken together with the discrete tax impact of the other factors affecting comparability, reduced the effective income tax rate by 16.8 percentage points. Excluding the impact of discrete tax items, our adjusted effective income tax rate was 30.0% in 2017.
Net Earnings from Continuing Operations Attributable to Viacom
Diluted Earnings Per Share from Continuing Operations
Diluted EPS from continuing operations attributabledecreased $0.48 per diluted share to Viacom decreased $470 million, or 20%$4.19 in the year ended September 30, 2018, reflecting the impact of net earnings. Excluding the items discussed in “Factors Affecting Comparability”, andadjusted diluted EPS from continuing operations decreased $0.70increased $0.35 per diluted share to $4.73.$4.12. Foreign exchange had an unfavorable $0.02 impact on diluted and adjusted diluted EPS from continuing operations.
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 rightsfilm and television content by Media Networks.
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2015 | 2014 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Advertising | $ | 5,007 | $ | 4,953 | $ | 54 | 1 | % | ||||||
| Affiliate fees | 4,908 | 4,660 | 248 | 5 | ||||||||||
| Ancillary | 575 | 558 | 17 | 3 | ||||||||||
| Total revenues by component | $ | 10,490 | $ | 10,171 | $ | 319 | 3 | % | ||||||
| Expenses | ||||||||||||||
| Operating | $ | 4,047 | $ | 3,622 | $ | (425 | ) | (12 | )% | |||||
| Selling, general and administrative | 2,138 | 2,130 | (8 | ) | — | |||||||||
| Depreciation and amortization | 162 | 148 | (14 | ) | (9 | ) | ||||||||
| Total expenses | $ | 6,347 | $ | 5,900 | $ | (447 | ) | (8 | )% | |||||
| Adjusted Operating Income | $ | 4,143 | $ | 4,271 | $ | (128 | ) | (3 | )% | |||||
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2015 | 2014 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Theatrical | $ | 841 | $ | 1,209 | $ | (368 | ) | (30 | )% | |||||
| Home entertainment | 871 | 1,164 | (293 | ) | (25 | ) | ||||||||
| License fees | 980 | 1,115 | (135 | ) | (12 | ) | ||||||||
| Ancillary | 191 | 237 | (46 | ) | (19 | ) | ||||||||
| Total revenues by component | $ | 2,883 | $ | 3,725 | $ | (842 | ) | (23 | )% | |||||
| Expenses | ||||||||||||||
| Operating | $ | 2,350 | $ | 3,031 | $ | 681 | 22 | |||||||
| Selling, general and administrative | 369 | 425 | 56 | 13 | ||||||||||
| Depreciation and amortization | 53 | 64 | 11 | 17 | ||||||||||
| Total expenses | $ | 2,772 | $ | 3,520 | $ | 748 | 21 | % | ||||||
| Adjusted Operating Income | $ | 111 | $ | 205 | $ | (94 | ) | (46 | )% | |||||
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions, except per share amounts) | 2014 | 2013 | $ | % | ||||||||||
| Revenues | $ | 13,783 | $ | 13,794 | $ | (11 | ) | — | % | |||||
| Operating income | 4,082 | 3,836 | 246 | 6 | ||||||||||
| Adjusted operating income | 4,125 | 3,942 | 183 | 5 | ||||||||||
| Net earnings from continuing operations attributable to Viacom | 2,392 | 2,407 | (15 | ) | (1 | ) | ||||||||
| Adjusted net earnings from continuing operations attributable to Viacom | 2,376 | 2,316 | 60 | 3 | ||||||||||
| Diluted EPS from continuing operations | 5.43 | 4.86 | 0.57 | 12 | ||||||||||
| Adjusted diluted EPS from continuing operations | $ | 5.40 | $ | 4.68 | $ | 0.72 | 15 | % | ||||||
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2014 | 2013 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Advertising | $ | 4,953 | $ | 4,855 | $ | 98 | 2 | % | ||||||
| Affiliate fees | 4,660 | 4,245 | 415 | 10 | ||||||||||
| Ancillary | 558 | 556 | 2 | — | ||||||||||
| Total revenues by component | $ | 10,171 | $ | 9,656 | $ | 515 | 5 | % | ||||||
| Expenses | ||||||||||||||
| Operating | $ | 3,622 | $ | 3,405 | $ | (217 | ) | (6 | )% | |||||
| Selling, general and administrative | 2,130 | 2,011 | (119 | ) | (6 | ) | ||||||||
| Depreciation and amortization | 148 | 144 | (4 | ) | (3 | ) | ||||||||
| Total expenses | $ | 5,900 | $ | 5,560 | $ | (340 | ) | (6 | )% | |||||
| Adjusted Operating Income | $ | 4,271 | $ | 4,096 | $ | 175 | 4 | % | ||||||
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2014 | 2013 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Theatrical | $ | 1,209 | $ | 1,239 | $ | (30 | ) | (2 | )% | |||||
| Home entertainment | 1,164 | 1,577 | (413 | ) | (26 | ) | ||||||||
| License fees | 1,115 | 1,206 | (91 | ) | (8 | ) | ||||||||
| Ancillary | 237 | 260 | (23 | ) | (9 | ) | ||||||||
| Total revenues by component | $ | 3,725 | $ | 4,282 | $ | (557 | ) | (13 | )% | |||||
| Expenses | ||||||||||||||
| Operating | $ | 3,031 | $ | 3,516 | $ | 485 | 14 | % | ||||||
| Selling, general and administrative | 425 | 443 | 18 | 4 | ||||||||||
| Depreciation and amortization | 64 | 89 | 25 | 28 | ||||||||||
| Total expenses | $ | 3,520 | $ | 4,048 | $ | 528 | 13 | % | ||||||
| Adjusted Operating Income | $ | 205 | $ | 234 | $ | (29 | ) | (12 | )% | |||||
| Year Ended September 30, 2015 | |||||||||||||||
| (in millions, except per share amounts) | Operating Income | Pre-tax Earnings from Continuing Operations | Net Earnings from Continuing Operations Attributable to Viacom | Diluted EPS from Continuing Operations | |||||||||||
| Reported results | $ | 3,112 | $ | 2,503 | $ | 1,922 | $ | 4.73 | |||||||
| Factors Affecting Comparability: | |||||||||||||||
| Restructuring and programming charges | 784 | 784 | 520 | 1.28 | |||||||||||
| Loss on pension settlement | 24 | 24 | 15 | 0.04 | |||||||||||
| Loss on extinguishment of debt | — | 18 | 11 | 0.03 | |||||||||||
| Discrete tax benefits | — | — | (258 | ) | (0.64 | ) | |||||||||
| Adjusted results | $ | 3,920 | $ | 3,329 | $ | 2,210 | $ | 5.44 | |||||||
| Year Ended September 30, 2014 | |||||||||||||||
| (in millions, except per share amounts) | Operating Income | Pre-tax Earnings from Continuing Operations | Net Earnings from Continuing Operations Attributable to Viacom | Diluted EPS from Continuing Operations | |||||||||||
| Reported results | $ | 4,082 | $ | 3,514 | $ | 2,392 | $ | 5.43 | |||||||
| Factors Affecting Comparability: | |||||||||||||||
| Asset impairment | 43 | 43 | 26 | 0.06 | |||||||||||
| Loss on extinguishment of debt | — | 11 | 7 | 0.02 | |||||||||||
| Discrete tax benefits | — | — | (49 | ) | (0.11 | ) | |||||||||
| Adjusted results | $ | 4,125 | $ | 3,568 | $ | 2,376 | $ | 5.40 | |||||||
| Year Ended September 30, 2013 | |||||||||||||||
| (in millions, except per share amounts) | Operating Income | Pre-tax Earnings from Continuing Operations | Net Earnings from Continuing Operations Attributable to Viacom | Diluted EPS from Continuing Operations | |||||||||||
| Reported results | $ | 3,836 | $ | 3,519 | $ | 2,407 | $ | 4.86 | |||||||
| Factors Affecting Comparability: | |||||||||||||||
| Restructuring, asset impairment and other charges | 106 | 106 | 74 | 0.15 | |||||||||||
| Gain on sale of HBO Pacific Partners and LAPTV | — | (111 | ) | (111 | ) | (0.22 | ) | ||||||||
| Discrete tax benefits | — | — | (54 | ) | (0.11 | ) | |||||||||
| Adjusted results | $ | 3,942 | $ | 3,514 | $ | 2,316 | $ | 4.68 | |||||||
42
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Media Networks
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2018 | 2017 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Advertising | $ | 4,751 | $ | 4,862 | $ | (111 | ) | (2 | )% | |||||
| Affiliate | 4,595 | 4,638 | (43 | ) | (1 | ) | ||||||||
| Ancillary | 665 | 596 | 69 | 12 | ||||||||||
| Total revenues by component | $ | 10,011 | $ | 10,096 | $ | (85 | ) | (1 | )% | |||||
| Expenses | ||||||||||||||
| Operating | $ | 4,315 | $ | 4,232 | $ | (83 | ) | (2 | )% | |||||
| Selling, general and administrative | 2,401 | 2,392 | (9 | ) | — | |||||||||
| Depreciation and amortization | 169 | 175 | 6 | 3 | ||||||||||
| Total expenses | $ | 6,885 | $ | 6,799 | $ | (86 | ) | (1 | )% | |||||
| Adjusted Operating Income | $ | 3,126 | $ | 3,297 | $ | (171 | ) | (5 | )% | |||||
Worldwide revenues decreased $85 million, or 1%, to $10.011 billion in the year ended September 30, 2018. Domestic revenues decreased $218 million, or 3%, to $7.751 billion, driven by lower advertising and LAPTV: In 2013, we completed the sales of our 20% interest in HBO Pacific Partners and our 22.5% interest in LAPTV, partnerships that own pay television channels under various brand names and that were accounted for under the equity method. The sales resulted in aggregate total proceeds of $124 million and gain of $111 million. The tax provision associated with the gains wasaffiliate revenues, partially offset by increased ancillary revenues. International revenues increased $133 million, or 6%, to $2.260 billion, driven by increases in affiliate and advertising revenues and a 2-percentage point favorable impact from the reversalTelefe acquisition.
Advertising
Worldwide advertising revenues decreased $111 million, or 2%, to $4.751 billion in the year ended September 30, 2018. Domestic advertising revenues decreased $157 million, or 4%, to $3.596 billion, principally reflecting lower linear impressions partially offset by higher pricing and growth in revenues from advanced marketing solutions, which increased 25%. International advertising revenues increased $46 million, or 4%, to $1.155 billion, primarily driven by a 2-percentage point favorable impact from the acquisition of Telefe, as well as growth at Telefe after the acquisition and growth in Europe.
Affiliate
Worldwide affiliate revenues decreased $43 million, or 1%, to $4.595 billion in the year ended September 30, 2018. Domestic affiliate revenues decreased $129 million, or 3%, to $3.791 billion, primarily driven by subscriber declines, which were partially offset by contractual rate increases. Rate increases were negatively impacted by renewal rate resets with certain distributors. International affiliate revenues increased $86 million, or 12%, to $804 million. Excluding a valuation allowance on capital loss carryforwards.2-percentage point favorable impact from foreign exchange, international affiliate revenues increased 10%, driven by increased subscription video-on-demand revenues, new channel launches and subscriber growth.
Ancillary
Worldwide ancillary revenues increased $69 million, or 12%, to $665 million in the year ended September 30, 2018, driven by increased consumer product, recreation and live event revenues. Domestic ancillary revenues increased $68 million, or 23%, to $364 million, benefiting from SpongeBob SquarePants: The Broadway Musical, as well as higher download-to-own and consumer product revenues. International ancillary revenues were substantially flat at $301 million. Excluding a 1-percentage point favorable impact from foreign exchange, international ancillary revenues decreased 1%.
Expenses
Operating
Operating expenses increased $83 million, or 2%, to $4.315 billion in the year ended September 30, 2018. Programming costs were substantially flat at $3.758 billion. Distribution and other expenses increased $81 million, or 17%, driven by costs related to growth initiatives.
Selling, General and Administrative
SG&A expenses were substantially flat at $2.401 billion in the year ended September 30, 2018. SG&A costs include a 3-percentage point benefit of savings from our cost transformation initiatives offset by increased advertising and promotion costs for the launch of the Paramount Network.
43
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Adjusted Operating Income
Adjusted operating income decreased $171 million, or 5%, to $3.126 billion in the year ended September 30, 2018, reflecting the operating results discussed above.
Filmed Entertainment
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2018 | 2017 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Theatrical | $ | 695 | $ | 808 | $ | (113 | ) | (14 | )% | |||||
| Home entertainment | 622 | 849 | (227 | ) | (27 | ) | ||||||||
| Licensing | 1,529 | 1,315 | 214 | 16 | ||||||||||
| Ancillary | 195 | 317 | (122 | ) | (38 | ) | ||||||||
| Total revenues by component | $ | 3,041 | $ | 3,289 | $ | (248 | ) | (8 | )% | |||||
| Expenses | ||||||||||||||
| Operating | $ | 2,672 | $ | 3,183 | $ | 511 | 16 | % | ||||||
| Selling, general and administrative | 369 | 342 | (27 | ) | (8 | ) | ||||||||
| Depreciation and amortization | 39 | 44 | 5 | 11 | ||||||||||
| Total expenses | $ | 3,080 | $ | 3,569 | $ | 489 | 14 | % | ||||||
| Adjusted Operating Loss | $ | (39 | ) | $ | (280 | ) | $ | 241 | 86 | % | ||||
Revenues
Worldwide revenues decreased $248 million, or 8%, to $3.041 billion in the year ended September 30, 2018. Domestic revenues decreased $116 million, or 7%, to $1.512 billion. International revenues decreased $132 million, or 8%, to $1.529 billion. Foreign exchange had a 1-percentage point favorable impact on our international revenues.
Theatrical
Worldwide theatrical revenues decreased $113 million, or 14%, to $695 million in the year ended September 30, 2018, principally reflectreflecting the number and mix of current year releases. Significant current year releases included Mission: Impossible - Fallout, A Quiet Place, Daddy’s Home 2, Sherlock Gnomes and Book Club compared with Transformers: The Last Knight, xXx: Return of Xander Cage, Baywatch, Ghost in the Shell, Jack Reacher: Never Go Back and Arrival in the prior year.Domestic theatrical revenues increased 8%, reflecting the strong performance of current year releases Mission: Impossible - Fallout and A Quiet Place, while international theatrical revenues decreased 27%, due to a difficult comparison against the strong international performance of Transformers: The Last Knight and xXx: Return of Xander Cage in the prior year.
Home Entertainment
Worldwide home entertainment revenues decreased $227 million, or 27%, to $622 million in the year ended September 30, 2018, primarily reflecting the number and mix of titles in release. Significant current year releases included Daddy’s Home 2 and A Quiet Place compared to Star Trek Beyond, Jack Reacher: Never Go Back and Arrival in the prior year. Foreign exchange had a 4-percentage point favorable impact on international home entertainment revenues. Domestic and international home entertainment revenues decreased 33% and 13%, respectively.
Licensing
Licensing revenues increased $214 million, or 16%, to $1.529 billion in the year ended September 30, 2018, primarily driven by the availability of Paramount Television product such as Tom Clancy’s Jack Ryan, Maniac and The Alienist, the release of tax reservesThe Cloverfield Paradox and the mix of titles available in each market. Domestic and international licensing revenues increased 33% and 6%, respectively. Foreign exchange had a 1-percentage point favorable impact on international licensing revenues.
Ancillary
Ancillary revenues decreased $122 million, or 38%, to $195 million in the year ended September 30, 2018. The prior year includes revenues from the sale of a partial copyright interest in certain films in connection with respectan agreement then in place.
Domestic ancillary revenues decreased 44% and international ancillary revenues decreased 15%.
Expenses
Filmed Entertainment segment expenses decreased $489 million, or 14%, to certain effectively settled tax positions,$3.080 billion in the year ended September 30, 2018, driven by lower operating expenses.
44
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Operating
Operating expenses decreased $511 million, or 16%, to $2.672 billion in the year ended September 30, 2018. Distribution and other costs, principally print and advertising expenses, decreased $633 million, or 40%, primarily driven by the number and mix of theatrical releases in the prior year, including Transformers: The Last Knight, and a prior year charge resulting from the termination of a slate financing agreement. Film costs increased $122 million, or 8%, primarily driven by higher costs associated with television product.
Selling, General and Administrative
SG&A expenses increased $27 million, or 8%, to $369 million in the year ended September 30, 2018, primarily driven by higher employee-related costs.
Adjusted Operating Loss
Adjusted operating loss was $39 million in the year ended September 30, 2018, compared with $280 million in 2017, an improvement of $241 million, or 86%, reflecting the operating results discussed above. Operating losses reflect 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 film are recognized as earned through its theatrical exhibition and subsequent distribution windows.
YEAR ENDED SEPTEMBER 30, 2017 vs. 2016
Consolidated Results of Operations
Revenues
Worldwide revenues increased $775 million, or 6%, to $13.263 billion in the year ended September 30, 2017. Filmed Entertainment revenues increased $627 million, or 24%, and Media Networks revenues increased $154 million, or 2%, with both segments reflecting increases across all revenue streams.
Expenses
Total expenses increased $939 million, or 9%, to $10.901 billion in the year ended September 30, 2017, principally reflecting higher segment expenses, as well as restructuring and programming charges of $381 million in 2017, compared with $206 million of restructuring charges in 2016. Filmed Entertainment expenses increased $462 million, or 15%, primarily reflecting higher operating expenses. Media Networks expenses increased $341 million, or 5%, principally driven by higher operating and SG&A expenses.
Operating
Operating expenses increased $752 million, or 11%, to $7.436 billion in the recognitionyear ended September 30, 2017. Consolidated operating expenses include a programming charge of certain capital loss carryforward$144 million in 2017, as described in more detail in “Factors Affecting Comparability”. Filmed Entertainment operating expenses increased $445 million, or 16%, and tax credit benefits. Media Networks operating expenses increased $169 million, or 4%.
Selling, General and Administrative
SG&A expenses increased $154 million, or 5%, to $3.005 billion in the year ended September 30, 2017, reflecting higher segment expenses of $186 million, partially offset by a decrease in equity-based compensation of $41 million, primarily driven by management changes. Media Networks SG&A expenses increased $163 million, or 7%, and Filmed Entertainment SG&A expenses increased $23 million, or 7%.
Restructuring
As discussed in “Factors Affecting Comparability”, restructuring charges of $237 million and $206 million were recognized in the years ended September 30, 2017 and 2016, respectively.
Gain on Asset Sale
As discussed in “Factors Affecting Comparability”, the year ended September 30, 2017 includes a $127 million gain on the sale of broadcast spectrum.
Operating Income
Operating income decreased $37 million, or 1%, to $2.489 billion in the year ended September 30, 2017, reflecting the operating results discussed above. Excluding the items discussed in “Factors Affecting Comparability”, adjusted operating income increased $11 million to $2.743 billion in the year ended September 30, 2017. Filmed Entertainment adjusted operating results improved $165 million, or 37%, principally reflecting the lapping of a 2016 film impairment charge and higher profits
45
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
from Paramount Television productions. Media Networks adjusted operating income decreased $187 million, or 5%, to $3.297 billion, as higher revenues were more than offset by increased expenses.
Income Taxes
Our effective income tax rate was 32.9%13.2% in 2013, excluding the impact ofyear ended September 30, 2017. The net discrete tax items. Discrete tax benefitsbenefit of $54$340 million, taken together with the effective incomediscrete tax rate impact of the other factors affecting comparability, discussed above, contributed 2.5reduced the effective income tax rate by 16.8 percentage points. Excluding the impact of discrete tax items, our adjusted effective income tax rate was 30.0% in 2017, a decline of 1.7 percentage points from the prior year, primarily driven by the change in the mix of domestic and international income.
Our effective income tax rate was 26.1% in the year ended September 30, 2016. The net discrete tax benefit of $102 million, taken together with the discrete tax impact of the restructuring charge, reduced the effective income tax rate by 5.6 percentage points. Excluding the impact of discrete tax items, our adjusted effective income tax rate was 31.7% in 2016.
Net Earnings from Continuing Operations Attributable to Viacom
Net earnings from continuing operations attributable to Viacom increased $435 million, or 30%, to $1.871 billion in the year ended September 30, 2017, principally due to gains on asset sales. Excluding the items discussed in “Factors Affecting Comparability”, adjusted net earnings from continuing operations attributable to Viacom increased $46 million, or 3%, to $1.511 billion in the year ended September 30, 2017, driven by the decrease in adjusted effective tax rate and increase in adjusted operating income.
Diluted Earnings Per Share from Continuing Operations
Diluted EPS from continuing operations increased $1.06 per diluted share to $4.67 in the year ended September 30, 2017, reflecting the impact of net earnings. Excluding the items discussed in “Factors Affecting Comparability”, adjusted diluted EPS from continuing operations increased $0.09 per diluted share to $3.77. Foreign exchange had an unfavorable $0.05 impact on diluted and adjusted diluted EPS from continuing operations.
Segment Results of Operations
Media Networks
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2017 | 2016 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Advertising | $ | 4,862 | $ | 4,809 | $ | 53 | 1 | % | ||||||
| Affiliate | 4,638 | 4,556 | 82 | 2 | ||||||||||
| Ancillary | 596 | 577 | 19 | 3 | ||||||||||
| Total revenues by component | $ | 10,096 | $ | 9,942 | $ | 154 | 2 | % | ||||||
| Expenses | ||||||||||||||
| Operating | $ | 4,232 | $ | 4,063 | $ | (169 | ) | (4 | )% | |||||
| Selling, general and administrative | 2,392 | 2,229 | (163 | ) | (7 | ) | ||||||||
| Depreciation and amortization | 175 | 166 | (9 | ) | (5 | ) | ||||||||
| Total expenses | $ | 6,799 | $ | 6,458 | $ | (341 | ) | (5 | )% | |||||
| Adjusted Operating Income | $ | 3,297 | $ | 3,484 | $ | (187 | ) | (5 | )% | |||||
Revenues
Worldwide revenues increased $154 million, or 2%, to $10.096 billion in the year ended September 30, 2017. Worldwide revenues include a 3-percentage point favorable impact from the acquisition of Telefe. Domestic revenues decreased $70 million, or 1%, to $7.969 billion. International revenues increased $224 million, or 12%, to $2.127 billion. Excluding a 5-percentage point unfavorable impact from foreign exchange, international revenues increased 17%, primarily driven by an 11-percentage point favorable impact from the Telefe acquisition.
Advertising
Worldwide advertising revenues increased $53 million, or 1%, to $4.862 billion in the year ended September 30, 2017. Foreign exchange had a 2-percentage point unfavorable impact on worldwide advertising revenues. Worldwide advertising revenues include a 4-percentage point favorable impact from the acquisition of Telefe. Domestic advertising revenues decreased $85 million, or 2%, to $3.753 billion, reflecting higher pricing, more than offset by lower impressions. International advertising revenues increased $138 million, or 14%, to $1.109 billion. Excluding an 8-percentage point unfavorable impact from foreign
46
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
exchange, international advertising revenues increased 22%, primarily driven by an 18-percentage point favorable impact from the Telefe acquisition, as well as growth in Europe.
Affiliate
Worldwide affiliate revenues increased $82 million, or 2%, to $4.638 billion in the year ended September 30, 2017. Domestic affiliate revenues increased $39 million, or 1%, to $3.920 billion, principally reflecting rate increases and higher revenues from subscription video-on-demand and other OTT agreements, partially offset by a decline in subscribers. International affiliate revenues increased $43 million, or 6%, to $718 million. Excluding a 3-percentage point unfavorable impact from foreign exchange, international affiliate revenues increased 9%, driven by the impact of rate increases, subscriber growth, new channel launches and subscription video-on-demand and other OTT agreements, as well as a 2-percentage point favorable impact from the Telefe acquisition.
Ancillary
Worldwide ancillary revenues increased $19 million, or 3%, to $596 million in the year ended September 30, 2017. Worldwide ancillary revenues include a 2-percentage point favorable impact from the acquisition of Telefe. Domestic ancillary revenues decreased $24 million, or 8%, to $296 million, principally driven by lower consumer product revenue. International ancillary revenues increased $43 million, or 17%, to $300 million, principally driven by higher consumer product revenue and the acquisition of Telefe, which reconcileshad a 6-percentage point favorable impact on international ancillary revenues.
Expenses
Media Networks segment expenses increased $341 million, or 5%, to $6.799 billion in the year ended September 30, 2017. Worldwide expenses include an unfavorable 3-percentage point impact from the acquisition of Telefe.
Operating
Operating expenses increased $169 million, or 4%, to $4.232 billion in the year ended September 30, 2017. Programming costs increased $127 million, or 3%, primarily due to the reported effective tax rateacquisition of 30.4%Telefe. Distribution and other expenses increased $42 million, or 10%, driven by increased participation and royalty costs on certain distribution and advertising agreements.
Selling, General and Administrative
SG&A expenses increased $163 million, or 7%, to $2.392 billion in the year ended September 30, 2017, reflecting a 3-percentage point increase due to the acquisition of Telefe, and higher employee-related and advertising and promotion costs.
Adjusted Operating Income
Adjusted operating income decreased $187 million, or 5%, to $3.297 billion in the year ended September 30, 2017, reflecting the operating results discussed above.
Filmed Entertainment
| Year Ended September 30, | Better/(Worse) | |||||||||||||
| (in millions) | 2017 | 2016 | $ | % | ||||||||||
| Revenues by Component | ||||||||||||||
| Theatrical | $ | 808 | $ | 605 | $ | 203 | 34 | % | ||||||
| Home entertainment | 849 | 783 | 66 | 8 | ||||||||||
| Licensing | 1,315 | 1,100 | 215 | 20 | ||||||||||
| Ancillary | 317 | 174 | 143 | 82 | ||||||||||
| Total revenues by component | $ | 3,289 | $ | 2,662 | $ | 627 | 24 | % | ||||||
| Expenses | ||||||||||||||
| Operating | $ | 3,183 | $ | 2,738 | $ | (445 | ) | (16 | )% | |||||
| Selling, general and administrative | 342 | 319 | (23 | ) | (7 | ) | ||||||||
| Depreciation and amortization | 44 | 50 | 6 | 12 | ||||||||||
| Total expenses | $ | 3,569 | $ | 3,107 | $ | (462 | ) | (15 | )% | |||||
| Adjusted Operating Loss | $ | (280 | ) | $ | (445 | ) | $ | 165 | 37 | % | ||||
47
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Revenues
Worldwide revenues increased $627 million, or 24%, to $3.289 billion in the year ended September 30, 2017. Domestic revenues increased $267 million, or 20%, to $1.628 billion. International revenues increased $360 million, or 28%, to $1.661 billion.
Theatrical
Worldwide theatrical revenues increased $203 million, or 34%, to $808 million in the year ended September 30, 2017, principally driven by the release of Transformers: The Last Knight. Other significant 2017 releases included xXx: Return of Xander Cage, Baywatch, Ghost in the Shell, Jack Reacher: Never Go Back and Arrival, compared with Star Trek Beyond, Daddy’sHome, Teenage Mutant Ninja Turtles:Out of the Shadows and The Big Short in 2016.Domestic theatrical revenues decreased 9%, while international theatrical revenues increased 86%, due to the strong international performance of Transformers: The Last Knight.
Home Entertainment
Worldwide home entertainment revenues increased $66 million, or 8%, to $849 million in the year ended September 30, 2017, primarily reflecting higher carryover revenues, driven by Teenage Mutant Ninja Turtles:Out of the Shadows, as well as catalog distribution revenues. Significant current year releases included Star Trek Beyond, Jack Reacher: Never Go Back and Arrival, while prior year releases included Mission: Impossible - Rogue Nation, Terminator: Genisys and Daddy’s Home. Foreign exchange had a 4-percentage point unfavorable impact on international home entertainment revenues. Domestic and international home entertainment revenues increased 11% and 3%, respectively.
Licensing
Licensing revenues increased $215 million, or 20%, to $1.315 billion in the year ended September 30, 2017, primarily driven by Paramount Television productions, including Shooter, 13 Reasons Why and Berlin Station. Domestic and international licensing revenues increased 32% and 13%, respectively.
Ancillary
Ancillary revenues increased $143 million, or 82%, to $317 million in the year ended September 30, 2017. Domestic ancillary revenues increased 89%, driven by the sale of a partial copyright interest in certain films released during the first half of the year in connection with an agreement then in place. International ancillary revenues increased 59%.
Expenses
Filmed Entertainment segment expenses increased $462 million, or 15%, to $3.569 billion in the year ended September 30, 2017.
Operating
Operating expenses increased $445 million, or 16%, to $3.183 billion in the year ended September 30, 2017. Distribution and other costs, principally print and advertising expenses, increased $426 million, or 37%, primarily driven by higher marketing costs for our 2017 film slate and a charge resulting from the termination of a slate financing agreement. Film costs increased $19 million, or 1%, primarily driven by the 2017 slate, including the release of Transformers:The Last Knight, partially offset by the lapping of a 2016 impairment charge.
Selling, General and Administrative
SG&A expenses increased $23 million, or 7%, to $342 million in the year ended September 30, 2017, primarily driven by higher employee-related costs.
Adjusted Operating Loss
Adjusted operating loss was $280 million in the year ended September 30, 2017, compared with $445 million in 2016, an improvement of $165 million, or 37%, reflecting the operating results discussed above. Operating losses reflect 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 film are recognized as earned through its theatrical exhibition and subsequent distribution windows.
48
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Sources and Uses of Cash
Our primary source of liquidity is cash provided through the operations of our businesses. We have access to external financing sources such as our $2.5 billion five-year revolving credit facility and the capital markets. Our principal uses of cash from operations include the creation of new programming and film content, acquisitions of third-party content, and interest and income tax payments. We also use cash for discretionary share repurchases under our stock repurchase program, as deemed appropriate, as well asthe repayment of debt, quarterly cash dividends, capital expenditures and acquisitions of businesses.
The Media Networks segment consistently generates a significant percentage of our cash flow from operating activities. Advertising is generally purchased by large media buying agencies and our affiliate feesrevenues are earned from cable and direct-to-home satellite television operators and other distributors. The Filmed Entertainment segment’s operational results and ability to generate cash flow from operations substantially depend on the number and timing of films and television series in development and production, the level and timing of print and advertising costs, and the public’s response to our theatrical film and home entertainment releases. In general, our segments require relatively low levels of capital expenditures in relation to our annual cash flow from operations. This contributes to our ability to generate cash flow for future investment in our content and business operations, which we expect to be able to maintain over time.
We use commercial paper borrowings, backstopped by our credit facility, and the credit facility to fund short-term domestic liquidity needs principally driven by the timing of our domestic operating cash flows and the amount of share repurchases in the period.flows. Our cash and cash equivalents totaled $506 million$1.557 billion as of September 30, 2015,2018, of which $446$671 million was held by our foreign subsidiariessubsidiaries.
As a result of the enactment of the Act, the Company recorded $81 million of provisional transition tax on $999 million of previously indefinitely reinvested foreign earnings and isrepatriated substantially all deemed permanently reinvested in our foreign operations. While we currentlyof these earnings to the U.S. during the fiscal year. We do not intend or foresee a need for repatriating funds held in our foreign subsidiaries, shouldcurrently have plans to repatriate any undistributed international cash not subject to the transition tax. Should we require additional capital in the United States (“U.S.”), we could elect to repatriate these additional funds or access external financing. Repatriatingfinancing, but repatriating these funds could result in a higher effectiveapproximately $90 million to $110 million of U.S. tax. Cash from earnings of our international subsidiaries generated after December 31, 2017 can be repatriated to the U.S. without incremental U.S. federal tax rate and cash taxes paid.under the Act.
We believe that our cash flows from operating activities together with our credit facility provide us with adequate resources to fund our anticipated ongoing cash requirements. We anticipate that future debt maturities will be funded with cash and cash equivalents, cash flows from operating activities and future access to capital markets, including our credit facility.
We may continue to access external financing from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. Our access to capital markets can be impacted by factors outside our control, including economic conditions; however, we believe that our strong cash flows and balance sheet, our credit facility and our credit rating will provide us with adequate access to funding given our expected cash needs. Any new borrowing cost would be affected by market conditions and short and long-term debt ratings assigned by independent rating agencies, and there can be no assurance that we will be able to access capital markets on terms and conditions that will be favorable to us.
Cash Flows
Cash and cash equivalents were $1.557 billion as of September 30, 2018, which increased $168 million compared with September 30, 2017. The following tables include information driving the change in cash and cash equivalents and a reconciliation of net cash provided by operating activities (GAAP) to free cash flow and operating free cash flow (non-GAAP). We define free cash flow as net cash provided by operating activities minus capital expenditures. We define operating free cash flow as free cash flow, excluding the impact of the cash premium on the extinguishment of debt, as applicable. Free cash flow and operating free cash flow are non-GAAP measures. Management believes the use of these measures provides investors with an important perspective on, in the case of free cash flow, our liquidity, including our ability to service debt and make investments in our businesses, and, in the case of operating free cash flow, our liquidity from ongoing activities.
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Cash Flows (in millions) | Year Ended September 30, | ||||||||||
| 2015 | 2014 | 2013 | |||||||||
| Cash provided by operations | $ | 2,313 | $ | 2,597 | $ | 3,083 | |||||
| Net cash flow used in investing activities | (257 | ) | (855 | ) | (335 | ) | |||||
| Net cash flow used in financing activities | (2,477 | ) | (3,100 | ) | (1,159 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | (73 | ) | (45 | ) | (34 | ) | |||||
| Net change in cash and cash equivalents | $ | (494 | ) | $ | (1,403 | ) | $ | 1,555 | |||
Change in cash and cash equivalents (in millions) | Year Ended September 30, | Better/(Worse) $ | |||||||||||||||||
| 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | |||||||||||||||
| Net cash provided by operating activities | $ | 1,822 | $ | 1,672 | $ | 1,371 | $ | 150 | $ | 301 | |||||||||
| Net cash provided by/(used in) investing activities | (224 | ) | 329 | (299 | ) | (553 | ) | 628 | |||||||||||
| Net cash used in financing activities | (1,410 | ) | (1,011 | ) | (1,173 | ) | (399 | ) | 162 | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (20 | ) | 20 | (26 | ) | (40 | ) | 46 | |||||||||||
| Net change in cash and cash equivalents | $ | 168 | $ | 1,010 | $ | (127 | ) | $ | (842 | ) | $ | 1,137 | |||||||
Reconciliation of net cash provided by operating activities to free cash flow and operating free cash flow | |||||||||||||||||||
| Net cash provided by operating activities (GAAP) | $ | 1,822 | $ | 1,672 | $ | 1,371 | $ | 150 | $ | 301 | |||||||||
| Capital expenditures | (178 | ) | (195 | ) | (172 | ) | 17 | (23 | ) | ||||||||||
| Free cash flow (Non-GAAP) | 1,644 | 1,477 | 1,199 | 167 | 278 | ||||||||||||||
| Debt retirement premium | — | 33 | — | (33 | ) | 33 | |||||||||||||
| Operating free cash flow (Non-GAAP) | $ | 1,644 | $ | 1,510 | $ | 1,199 | $ | 134 | $ | 311 | |||||||||
Operating Activities
Cash provided by operationsoperating activities was $2.313$1.822 billion in 2015, a decrease2018, an increase of $284$150 million compared with 2014. The decrease2017, primarily reflectsreflecting lower income taxes and interest payments, partially offset by an increase in programming spending, partially offset by lower income tax payments.
film and television production. See Note 17 of the Consolidated Financial Statements for more information regarding income tax payments.
Cash provided by operating activities was $1.672 billion in 2017, an increase of $301 million compared with 2016, primarily reflecting lower film production spend, partially offset by other unfavorable working capital requirements, including higher income tax payments.
Investing Activities
Cash used in investing activities was $257$224 million in 2015,2018, principally reflecting capital expenditures and our investment in Prismacquisition activity, comprised of WhoSay Inc., VidCon LLC and Awesomeness TV Private Limited.Holdings, LLC.
Cash used inprovided by investing activities was $855$329 million in 2014,2017, principally reflecting net proceeds of $593 million from the purchase price forsale of our investment in EPIX, $147 million from the sale of certain broadcast spectrum and $108 million from the sale of marketable securities, partially offset by the acquisition of Channel 5Telefe for $336 million, net of cash acquired, and capital expenditures.
Cash used in investing activities was $335$299 million in 2013, which included payments related to the earn-out dispute2016, principally reflecting capital expenditures and contributions made into grantor trusts in connection with the former shareholdersseparation of a discontinued operation and capital expenditures, partially offset by $124 millioncertain senior executives. See Note 14 of proceeds received from the sales of our investments in HBO Pacific Partners and LAPTV.Consolidated Financial Statements for additional information.
Financing Activities
Cash used in financing activities was $2.477$1.410 billion in 2015, primarily driven by the settlement2018, principally reflecting $1.000 billion of share repurchases totaling $1.548 billion, dividend payments of $564 million and net payments of $410 million from debt transactions. Proceeds of $990 million from the issuance of senior notes and debentures with an aggregate face value of $1.0 billion were more than offset by debt repayments of $1.400 billion.
Cash used in financing activities was $1.159$1.011 billion in 2013,2017, principally reflecting net payments of $783 million from debt transactions and dividend payments of $319 million, partially offset by stock option exercise proceeds of $172 million.
Cash used in financing activities was $1.173 billion in 2016, primarily driven by dividend payments of $635 million, debt repayments of $368 million and the settlement of share repurchases totaling $4.664 billion and dividend payments of $555 million, partially offset by the issuance of senior notes and debentures for aggregate net cash proceeds of $3.732 billion, stock option proceeds of $403 million and $97 million from excess tax benefits, which represents the actual tax deductions in excess of amounts previously recognized.$100 million.
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Capital Resources
Capital Structure and Debt
Debt (in millions) | September 30, | ||||||
| 2015 | 2014 | ||||||
| Senior notes and debentures | $ | 12,142 | $ | 12,531 | |||
| Capital leases and other obligations | 143 | 168 | |||||
| Total debt | $ | 12,285 | $ | 12,699 | |||
Debt (in millions) | September 30, | ||||||
| 2018 | 2017 | ||||||
| Notes and debentures | $ | 10,052 | $ | 11,065 | |||
| Capital leases and other obligations | 30 | 54 | |||||
| Total debt | $ | 10,082 | $ | 11,119 | |||
In December 2014,2018, we issued a total of $1.0redeemed $1.039 billion of senior notes and debentures as follows:for a redemption price of $1.000 billion. As a result, we recognized a net pre-tax extinguishment gain of $25 million, which included $14 million of unamortized debt costs and transaction fees.
The proceeds, netinterest rate payable on our 2.250% Senior notes due February 2022 and 3.450% Senior notes due October 2026, collectively the “Senior Notes”, will be subject to adjustment from time to time if Moody’s Investors Services, Inc. or S&P Global Ratings downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Senior Notes. The interest rate on these Senior Notes would increase by 0.25% upon each credit agency downgrade up to a maximum of the discount2.00%, and other issuance fees and expenses, from the issuance of the senior notes and debentures were $990 million. We utilized a portion of the proceedswould similarly be decreased for the repayment of the $600 million aggregatesubsequent upgrades. The outstanding principal amount of our 1.250%2.250% Senior Notesnotes due February 2015. We utilized the remaining proceeds for general corporate purposes, including the repurchase of shares under our stock repurchase program.
Our outstanding senior notes and debentures provide for certain covenant packages typical for an investment grade company. There is onean acceleration trigger for certainthe majority of the senior notes and debentures in the event of a change in control under certain specified circumstances coupled with ratings downgrades due to the change in control.control, as well as certain optional redemption provisions for our junior debentures.
At September 30, 20152018 and 2014,2017, the total unamortized discount and issuance fees and expenses related to the fixed rate seniorour outstanding notes and debentures was $478$431 million and $489$457 million, respectively.
Credit Facility: In November 2014, we amendedAt September 30, 2018 and 2017, there were no amounts outstanding under 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 fromdue November 9, 2017 to November 18, 2019. The average credit facility amount outstanding for the twelve months ending September 30, 2018 was $42 million, which had a weighted average interest rate of 2.74%. The credit facility is used for general corporate purposes and to support commercial paper outstanding, if any. The borrowing rate under the credit facility is LIBOR plus a margin ranging from 0.75%1.25% to 1.75%2.25% based on our current public debt rating. At September 30, 2015 and 2014, 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 September 30, 2015.2018.
Commercial Paper: At September 30, 20152018 and 20142017, there was no commercial paper outstanding. The average commercial paper outstanding for the twelve months ending September 30, 2015,2018 was $1.2 billion,$683 million, which had a weighted average interest rate of 0.44%2.25%.
Stock Repurchase Program: During 2018 and 2017, we did not repurchase any shares of Class B common stock. During 2016, we repurchased 2.1 million shares under the program for an aggregate price of $100 million. There is $4.9 billion of remaining capacity under our $20.0 billion stock repurchase program.
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Commitments and Contingencies
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. See Note 11 of the Consolidated Financial Statements for additional information. Additionally, we are subject to a redeemable put option (see Note 10 to our Consolidated Financial Statements).
Guarantees: In the course of our business, we both provide and receive the benefit of indemnities that are intended to allocate certain risks associated with business transactions. Similarly, we may remain contingently liable for various obligations of a business that has been divested in the event that a third party does not live up to its obligations under an indemnification agreement.
Leases - 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.
Other - We have indemnification obligations with respect to letters of credit and surety bonds primarily used as security against non-performance in the normal course of business.
Film Financing Arrangements: From time to time we enter into film or television programming (collectively referred to as “film”) financing arrangements that involve the sale of a partial copyright interest in a film to third-party investors. Since the investors typically have the risks and rewards of ownership proportionate to their ownership in the film, we generally record the amounts received for the sale of copyright interest as a reduction of the cost of the film and related cash flows are reflected in net cash flow from operating activities. We also enter into collaborative arrangements with other studios to jointly finance and distribute theatrical productionsfilms (“co-financing arrangements”). A co-financing arrangement typically involves joint ownership of the film asset with, under which each partner is responsible for distribution of the film in specific territories.territories or distribution windows. The partnerspartners’ share in the profits and losses of the film in accordance with their respective ownership interest.films under these arrangements are included within participations expense under the individual-film-forecast-computation method.
Contractual Obligations
Our contractual obligations include amounts reflected on our balance sheet, as well as off-balance sheet arrangements. At September 30, 2015,2018, our significant contractual obligations, including payments due for the next five fiscal years and thereafter, were as follows:
Contractual Obligations (in millions) | Total | 1 year | 2-3 years | 4-5 years | After 5 years | Total | 2019 | 2020-2021 | 2022-2023 | Thereafter | ||||||||||||||||||||||||||||
| Off-balance Sheet Arrangements | ||||||||||||||||||||||||||||||||||||||
Programming and talent commitments (1) | $ | 1,907 | $ | 730 | $ | 863 | $ | 219 | $ | 95 | $ | 2,001 | $ | 759 | $ | 833 | $ | 334 | $ | 75 | ||||||||||||||||||
Operating leases (2) | 1,887 | 237 | 403 | 212 | 1,035 | 1,686 | 176 | 426 | 294 | 790 | ||||||||||||||||||||||||||||
Purchase obligations (3) | 1,121 | 518 | 376 | 179 | 48 | 1,050 | 578 | 386 | 70 | 16 | ||||||||||||||||||||||||||||
| On-Balance Sheet Arrangements | ||||||||||||||||||||||||||||||||||||||
Capital lease obligations (4) | 108 | 22 | 46 | 33 | 7 | $ | 34 | $ | 19 | $ | 14 | $ | — | $ | 1 | |||||||||||||||||||||||
| Debt | 12,620 | 368 | 1,900 | 1,350 | 9,002 | 10,483 | 550 | 752 | 2,331 | 6,850 | ||||||||||||||||||||||||||||
| Interest payments | 8,941 | 581 | 1,068 | 931 | 6,361 | 9,415 | 518 | 950 | 867 | 7,080 | ||||||||||||||||||||||||||||
Other long-term obligations | $ | 2,270 | $ | 1,563 | $ | 588 | $ | 108 | $ | 11 | 2,412 | 1,391 | 846 | 169 | 6 | |||||||||||||||||||||||
| (1) | Programming and talent commitments include |
| (2) | Operating leases include long-term non-cancelable operating lease commitments for office space, equipment, transponders, studio facilities and vehicles. |
| (3) | Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders. |
| (4) | Capital lease obligations include capital leases for satellite transponders. |
| (5) | Interest payments on our junior subordinated debentures subsequent to the expiration of their fixed-rate periods have been included based on their current fixed rates. |
| (6) | Other long-term obligations principally consist of participations, residuals and programming obligations for content that is available for airing. |
52
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
MARKET RISK
We are exposed to market risk related to foreign currency exchange rates and interest rates. We use or expect to use derivative financial instruments to modify exposure to risks from fluctuations in foreign currency exchange rates and interest rates. In accordance with our policy, we do not use derivative instruments unless there is an underlying exposure, and we do not hold or enter into financial instruments for speculative trading purposes.
Foreign Exchange Risk
We conduct business in various countries outside the U.S., resulting in exposure to movements in foreign exchange rates when translating from the foreign local currency to the U.S. Dollar.
We use foreign currency forward contracts to economically hedge anticipated cash flows and foreign currency balances in such currencies as the British Pound, the Indian Rupee, the Euro, the Brazilian Real, the Japanese Yen,Canadian Dollar, the Australian Dollar, the Singapore DollarJapanese Yen and the Canadian Dollar.Brazilian Real. We also enter into forward contracts to hedge future production costs orand programming obligations. The change in fair value of non-designated foreign exchange contracts is included in current period earnings as part of Other items, net in the Consolidated Statements of Earnings. We manage the use of foreign exchange derivatives centrally.
At September 30, 20152018 and 2014,2017, the notional value of all foreign exchange contracts was $1.040 billion$642 million and $628$869 million, respectively. In 2015, $7692018, $345 million related to future production costs and $297 million related to our foreign currency balances and $271balances. In 2017, $582 million related to future production costs. In 2014, $390costs and $287 million related to our foreign currency balances, $154 million related to anticipated investing cash flows and $84 million related to future production costs.balances.
Interest Rate Risk
A portion of our interest expense is exposed to movements in short-term rates. A 1% change to the weighted average interest rate on commercial paper and credit facility amounts outstanding in 2018 would increase or decrease interest expense by approximately $7 million. Also, interest expense for future long-term debt issues is exposed to movements in long-term rates. Interest rate hedges may be used to modify both of these exposures at our discretion. There were no interest ratesrate hedges outstanding at September 30, 20152018 and 2014. Since the majority of our debt is fixed rate, we do not expect that a 1% increase or decrease in the level of interest rates would have a material impact on our Consolidated Financial Statements.2017.
Viacom has issued senior notes and debentures that, at September 30, 2015,2018, had an outstanding balance of $12.1$10.1 billion and an estimated fair value of $12.0$10.5 billion. A 1% increase or decrease in the level of interest rates would decrease or increase the fair value of the senior notes and debentures by approximately $854$800 million and $993$900 million, respectively.
Credit Risk
We continually monitor our positions with, and credit quality of, our customers and the financial institutions that are counterparties to our financial instrument agreements. We are exposed to credit loss in the event of nonpayment by our customers and nonperformance by the counterparties to our financial instrument agreements. However, we do not anticipate nonperformance by the counterparties to our financial instrument agreements and we believe our allowance for doubtful accounts is sufficient to cover any anticipated nonpayment by our customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, which are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates.
Our critical accounting policies are those that are considered by management to require significant judgment and use of estimates and that could have a significant impact on our financial statements. An understanding of our critical accounting policies is necessary to analyze our financial results. Our critical accounting policies include our accounting for originalfilm and television production costs, acquired programming rights, multiple-element arrangements, revenue allowances,recognition, income taxes and goodwill and other intangible assets.goodwill. The risks and uncertainties involved in applying our critical accounting policies are provided below. Unless otherwise noted, we applied our critical accounting policies and estimation methods consistently in all material respects and for all periods presented, and have discussed such policies with our Audit Committee. For a summary of our significant accounting policies see Note 2 of the Consolidated Financial Statements.
53
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
Film and Television Production Costs
We capitalize original programmingfeature film and feature filmtelevision production costs, on a title-specific basis, as Inventory, net in the Consolidated Balance Sheets. We use an individual-film-forecast-computation method to amortize original production costs and to accrue estimated liabilities for residuals and participations over the applicable title’s life cycle based upon the ratio of current period to estimated remaining total gross revenues (“ultimate revenues”) for each title. The estimate of ultimate revenues impacts the timing of amortization and accrual of residualsparticipations and participations.residuals.
Our estimate of ultimate revenues for feature films includes revenues from all sources that are estimated to be earned within ten10 years from the date of a film’s initial theatrical release. For acquired film libraries, our estimate of ultimate revenues is for a period within 20 years from the date of acquisition. Prior to the release of a feature film and throughout its life,films, we estimate the ultimate revenues based on the historical performance of similar content and pre-release market research (including test market screenings), as well as incorporating factors of the content itself, including, but not limited to, the expected number of theaters and markets in which the original content will be released, the genre of the original content and the past box office performance of the lead actors and actresses. We believe the most sensitive factor affecting our estimate of ultimate revenues for films intended for theatrical release is domestic theatrical exhibition, as subsequent markets have historically exhibited a high correlation to domestic theatrical performance. Upon a film’s release and determination of domestic theatrical performance, our estimates of revenues from succeeding windows and markets are revised based on historical relationships and an analysis of current market trends. The most sensitive factor affecting our estimates for films subsequent to their initial release is the extent of home entertainment sales achieved. In addition to theatrical performance, home entertainment sales vary based on a variety of factors including demand for our titles, the volume and quality of competing home entertainment products, marketing and promotional strategies, as well as economic conditions.
Upon a film’s initial release, we update our estimate of ultimate revenues based on expected future and actual results. Our estimates of revenues from succeeding windows and markets are revised based on historical relationships to theatrical performance and an analysis of current market trends. We also review and revise estimates of ultimate revenue and participation costs as of each reporting date to reflect the most current available information. If estimates for a film are revised, the difference between amortization expense determined using the new estimate and any amounts previously expensed during that fiscal year are charged or credited to our Consolidated Statement of Earnings in the quarter in which the estimates are revised. The most sensitive factor affecting our estimates for films subsequent to their initial release is the extent of home entertainment sales achieved. In addition to theatrical performance, home entertainment sales vary based on a variety of factors including demand for our titles, the volume and quality of competing products, marketing and promotional strategies, as well as economic conditions.
Ultimate revenues for episodic television programming are limited to the amount of contracted revenue. Accordingly, television production costs in excess of the amount of contracted revenue are expensed as incurred. For original programming broadcast on our networks, capitalized programoriginal programming costs are amortized utilizing an individual-film-forecast-computation method over the projected useful life of the programming, dependingapplicable title’s ultimate revenues based on genre and historical experience, beginning with the month of initial exhibition. The most sensitive factor affecting ultimate revenues is ratings, which are an indication of audience acceptance and directly impact the level of advertising revenues we will be able to generate during the airing of the programming. Poor ratings may result in effective abandonment of a program, which would requireresult in the immediate write-off of any unamortized production costs.
If we believe that the release of our content will not be or has not been favorably received, then we would assess whether the fair value of such content is less than the unamortized portion of its capitalized costs and, if need be, recognize an impairment charge for the amount by which the unamortized capitalized costs exceed the fair value. We utilize the individual-film-forecast-computation method (adjusted to incorporate revenue and related costs, including future exploitation costs, if any, expected to occur in periods beyond 10 years from the date of a film’s initial release) to develop the cash flows which are subsequently discounted to compute the fair value of a title that is being assessed for impairment. The discount rate utilized takes into account the time value of money as well as a risk premium. The risk premium reflects the uncertainties of realizing the expected cash flows of a title which is impacted by the title’s position within its product life cycle.
Acquired Programming Rights
54
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
aggregate similar programming based on the specific demographic targeted by each respective program service. Net realizable value is determined by estimating advertising revenues to be derived from the future airing of the programming within the daypart as well as an allocation of affiliate fee revenuerevenues to programming. An impairment charge may be necessary if our estimates of future cash flows of similar programming are insufficient or if programming is abandoned.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Determining whether some or all of these criteria have been met involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. This includes the evaluation of multiple element arrangements for bundled advertising sales and content licenses, which involves allocating the consideration among individual deliverables within the bundled arrangement.
Multiple-Element Arrangements
We enter into arrangements under which we performinvolve multiple revenue-generating activities. We must allocate consideration toIn accounting for multiple-element arrangements, judgment is exercised in identifying the separate unitselements of accountthe transaction and in determining the arrangement, which could impact the timingvalue of revenue recognition.these elements.
Advertising revenues are principally generated from the sale of advertising time comprised of multiple commercial units. Each advertising spot comprises a deliverable for accounting purposes. Consideration for these arrangements is allocated among the individual advertising spots based on relative fair value using Viacom-specific prices.
Gross versus Net Revenue
We earn and recognize revenues under distribution and outsourced agency agreements. In such cases, determining whether revenue should be reported on a gross or net basis is based on management’s assessment of who our customer is in the transaction. To the extent the end consumer is our customer, we act as the principal in a transaction and revenues earned from the end user are reported on a gross basis. This determination involves judgment and is based on an evaluation of the facts and circumstances of the terms of an arrangement.
Revenue Allowances
In accordance with the accounting guidance related to revenue recognition when a right of return exists, revenue allowances are recorded to adjust amounts originally invoiced to the estimated net realizable value of a particular product. Upon the sale of home entertainment productsDVDs and Blu-ray discs to wholesalers and retailers, we record a reduction of revenue for the impact of estimated future returns, rebates and other incentives (“estimated returns”). In determining estimated returns, we consider numerous sources of qualitative and quantitative evidence including forecasted sales data, customers’ rights of return, units shipped and units remaining at retail, historical return rates for similar product, current economic trends, competitive environment, promotions
and sales strategies.
Forecasted sales data is determined by comparing a particular release to product that has similar characteristics where applicable, such as franchise, genre, box office levels and release patterns, using regression analysis, decay rates and other tools. Based on the results of this analysis and the sales strategies to be used for the release, we reserve an appropriate percentage of each dollar of product revenue on a title taking into consideration the qualitative and quantitative factors described above. Forecasted sales data is reviewed and updated throughout each quarter and is consistent with the projections of ultimate revenues used in applying the individual-film-forecast-computation method to amortize our film costs. Accordingly, a change in forecasted sales affects both the revenue allowance and related expenses. Actual sell-through data is reviewed as it becomes available against the forecasted sales data to ensure that estimates continue to be consistent with actual sales performance.
Our estimate of future returns affects reported revenue and operating income. If we underestimate the impact of future returns in a particular period, then we may record less revenue and related expenses in later periods when returns exceed the estimated amounts. If we overestimate the impact of future returns in a particular period, then we may record additional revenue and related expenses in later periods when returns are less than estimated. An incremental change of 1%1-percentage point in our estimated sales returns rate (i.e., provisions for returns divided by gross sales of related product) for home entertainment DVDs and Blu-ray
55
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
products would have a $12$6 million impact on our total revenue for the year ended September 30, 2015.2018. This revenue impact would be partially offset by a corresponding impact on related expenses depending on the margin associated with a specific film and other factors.
Income Taxes
Significant judgment is required in determining our annual provision for income taxes and evaluating our income tax positions. Our tax rates are impacted by the tax laws, regulations and policies in federal, state, and local and international territories where our businesses operate. Changes to these laws and regulations and uncertainty generated by the prospect of future tax legislation may also affect our income tax positions, in addition to other factors, including our global mix of earnings, acquisitions and dispositions, as well as the tax characteristics of our income. In determining our income tax provisions on a jurisdiction basis, we are required to make judgments on the need to record deferred tax assets and liabilities, including the realizability of deferred tax assets. A valuation allowance for deferred tax assets is established if it is more likely than not that a deferred tax asset will not be realized. In evaluating uncertain tax positions, we make determinations of the application of complex tax rules, regulations and practices. We evaluate our uncertain tax positions quarterly based on many factors including, but not limited to, new facts, changes in tax law and interpretations, as well as information received from regulators. A change in any one of these factors could change our evaluation of an existing uncertain tax position, resulting in the recognition of an additional charge or benefit to our income tax provision in the period and may result in fluctuations in our effective income tax rate. Additionally, our income tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our income tax provisions. The resolution of audit issues and income tax positions taken may take extended periods of time due to the length of examinations by tax authorities and the possible extension of statutes of limitations.
A 1%1-percentage point change in our effective income tax rate excluding discrete items, would result in additional income tax expense of approximately $33$20 million for the year ended September 30, 2015.2018.
Goodwill
A quantitative goodwill recognized in a business combination.
Management’s Discussion and Analysis
of Results of Operations and Financial Condition
(continued)
OTHER MATTERS
Related Parties
In the ordinary course of business we enter into transactions with related parties, including National Amusements, Inc. (“National Amusements”), CBS, their respective subsidiaries and affiliates and companies that we account for under the equity method of accounting. See Note 20 to the Consolidated Financial Statements for details regarding the related party transactions and their impact on the Financial Statements.
Agreements with CBS Corporation
In connection with our separation from CBS, effective as of January 1, 2006 (the “separation”), we and CBS entered into a Separation Agreement, a Transition Services Agreement and a Tax Matters Agreement, as well as certain other agreements to govern the terms of the separation and certain of the ongoing relationships between CBS and us after the separation. These related party arrangements are more fully described below.
Pursuant to the Separation Agreement, each company is obligated to indemnify the other company and the other company’s officers, directors and employees for any losses arising out of its failure to perform or discharge any of the liabilities it assumed pursuant to the Separation Agreement, including with respect to certain legal matters, its businesses as conducted as of the date of the separation and its breaches of shared contracts.
Subject to limited exceptions, the Separation Agreement provides that none of Viacom, any subsidiary of Viacom or any person that is controlled by Viacom after the separation will own or acquire an interest in a radio or television broadcast station, television broadcast network or daily newspaper, if such ownership or acquisition would (i) cause CBS, any subsidiary of CBS or any entity controlled by CBS after the date of the separation to be in violation of U.S. federal laws limiting the ownership or control of radio broadcast stations, television broadcast stations and/or television broadcast networks or (ii) limit in any manner at any time under such laws CBS’s ability to acquire additional interests in a radio or television broadcast station and/or television broadcast network. These restrictions will terminate when none of Mr. Redstone, NAI,National Amusements, NAIRI Inc. or any of their successors, assigns or transferees are deemed to have interests in both CBS and Viacom that are attributable under applicable U.S. federal laws.
The Separation Agreement also provides that neither Viacom, any subsidiary of Viacom or any person controlled by Viacom nor CBS, any subsidiary of CBS or any person controlled by CBS will acquire any asset, enter into any agreement or accept or agree to any condition that purports to bind, or subjects to a legal order, the other company, its subsidiaries or any person it controls without such other party’s written consent.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Disclosures on our market risk are included in “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Market Risk.”
Item 8. Financial Statements and Supplementary Data.
| Index to financial statements and supplementary data: | |
Consolidated Statements of Earnings for the years ended September 30, | |
Consolidated Statements of Cash Flows for the years ended September 30, | |
Consolidated Statements of | |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management has prepared and is responsible for our consolidated financial statements and related notes. Management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Viacom Inc. and its subsidiaries'subsidiaries’ (the “Company”) internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our personal participation, we conducted an assessment of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) as issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that as of September 30, 2015,2018, Viacom maintained effective internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of September 30, 20152018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein.
VIACOM INC. | |
| By: | /S/ |
| President and Chief Executive Officer | |
| By: | /S/ WADE DAVIS |
| Wade Davis | |
| Executive Vice President, Chief Financial Officer | |
| By: | /S/ KATHERINE GILL-CHAREST |
| Katherine Gill-Charest | |
Senior Vice President, Controller and | |
To theBoard of Directors and Stockholders of Viacom Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018and 2017, and the results of theiroperations and theircash flows for each of the three years in the period ended September 30, 2018in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 8 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2015,2018, based on criteria established in in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 8.Reporting. Our responsibility is to express opinions on these the Company’s consolidatedfinancial statements on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
November 16, 2018
We have served as the Company’s auditor since 2005.
VIACOM INC.
CONSOLIDATED STATEMENTS OF EARNINGS
| Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||
| (in millions, except per share amounts) | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | ||||||||||||||||
| Revenues | $ | 13,268 | $ | 13,783 | $ | 13,794 | $ | 12,943 | $ | 13,263 | $ | 12,488 | ||||||||||
| Expenses: | ||||||||||||||||||||||
| Operating | 6,868 | 6,542 | 6,799 | 6,879 | 7,436 | 6,684 | ||||||||||||||||
| Selling, general and administrative | 2,860 | 2,899 | 2,829 | 3,056 | 3,005 | 2,851 | ||||||||||||||||
| Depreciation and amortization | 222 | 217 | 237 | 213 | 223 | 221 | ||||||||||||||||
| Asset impairment | — | 43 | 7 | |||||||||||||||||||
| Restructuring | 206 | — | 86 | |||||||||||||||||||
| Restructuring and related costs | 225 | 237 | 206 | |||||||||||||||||||
| Total expenses | 10,156 | 9,701 | 9,958 | 10,373 | 10,901 | 9,962 | ||||||||||||||||
| Gain on asset sale | — | 127 | — | |||||||||||||||||||
| Operating income | 3,112 | 4,082 | 3,836 | 2,570 | 2,489 | 2,526 | ||||||||||||||||
| Interest expense, net | (657 | ) | (615 | ) | (464 | ) | (560 | ) | (618 | ) | (616 | ) | ||||||||||
| Equity in net earnings of investee companies | 102 | 69 | 41 | 9 | 81 | 87 | ||||||||||||||||
| Loss on extinguishment of debt | (18 | ) | (11 | ) | — | |||||||||||||||||
| Gain on sale of EPIX | — | 285 | — | |||||||||||||||||||
| Other items, net | (36 | ) | (11 | ) | 106 | (22 | ) | (25 | ) | (7 | ) | |||||||||||
| Earnings from continuing operations before provision for income taxes | 2,503 | 3,514 | 3,519 | 1,997 | 2,212 | 1,990 | ||||||||||||||||
| Provision for income taxes | (501 | ) | (1,050 | ) | (1,070 | ) | (269 | ) | (293 | ) | (519 | ) | ||||||||||
| Net earnings from continuing operations | 2,002 | 2,464 | 2,449 | 1,728 | 1,919 | 1,471 | ||||||||||||||||
| Discontinued operations, net of tax | — | (1 | ) | (12 | ) | 31 | 3 | 2 | ||||||||||||||
| Net earnings (Viacom and noncontrolling interests) | 2,002 | 2,463 | 2,437 | 1,759 | 1,922 | 1,473 | ||||||||||||||||
| Net earnings attributable to noncontrolling interests | (80 | ) | (72 | ) | (42 | ) | (40 | ) | (48 | ) | (35 | ) | ||||||||||
| Net earnings attributable to Viacom | $ | 1,922 | $ | 2,391 | $ | 2,395 | $ | 1,719 | $ | 1,874 | $ | 1,438 | ||||||||||
| Amounts attributable to Viacom: | ||||||||||||||||||||||
| Net earnings from continuing operations | $ | 1,922 | $ | 2,392 | $ | 2,407 | $ | 1,688 | $ | 1,871 | $ | 1,436 | ||||||||||
| Discontinued operations, net of tax | — | (1 | ) | (12 | ) | 31 | 3 | 2 | ||||||||||||||
| Net earnings attributable to Viacom | $ | 1,922 | $ | 2,391 | $ | 2,395 | $ | 1,719 | $ | 1,874 | $ | 1,438 | ||||||||||
| Basic earnings per share attributable to Viacom: | ||||||||||||||||||||||
| Continuing operations | $ | 4.78 | $ | 5.54 | $ | 4.95 | $ | 4.19 | $ | 4.68 | $ | 3.62 | ||||||||||
| Discontinued operations | — | (0.01 | ) | (0.02 | ) | 0.08 | 0.01 | 0.01 | ||||||||||||||
| Net earnings | $ | 4.78 | $ | 5.53 | $ | 4.93 | $ | 4.27 | $ | 4.69 | $ | 3.63 | ||||||||||
| Diluted earnings per share attributable to Viacom: | ||||||||||||||||||||||
| Continuing operations | $ | 4.73 | $ | 5.43 | $ | 4.86 | $ | 4.19 | $ | 4.67 | $ | 3.61 | ||||||||||
| Discontinued operations | — | — | (0.02 | ) | 0.08 | 0.01 | — | |||||||||||||||
| Net earnings | $ | 4.73 | $ | 5.43 | $ | 4.84 | $ | 4.27 | $ | 4.68 | $ | 3.61 | ||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||||
| Basic | 402.2 | 432.1 | 486.2 | 402.7 | 399.9 | 396.5 | ||||||||||||||||
| Diluted | 406.0 | 440.2 | 494.8 | 403.0 | 400.6 | 398.0 | ||||||||||||||||
| Dividends declared per share of Class A and Class B common stock | $ | 1.46 | $ | 1.26 | $ | 1.15 | $ | 0.80 | $ | 0.80 | $ | 1.40 | ||||||||||
See accompanying notes to Consolidated Financial Statements
VIACOM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||
| (in millions) | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | ||||||||||||||||
| Net earnings (Viacom and noncontrolling interests) | $ | 2,002 | $ | 2,463 | $ | 2,437 | $ | 1,759 | $ | 1,922 | $ | 1,473 | ||||||||||
| Other comprehensive income/(loss), net of tax: | ||||||||||||||||||||||
| Foreign currency translation adjustments | (237 | ) | (85 | ) | (42 | ) | (166 | ) | 29 | (101 | ) | |||||||||||
| Defined benefit pension plans | (7 | ) | (104 | ) | 190 | 40 | 37 | (65 | ) | |||||||||||||
| Cash flow hedges | 1 | (2 | ) | 9 | (1 | ) | 7 | 1 | ||||||||||||||
| Available for sale securities | — | — | 3 | |||||||||||||||||||
| Available-for-sale securities | 48 | — | — | |||||||||||||||||||
| Other comprehensive income/(loss) (Viacom and noncontrolling interests) | (243 | ) | (191 | ) | 160 | (79 | ) | 73 | (165 | ) | ||||||||||||
| Comprehensive income | 1,759 | 2,272 | 2,597 | 1,680 | 1,995 | 1,308 | ||||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 78 | 73 | 39 | 37 | 47 | 28 | ||||||||||||||||
| Comprehensive income attributable to Viacom | $ | 1,681 | $ | 2,199 | $ | 2,558 | $ | 1,643 | $ | 1,948 | $ | 1,280 | ||||||||||
See accompanying notes to Consolidated Financial Statements
VIACOM INC.
CONSOLIDATED BALANCE SHEETS
| September 30, | September 30, | |||||||||||||
| (in millions, except par value) | 2015 | 2014 | 2018 | 2017 | ||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 506 | $ | 1,000 | $ | 1,557 | $ | 1,389 | ||||||
| Receivables, net | 2,807 | 3,066 | 3,141 | 2,970 | ||||||||||
| Inventory, net | 786 | 846 | 896 | 919 | ||||||||||
| Prepaid and other assets | 559 | 340 | 482 | 523 | ||||||||||
| Total current assets | 4,658 | 5,252 | 6,076 | 5,801 | ||||||||||
| Property and equipment, net | 947 | 1,016 | 919 | 978 | ||||||||||
| Inventory, net | 3,616 | 3,897 | 3,848 | 3,982 | ||||||||||
| Goodwill | 11,456 | 11,535 | 11,609 | 11,665 | ||||||||||
| Intangibles, net | 340 | 399 | 313 | 313 | ||||||||||
| Other assets | 1,200 | 948 | 1,018 | 959 | ||||||||||
| Total assets | $ | 22,217 | $ | 23,047 | $ | 23,783 | $ | 23,698 | ||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 506 | $ | 475 | $ | 433 | $ | 431 | ||||||
| Accrued expenses | 748 | 969 | 848 | 869 | ||||||||||
| Participants' share and residuals | 860 | 993 | 719 | 825 | ||||||||||
| Program obligations | 703 | 703 | 662 | 712 | ||||||||||
| Deferred revenue | 481 | 350 | 398 | 463 | ||||||||||
| Current portion of debt | 18 | 18 | 567 | 19 | ||||||||||
| Other liabilities | 538 | 427 | 427 | 434 | ||||||||||
| Total current liabilities | 3,854 | 3,935 | 4,054 | 3,753 | ||||||||||
| Noncurrent portion of debt | 12,267 | 12,681 | 9,515 | 11,100 | ||||||||||
| Participants' share and residuals | 351 | 403 | 523 | 384 | ||||||||||
| Program obligations | 356 | 459 | 498 | 477 | ||||||||||
| Deferred tax liabilities, net | 223 | 266 | 296 | 294 | ||||||||||
| Other liabilities | 1,348 | 1,340 | 1,186 | 1,323 | ||||||||||
| Redeemable noncontrolling interest | 219 | 216 | 246 | 248 | ||||||||||
| Commitments and contingencies (Note 11) | ||||||||||||||
| Viacom stockholders' equity: | ||||||||||||||
| Class A common stock, par value $0.001, 375.0 authorized; 50.1 and 50.9 outstanding, respectively | — | — | ||||||||||||
| Class B common stock, par value $0.001, 5,000.0 authorized; 348.0 and 363.3 outstanding, respectively | — | — | ||||||||||||
| Class A common stock, par value $0.001, 375.0 authorized; 49.4 and 49.4 outstanding, respectively | — | — | ||||||||||||
| Class B common stock, par value $0.001, 5,000.0 authorized; 353.7 and 353.0 outstanding, respectively | — | — | ||||||||||||
| Additional paid-in capital | 10,017 | 9,772 | 10,145 | 10,119 | ||||||||||
| Treasury stock, 398.0 and 377.0 common shares held in treasury, respectively | (20,725 | ) | (19,225 | ) | ||||||||||
| Treasury stock, 393.1 and 393.8 common shares held in treasury, respectively | (20,562 | ) | (20,590 | ) | ||||||||||
| Retained earnings | 14,780 | 13,465 | 18,561 | 17,124 | ||||||||||
| Accumulated other comprehensive loss | (534 | ) | (293 | ) | (737 | ) | (618 | ) | ||||||
| Total Viacom stockholders' equity | 3,538 | 3,719 | 7,407 | 6,035 | ||||||||||
| Noncontrolling interests | 61 | 28 | 58 | 84 | ||||||||||
| Total equity | 3,599 | 3,747 | 7,465 | 6,119 | ||||||||||
| Total liabilities and equity | $ | 22,217 | $ | 23,047 | $ | 23,783 | $ | 23,698 | ||||||
See accompanying notes to Consolidated Financial Statements
VIACOM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended September 30, | Year Ended September 30, | |||||||||||||||||||||
| (in millions) | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | ||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||
| Net earnings (Viacom and noncontrolling interests) | $ | 2,002 | $ | 2,463 | $ | 2,437 | $ | 1,759 | $ | 1,922 | $ | 1,473 | ||||||||||
| Discontinued operations, net of tax | — | 1 | 12 | (31 | ) | (3 | ) | (2 | ) | |||||||||||||
| Net earnings from continuing operations | 2,002 | 2,464 | 2,449 | 1,728 | 1,919 | 1,471 | ||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||
| Depreciation and amortization | 222 | 217 | 237 | 213 | 223 | 221 | ||||||||||||||||
| Asset impairment | — | 43 | 7 | |||||||||||||||||||
| Feature film and program amortization | 4,925 | 4,206 | 4,371 | 4,785 | 4,739 | 4,568 | ||||||||||||||||
| Equity-based compensation | 101 | 122 | 128 | 57 | 68 | 163 | ||||||||||||||||
| Equity in net earnings and distributions from investee companies | (95 | ) | (39 | ) | 15 | (2 | ) | (14 | ) | (83 | ) | |||||||||||
| Gain on sale of HBO Pacific Partners and LAPTV | — | — | (111 | ) | ||||||||||||||||||
| Gain on asset sales | (16 | ) | (412 | ) | — | |||||||||||||||||
| Deferred income taxes | (82 | ) | (290 | ) | 494 | (45 | ) | (174 | ) | 254 | ||||||||||||
| Operating assets and liabilities, net of acquisitions: | ||||||||||||||||||||||
| Receivables | 124 | (106 | ) | (423 | ) | (250 | ) | (132 | ) | 149 | ||||||||||||
| Inventory, program rights and participations | (4,826 | ) | (4,245 | ) | (4,063 | ) | ||||||||||||||||
| Production and programming | (4,606 | ) | (4,412 | ) | (5,102 | ) | ||||||||||||||||
| Accounts payable and other current liabilities | (9 | ) | 252 | (31 | ) | (45 | ) | (207 | ) | (229 | ) | |||||||||||
| Other, net | (49 | ) | (27 | ) | 41 | 3 | 74 | (41 | ) | |||||||||||||
| Discontinued operations, net | — | — | (31 | ) | ||||||||||||||||||
| Cash provided by operations | 2,313 | 2,597 | 3,083 | |||||||||||||||||||
| Net cash provided by operating activities | 1,822 | 1,672 | 1,371 | |||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||
| Acquisitions and investments, net | (115 | ) | (732 | ) | 124 | (112 | ) | (378 | ) | (58 | ) | |||||||||||
| Capital expenditures | (142 | ) | (123 | ) | (160 | ) | (178 | ) | (195 | ) | (172 | ) | ||||||||||
| Discontinued operations, net | — | — | (299 | ) | ||||||||||||||||||
| Net cash flow used in investing activities | (257 | ) | (855 | ) | (335 | ) | ||||||||||||||||
| Proceeds received from asset sales | 57 | 848 | — | |||||||||||||||||||
| Grantor trust proceeds/(contributions) | 9 | 54 | (69 | ) | ||||||||||||||||||
| Net cash provided by/(used in) investing activities | (224 | ) | 329 | (299 | ) | |||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||
| Borrowings | 990 | 1,484 | 3,732 | — | 2,569 | — | ||||||||||||||||
| Debt repayments | (1,400 | ) | (600 | ) | — | (1,000 | ) | (3,352 | ) | (368 | ) | |||||||||||
| Purchase of treasury stock | (1,548 | ) | (3,529 | ) | (4,664 | ) | — | — | (100 | ) | ||||||||||||
| Dividends paid | (564 | ) | (541 | ) | (555 | ) | (322 | ) | (319 | ) | (635 | ) | ||||||||||
| Excess tax benefits on equity-based compensation awards | 43 | 84 | 97 | |||||||||||||||||||
| Exercise of stock options | 146 | 173 | 403 | 2 | 172 | 11 | ||||||||||||||||
| Other, net | (144 | ) | (171 | ) | (172 | ) | (90 | ) | (81 | ) | (81 | ) | ||||||||||
| Net cash flow used in financing activities | (2,477 | ) | (3,100 | ) | (1,159 | ) | ||||||||||||||||
| Net cash used in financing activities | (1,410 | ) | (1,011 | ) | (1,173 | ) | ||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (73 | ) | (45 | ) | (34 | ) | (20 | ) | 20 | (26 | ) | |||||||||||
| Net change in cash and cash equivalents | (494 | ) | (1,403 | ) | 1,555 | 168 | 1,010 | (127 | ) | |||||||||||||
| Cash and cash equivalents at beginning of period | 1,000 | 2,403 | 848 | 1,389 | 379 | 506 | ||||||||||||||||
| Cash and cash equivalents at end of period | $ | 506 | $ | 1,000 | $ | 2,403 | $ | 1,557 | $ | 1,389 | $ | 379 | ||||||||||
See accompanying notes to Consolidated Financial Statements
VIACOM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| (in millions) | Common Stock (shares) | Common Stock/ Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Viacom Stockholders’ Equity | Noncontrolling Interests | Total Equity | Common Stock (shares) | Common Stock/ Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Viacom Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2012 | 507.0 | $ | 8,917 | $ | (11,025 | ) | $ | 9,820 | $ | (264 | ) | $ | 7,448 | $ | (9 | ) | $ | 7,439 | ||||||||||||||||||||||||||||||||||||||||||
| September 30, 2015 | 398.1 | $ | 10,017 | $ | (20,725 | ) | $ | 14,780 | $ | (534 | ) | $ | 3,538 | $ | 61 | $ | 3,599 | |||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | 2,395 | — | 2,395 | 42 | 2,437 | — | — | — | 1,438 | — | 1,438 | 35 | 1,473 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of income tax expense of $119 | — | — | — | — | 163 | 163 | (3 | ) | 160 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of income tax benefit of $31 | — | — | — | — | (158 | ) | (158 | ) | (7 | ) | (165 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | — | — | — | (24 | ) | — | (24 | ) | (33 | ) | (57 | ) | — | — | — | (32 | ) | — | (32 | ) | (36 | ) | (68 | ) | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | (562 | ) | — | (562 | ) | — | (562 | ) | — | — | — | (558 | ) | — | (558 | ) | — | (558 | ) | ||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (69.2 | ) | — | (4,800 | ) | — | — | (4,800 | ) | — | (4,800 | ) | (2.1 | ) | — | (100 | ) | — | — | (100 | ) | — | (100 | ) | ||||||||||||||||||||||||||||||||||||
| Equity-based compensation and other | 11.5 | 573 | — | — | — | 573 | — | 573 | 1.0 | 122 | 27 | — | — | 149 | — | 149 | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2013 | 449.3 | 9,490 | (15,825 | ) | 11,629 | (101 | ) | 5,193 | (3 | ) | 5,190 | |||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2016 | 397.0 | 10,139 | (20,798 | ) | 15,628 | (692 | ) | 4,277 | 53 | 4,330 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | 2,391 | — | 2,391 | 72 | 2,463 | — | — | — | 1,874 | — | 1,874 | 48 | 1,922 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of income tax benefit of $68 | — | — | — | — | (192 | ) | (192 | ) | 1 | (191 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income/(loss), net of income tax expense of $27 | — | — | — | — | 74 | 74 | (1 | ) | 73 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | — | — | — | (8 | ) | — | (8 | ) | (42 | ) | (50 | ) | — | — | — | (57 | ) | — | (57 | ) | (16 | ) | (73 | ) | ||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | (547 | ) | — | (547 | ) | — | (547 | ) | — | — | — | (321 | ) | — | (321 | ) | — | (321 | ) | ||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (40.7 | ) | — | (3,400 | ) | — | — | (3,400 | ) | — | (3,400 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation and other | 5.6 | 282 | — | — | — | 282 | — | 282 | 5.4 | (20 | ) | 208 | — | — | 188 | — | 188 | |||||||||||||||||||||||||||||||||||||||||||
| September 30, 2014 | 414.2 | 9,772 | (19,225 | ) | 13,465 | (293 | ) | 3,719 | 28 | 3,747 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2017 | 402.4 | 10,119 | (20,590 | ) | 17,124 | (618 | ) | 6,035 | 84 | 6,119 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | 1,922 | — | 1,922 | 80 | 2,002 | — | — | — | 1,719 | — | 1,719 | 40 | 1,759 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of income tax benefit of $8 | — | — | — | — | (241 | ) | (241 | ) | (2 | ) | (243 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of income tax expense of $77 | — | — | — | — | (76 | ) | (76 | ) | (3 | ) | (79 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | — | — | — | (18 | ) | — | (18 | ) | (45 | ) | (63 | ) | — | — | — | — | — | — | (63 | ) | (63 | ) | ||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | (589 | ) | — | (589 | ) | — | (589 | ) | — | — | — | (325 | ) | — | (325 | ) | — | (325 | ) | ||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (21.1 | ) | — | (1,500 | ) | — | — | (1,500 | ) | — | (1,500 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation and other | 5.0 | 245 | — | — | — | 245 | — | 245 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2015 | 398.1 | $ | 10,017 | $ | (20,725 | ) | $ | 14,780 | $ | (534 | ) | $ | 3,538 | $ | 61 | $ | 3,599 | |||||||||||||||||||||||||||||||||||||||||||
Equity-based compensation and other(1) | 0.7 | 26 | 28 | 43 | (43 | ) | 54 | — | 54 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2018 | 403.1 | $ | 10,145 | $ | (20,562 | ) | $ | 18,561 | $ | (737 | ) | $ | 7,407 | $ | 58 | $ | 7,465 | |||||||||||||||||||||||||||||||||||||||||||
(1) Includes reclassification of $43 million of stranded tax effects resulting from the Tax Cuts and Jobs Act, as discussed further in Note 1.
See accompanying notes to Consolidated Financial Statements
VIACOM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Description of Business
Viacom is home to premier globalcreates entertainment experiences that drive conversation and culture around the world. Through television, film, digital media, live events, merchandise and solutions, our brands that create compelling television programs, motion pictures, short-form content, apps, games, consumer products, social media experiencesconnect with diverse, young and other entertainment content foryoung at heart audiences in more than 180 countries. Viacom operates through two reportingreportable 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, services and related branded products for consumers in targeted demographics attractive to advertisers, content distributors and retailers.retailers through our global media brands including flagship brands Nickelodeon, MTV, BET, Comedy Central and Paramount Network. The Filmed Entertainment segment develops, produces, finances, acquires and distributes motion pictures,films, television programming and other entertainment content under thethrough its Paramount Pictures, Paramount Vantage, Paramount Classics,Players, Paramount Animation Insurge Pictures,and Paramount Television divisions, in various markets and media worldwide, for itself and for third parties. It partners on various projects with key Viacom brands, including Nickelodeon Movies, MTV Films, and Paramount Television brands.BET Films. References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries, unless the context requires otherwise.
The consolidated financial statements present the Company’s financial results for the years ended September 30, 20152018 (“2015”2018”), September 30, 20142017 (“2014”2017”) and September 30, 20132016 (“2013”2016”).
Use of Estimates
Preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“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
Equity-Based Compensation
Income Taxes
During 2018, we adopted ASU 2018-02 - Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). ASU 2018-02 allows for reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act from AOCI to retained earnings. Certain tax effects become stranded in AOCI when deferred tax balances originally recorded at the historical income tax rate are adjusted in income from continuing operations based on the lower newly enacted income tax rate. As a result of the adoption, we reclassified the stranded income tax effects resulting from the Tax Cuts and Jobs Act, increasing the accumulated other comprehensive loss by $43 million with a corresponding increase to retained earnings. The reclassification was primarily comprised of amounts relating to pension benefit plan obligations and available-for-sale securities.
In October 2016, the FASB issued ASU 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted. As of September 30, 2018, the Company had approximately $175 million of unrecorded net deferred tax assets, primarily related to an intra-entity transfer of assets. Once recorded, the deferred tax assets will be amortized over the next 15 years.
67
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15 - Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted. The new standard will impact our statement of cash flows by increasing cash flow from operating activities and decreasing cash flow from financing activities in periods when debt issuanceprepayment or debt extinguishment costs are paid. The guidance is required to be applied retrospectively and the amount that will be reclassified for 2017 is $33 million.
Financial Instruments
In connection with its financial instruments project, the FASB issued 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. Subsequent accounting standard updates have also been issued which amend and/or clarify the application of ASU 2016-01.
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. We are currently evaluating the impact of the new standard.
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 equity investments. For equity 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 expect to adopt ASU 2016-01 using the modified retrospective method and record a transition adjustment to reclassify $54 million, net of tax, of accumulated other comprehensive income related to our available-for-sale securities to retained earnings. We further expect to adopt prospectively the “measurement alternative” using subsequent available observable price changes for our investments without readily determinable fair values. Gains and losses resulting from the movements in fair value of equity investments will be recorded as a component of Other items, net in the Consolidated Statements of Earnings.
Leases
In February 2016, the FASB issued ASU 2016-02 - Leases. Subsequent ASUs have also been issued that amend and/or clarify the application of ASU 2016-02. 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 a direct deduction from the carrying amount of the related debt rather than as an asset. Theeither 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 iswill be effective for the first interim and annual periods beginning after December 15, 2015,period of our 2020 fiscal year, with early adoption permitted,permitted. See Note 11 for additional information regarding our future minimum lease commitments as of September 30, 2018. The guidance provides an option to either (1) adopt retrospectively and must be applied onrecognize a retrospective basis to all prior periodscumulative-effect adjustment at the beginning of the earliest period presented in the financial statements. Instatements or (2) recognize a cumulative-effect adjustment at the third quarterbeginning of 2015, we adoptedthe period of adoption. We are evaluating the adoption methodology and the impact of the new guidance. As of September 30, 2015 and 2014, approximately $70 million of debt issuance costs has been reclassified from Other assets to Noncurrent portion of debt inguidance on our Consolidated Balance Sheets.consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued 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 principleSubsequent ASUs have also been issued which amend and/or clarify the application of ASU 2014-09 is that2014-09. The guidance provides a company shouldfive 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. ASU 2014-09The guidance will be effective for the first interim period within annual reporting periods beginning after December 15, 2017,of our 2019 fiscal year, and allows adoption either under a full retrospective or a modified retrospective approach. Early
We have assessed the impact of adopting this guidance and have finalized our implementation plan. The new standard will impact the timing of revenue recognition for renewals and extensions of existing licensing agreements for intellectual property, which upon adoption will be recognized as revenue when the renewal term begins rather than when the agreement is permitted, but no earlier than annual reportingextended or renewed under guidance currently in effect. Additionally, under the new guidance, reserves related to sales returns and price
68
protection will be classified as a liability, as compared to our current accounting as a contra-receivable. We have not identified any other significant impacts to our consolidated financial statements based on our assessment to date. We will apply the modified retrospective method of adoption, which will result in a cumulative effect adjustment that is not expected to be material to the opening retained earnings balance for our 2019 fiscal year. In future periods, beginning after December 15, 2016.the significance of the change to the accounting for renewals and extensions will depend on the dollar value of such transactions as well as the differences in timing between when agreements are executed and when the new rights periods begin.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12 - Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. Among other provisions, ASU 2017-12 expands the eligibility of hedging strategies that qualify for hedge accounting, changes the assessment of hedge effectiveness and modifies the presentation and disclosure of hedging activities. 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.standard on our consolidated financial statements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of Viacom Inc., its subsidiaries and variable interest entities (“VIEs”) where we are considered the primary beneficiary, after elimination of intercompany accounts and transactions. Investments in business entities in which Viacom lacks control but does have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. Our proportionate share of net income or loss of the entity is recorded in Equity in net earnings of investee companies in the Consolidated Statements of Earnings. Related party
Business Combinations
We account for business combinations using the acquisition method of accounting. Under the acquisition method, once control is obtained of a business, 100% of the assets, liabilities and certain contingent liabilities acquired, including amounts attributed to noncontrolling interests, are recorded at fair value. Any transaction costs are expensed as incurred.
Foreign Currency Translation and Remeasurement
Assets and liabilities of subsidiaries with a functional currency other than the United States (“U.S.”) Dollar are translated into U.S. Dollars using period-end exchange rates, while results of operations are translated at exchange rates during the period. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets. Substantially all of our foreign operations use the local currency as the functional currency. Foreign subsidiaries using the U.S. DollarEffective July 1, 2018, Argentina has been designated as thea highly inflationary economy. Subsidiaries’ transactions denominated in currencies other than their functional currency includewill result in remeasurement adjustments in earnings,gains and losses, which are reflected within Other items, net in the Consolidated Statements of Earnings.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Determining whether some or all of these criteria have been met involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. This includes the evaluation of multiple element arrangements for bundled advertising sales and content licenses, which involves allocating the consideration among individual deliverables within the bundled arrangement.
Advertising Revenues: Revenue from the sale of advertising earned by the Media Networks segment is recognized, net of agency commissions, when the advertisement is aired and to the extent the contracted audience rating is met. For advertising sold based on impression guarantees, audience deficiency may result in an obligation to deliver subsequent additional units. To the extent we do not satisfy contracted audience ratings,impression guarantees, we record deferred revenue until such time that the audience ratingimpression guarantee has been satisfied.
69
Affiliate FeesRevenues: Affiliate feesrevenues from cable television operators, direct-to-home satellite television operators and mobile networks are recognized by the Media Networks segment as the service is provided to the distributor. Fees associated with certain distribution arrangements with subscription video-on-demand and other over-the-top (“OTT”) services are recognized upon program availability.
Ancillary Revenues: Revenue associated with consumer products and brand licensing is typically recognized utilizing contractual royalty rates applied to sales amounts reported by licensees. Revenue from licensing of our programming content for download-to-own and download-to-rent services is recognized when we are notified by the multi-platform retailer that the product has been downloaded and all other revenue recognition criteria are met.
Multiple-Element Arrangements:We enter into arrangements under which we perform multiple revenue-generating activities. We allocate consideration to separate units of account in the arrangement and recognize the associated revenue as each unit of account is delivered.
Advertising revenues are principally generated from the sale of advertising time comprised of multiple commercial units. Each advertising spot comprises a deliverable for accounting purposes. Consideration for these arrangements is allocated among the individual advertising spots based on relative fair value using Viacom-specific prices.
Subscription video-on-demand and other OTT arrangements include certain programs made available to distributors on one or more dates for a fixed fee. Consideration for such arrangements is allocated among the programs based on relative fair value using stand alone selling price, where available, or management’s best estimate considering viewing performance and other factors.
Gross versus Net Revenue: We earn and recognize revenues as a distributor on behalf of third partiesunder distribution and through outsourced agency agreements. In such cases, determining whether revenue should be reported on a gross or net basis is based on management’s assessment of who our customer is in the transaction. To the extent the end consumer is our customer, we act as the principal in a transaction and revenues earned from the end user are reported on a gross basis. This determination involves judgment and is based on an evaluation of whether we have the substantial risks and rewards under the terms of an arrangement.
Revenue Allowances: We record a provision for sales returns and allowances at the time of sale based upon an estimate of future returns, rebates and other incentives (“estimated returns”). In determining estimated returns, we consider numerous sources of qualitative and quantitative evidence including forecasted sales data, customers’ rights of return, units shipped and units remaining at retail, historical return rates for similar product, current economic trends, competitive environment, promotions and sales strategies. Reserves for accounts receivable are based on amounts estimated to be uncollectible. Our reserve for sales returns and allowances was $126$64 million and $199$79 million at September 30, 20152018 and 2014,2017, respectively. Our allowance for doubtful accounts was $37$45 million and $30$49 million at September 30, 20152018 and 2014,2017, respectively.
Advertising Expense
We expense advertising costs as they are incurred. We incurred total advertising expenses of $748$917 million in 2015, $1.0202018, $1.335 billion in 20142017 and $1.117 billion$987 million in 2013.2016.
Equity-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The fair value received is recognized in earnings over the period during which an employee is required to provide service.
Income Taxes
Our provision for income taxes includes the current tax owed on the current period earnings, as well as a deferred provision which reflects the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in existing tax laws and rates, their related interpretations, as well as the uncertainty generated by the prospect of tax legislation in the future may affect the amounts of deferred tax liabilities or the realizability of deferred tax assets. Deferred tax assets and deferred tax liabilities are classified as noncurrent and are included in Other Assets and Deferred tax liabilities, net, respectively,within the Consolidated Balance Sheets.
For tax positions we have taken or expect to take in a tax return, we apply a more likely than not assessment (i.e., there is a greater than 50 percent chance) about whether the tax position will be sustained upon examination by the appropriate tax authority with full knowledge of all relevant information. Amounts recorded for uncertain tax positions are periodically
70
assessed, including the evaluation of new facts and circumstances, to ensure sustainability of the position. Interest and penalties related to uncertain tax positions are included in the Provision for income taxes in the Consolidated Statements of Earnings. Liabilities for uncertain tax positions are classified as Other liabilities – noncurrent in the Consolidated Balance Sheets.
Earnings per Common 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 are excluded from the calculation of diluted earnings per common share.
Comprehensive Income
Comprehensive income includes net earnings, foreign currency translation adjustments, amortization of amounts related to defined benefit plans, unrealized gains and losses on certain derivative financial instruments, and unrealized gains and losses on investments in equity securities which are publicly traded.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.
Inventory
Inventories related to film and original media network programming contenttelevision productions (which include direct production costs, production overhead, acquisition costs and development costs) are stated at the lower of amortized cost or fair value. Acquired program rights and obligations are recorded based on the gross amount of the liability when the license period has begun, and when the program is accepted and available for airing. Acquired programming is stated at the lower of unamortized cost or net realizable value. Film, television and acquired programming inventories are included as a component of Inventory, net, in the Consolidated Balance Sheets. Film, television and acquired programming costs, including inventory amortization, development costs, participationsresiduals and residualsparticipations and impairment charges, if any, are included within Operating expenses in the Consolidated Statements of Earnings.
Film inventoryand television production costs: Film inventories are amortizedWe use an individual-film-forecast-computation method to amortize film costs and to accrue estimated liabilities for residuals and participations are accrued using an individual-film-forecast-computation methodover the applicable title’s life cycle based onupon the ratio of current period to estimated remaining total gross revenues (“ultimate revenues”). Ultimate for each title. The estimate of ultimate revenues impacts the timing of amortization and accrual of residuals and participations. Our estimate of ultimate revenues for feature films includeincludes revenues from all sources that are estimated to be earned within 10 years from the date of a film’s initial theatrical release. For acquired film libraries, our estimate of ultimate revenues is for a period within 20 years from the date of acquisition. These estimates are periodically reviewed and adjustments, if any, will result in changes to inventory amortization rates, estimated accruals for participationsresiduals and residualsparticipations or possibly the recognition of an impairment charge to operating income. Film development costs that have not been set for production are expensed within three years unless they are abandoned earlier, in which case these projects are written down to their estimated
fair value in the period the decision to abandon the project is determined. We have a rigorous greenlight process designed to manage the risk of loss or abandonment. We have entered into film financing arrangements that involve the sale of a partial copyright interest in a film. Amounts received under these arrangements are deducted from the film’s cost.
Acquired programming: The costsCosts incurred in acquiring programsprogram rights, including advances, are capitalized and amortized over the license period or projected useful life of the programming, if shorter, commencing upon availability, based on estimated future airings. If initial airings are expected to generate higher revenues an accelerated method of amortization is used. Net realizable value of acquired rights programming is evaluated quarterly by us on a daypart basis, which is defined as an aggregation of programs broadcast during a particular time of day or an aggregation of programs of a similar type. We aggregate similar programming based on the specific demographic targeted by each respective program service. Net realizable value is determined by estimating advertising revenues to be derived from the future airing of the programming within the daypart as well as an allocation of affiliate fee revenue to the programming. An impairment charge may be necessary if our estimates of future cash flows of similar programming are insufficient or if programming is abandoned.
Home entertainment inventory: Home entertainment inventory is valued at the lower of cost or net realizable value. Cost is determined using the average cost method.
71
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using the straight-line method. Leasehold improvements are amortized using the straight-line method over the shorter of their useful lives or the life of the lease. Costs associated with repairs and maintenance of property and equipment are expensed as incurred.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill represents the residual difference between the fair value of consideration paid for a business and the fair value of the net assets acquired. Goodwill is not amortized, but rather is tested annually for impairment, on August 31 each year, or sooner when circumstances indicate impairment may exist. Goodwill is tested for impairment at the reporting unit level, which is an operating segment, or a business which is one level below that operating segment.
Identifiable intangible assets with finite lives are amortized over their estimated useful lives, which range up to 20 years, and identifiable intangible assets with indefinite lives are not amortized, but rather are tested annually for impairment, or sooner when circumstances indicate impairment may exist. Amortizable intangible assets and other long-lived assets are tested for impairment utilizing an income approach based on undiscounted cash flows upon the occurrence of certain triggering events and, if impaired, are written down to fair value. The impairment test is performed at the lowest level of cash flows associated with the asset.
Investments
Our investments primarily consist of investments in equity.equity investments. Investments in which we have a significant influence, but not a controlling interest, are accounted for using the equity method. Other investments are carried at fair value, to the extent publicly traded, with unrealized gains and losses recorded in other comprehensive income, or at cost. We monitor our investments for impairment at least annually and make appropriate reductions in carrying values if we determine that an impairment charge is required based on qualitative and quantitative information. Our investments are included in Other assets – noncurrent in the Consolidated Balance Sheets.
Guarantees
At the inception of a guarantee, we recognize a liability for the fair value of an obligation assumed by issuing the guarantee. The related liability is subsequently reduced as utilized or extinguished and increased if there is a probable loss associated with the guarantee which exceeds the value of the recorded liability.
Treasury Stock
Treasury stock is accounted for using the cost method.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The framework for measuring fair value provides a hierarchy that prioritizes the inputs to valuation techniques used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Derivative Financial Instruments
Derivative financial instruments are recorded on the Consolidated Balance Sheets as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair value of both the derivatives and the hedged items are recorded in current earnings as part of Other items, net in the Consolidated Statements of Earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives is recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets and subsequently recognized in earnings when the hedged items impact income. The fair value of derivative financial instruments is included in Prepaid and other assets and Other liabilities – current in the Consolidated Balance Sheets. Changes in the fair value of derivatives not designated as hedges and the ineffective portion of cash flow hedges are recorded in earnings. We do not hold or enter into financial
72
instruments for speculative trading purposes. Cash flows from derivative instruments are classified in the same category as the cash flows from the related assets, liabilities or forecasted transactions in the Consolidated Statements of Cash Flows.
Pension Benefits
Our defined benefit pension plans principally consist of both funded and unfunded noncontributory plans, covering the majority of domestic employees and retirees. The funded defined benefit pension plan and unfunded pension planswhich are currently frozen to future benefit accruals. The expense we recognize is determined using certain assumptions, including, among others, the expected long-term rate of return and discount rate, among others.rate. We recognize the funded status of our defined benefit plans (other than a multiemployer plan) as an asset or liability in the Consolidated Balance Sheets and recognize the changes in the funded status in the year in which the changes occur through Accumulated other comprehensive loss in the Consolidated Balance Sheets.
NOTE 3. ACCOUNTS RECEIVABLE
We had $577$520 million and $482$486 million of noncurrent trade receivables as of September 30, 20152018 and 2014,2017, respectively. Accounts receivables are principally related to content distribution arrangements at Media Networks and long-term television license arrangements at Filmed Entertainment and subscription video-on-demand and other OTT 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.
NOTE 4. ACQUISITION &ACQUISITIONS AND INVESTMENTS
In 2018, the Company acquired WhoSay Inc., a leading influence marketing firm, VidCon LLC, a host of conferences dedicated to online video, and Awesomeness TV Holdings, LLC, a multi-platform media company serving global Gen-Z audiences as a digital-first destination for original programming, for total consideration of $87 million, net of cash acquired. The operating results of these acquisitions were not material.
On September 10, 2014,November 15, 2016, we acquired Channel 5 Broadcasting Limited,Televisión Federal S.A. (“Telefe”), one of the main free-to-air channels and biggest content producers in Argentina, for $336 million, net of cash acquired. The operating results of Telefe were not material.
The following table summarizes our allocation of Telefe’s purchase price as of the acquisition date:
Purchase Price Allocation (in millions) | |||||
| Current assets | $ | 88 | |||
| Goodwill | 258 | ||||
| Intangible assets | 49 | ||||
| Property and equipment | 73 | ||||
| Other assets | 13 | ||||
| Assets acquired | 481 | ||||
| Accounts payable and accrued expenses | 55 | ||||
| Other liabilities | 90 | ||||
| Liabilities assumed | 145 | ||||
| $ | 336 | ||||
The goodwill, which is not deductible for tax purposes, reflects the Company-specific synergies arising from the acquisition. Intangible assets primarily consist of trade names and broadcast licenses with a UK television public service broadcaster,useful life of 15 years.
Investments
Our equity method investments total $241 million and $258 million as of September 30, 2018 and 2017, respectively. During the year ended September 30, 2018, we completed a sale of a 1% equity interest in Viacom18 to our joint venture partner for £450 million. The acquisition complements our pay television networks and increased our investment$20 million, resulting in content produceda gain of $16 million, which is included in Other items, net in the UK.Consolidated Statements of Earnings.
Our cost method investments total $89 million and $98 million as of September 30, 2018 and 2017, respectively. We recognized impairment losses of $46 million and $10 million to write off certain cost method investments during the years ended
Purchase Price Allocation (in millions) | |||||
| Inventory, net | $ | 149 | |||
| Other current assets | 102 | ||||
| Goodwill | 490 | ||||
| Intangibles, net | 203 | ||||
| Other assets | 71 | ||||
| Total assets acquired | 1,015 | ||||
| Program obligations and other current liabilities | 106 | ||||
| Program obligations | 64 | ||||
| Other liabilities | 98 | ||||
| Total liabilities assumed | 268 | ||||
| $ | 747 | ||||
On May 11, 2017, we completed the sale of our 49.76% interest in EPIX, a premium entertainment network, to Metro-Goldwyn-Mayer. The sale resulted in proceeds of $593 million, net of transaction costs of $4 million, and a gain of $285 million. In addition, prior to the closing of the sale, EPIX paid a dividend, of which our pro rata share was $37 million.
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 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.
NOTE 5. PROPERTY AND EQUIPMENT
Property and Equipment, net (in millions) | September 30, | Estimated Life (in years) | September 30, | Estimated Life (in years) | ||||||||||||||||
| 2015 | 2014 | 2018 | 2017 | |||||||||||||||||
| Land | $ | 238 | $ | 238 | — | $ | 251 | $ | 261 | — | ||||||||||
| Buildings | 449 | 445 | up to 40 | 468 | 491 | up to 40 | ||||||||||||||
| Capital leases | 257 | 266 | up to 15 | 193 | 201 | up to 15 | ||||||||||||||
| Equipment and other | 1,871 | 1,852 | up to 20 | 2,101 | 2,020 | up to 20 | ||||||||||||||
| Property and equipment | 2,815 | 2,801 | 3,013 | 2,973 | ||||||||||||||||
| Less: Accumulated depreciation | (1,868 | ) | (1,785 | ) | ||||||||||||||||
| Accumulated depreciation | (2,094 | ) | (1,995 | ) | ||||||||||||||||
| Property and equipment, net | $ | 947 | $ | 1,016 | $ | 919 | $ | 978 | ||||||||||||
Depreciation expense, including assets under capital leases, was $182 million in 2018, $194 million in 2017, and $188 million in 2015, $177 million in 2014 and $174 million in 2013.2016. Depreciation expense related to capital leases was $20$15 million in 2015, $212018, $16 million in 20142017 and $21$18 million in 2013.2016. Accumulated depreciation of capital leases was $171$172 million and $156$160 million at September 30, 20152018 and 2014,2017, respectively.
Inventory (in millions) | September 30, | ||||||
| 2015 | 2014 | ||||||
| Film inventory: | |||||||
| Released, net of amortization | $ | 576 | $ | 664 | |||
| Completed, not yet released | 55 | 131 | |||||
| In process and other | 806 | 436 | |||||
| Total film inventory, net of amortization | 1,437 | 1,231 | |||||
| Original programming: | |||||||
| Released, net of amortization | 1,161 | 1,409 | |||||
| In process and other | 607 | 631 | |||||
| Total original programming, net of amortization | 1,768 | 2,040 | |||||
| Acquired program rights, net of amortization | 1,108 | 1,367 | |||||
| Home entertainment inventory | 89 | 105 | |||||
| Total inventory, net | 4,402 | 4,743 | |||||
| Less current portion | (786 | ) | (846 | ) | |||
| Total inventory-noncurrent, net | $ | 3,616 | $ | 3,897 | |||
NOTE 6. INVENTORY
Inventory (in millions) | September 30, | ||||||
| 2018 | 2017 | ||||||
| Film inventory: | |||||||
| Released, net of amortization | $ | 454 | $ | 534 | |||
| Completed, not yet released | 11 | 85 | |||||
| In process and other | 713 | 686 | |||||
| 1,178 | 1,305 | ||||||
| Television production: | |||||||
| Released, net of amortization | 6 | 15 | |||||
| In process and other | 201 | 237 | |||||
| 207 | 252 | ||||||
| Original programming: | |||||||
| Released, net of amortization | 1,124 | 1,146 | |||||
| In process and other | 757 | 673 | |||||
| 1,881 | 1,819 | ||||||
| Acquired program rights, net of amortization | 1,411 | 1,435 | |||||
| Home entertainment inventory | 67 | 90 | |||||
| Total inventory, net | 4,744 | 4,901 | |||||
| Less current portion | 896 | 919 | |||||
| Noncurrent portion | $ | 3,848 | $ | 3,982 | |||
We expect to amortize approximately $1.4 billion of film inventory, television production and original programming, including released and completed, not yet released, during the fiscal year ending September 30, 2019 using the individual-film-forecast-computation method. In addition, we expect to amortize 90% of unamortized released film and television costs, excluding acquired film libraries, at September 30, 2018, within the next three years.
NOTE 7. GOODWILL AND INTANGIBLES
Goodwill
The following table details the change in goodwill by segment for 20152018 and 2014:2017:
Goodwill (in millions) | Media Networks | Filmed Entertainment | Total | ||||||||
| Balance at September 30, 2013 | $ | 9,486 | $ | 1,593 | $ | 11,079 | |||||
| Acquisitions | 479 | — | 479 | ||||||||
| Dispositions | (5 | ) | — | (5 | ) | ||||||
| Foreign currency translation | (18 | ) | — | (18 | ) | ||||||
| Balance at September 30, 2014 | 9,942 | 1,593 | 11,535 | ||||||||
| Dispositions | (3 | ) | — | (3 | ) | ||||||
| Foreign currency translation | (92 | ) | — | (92 | ) | ||||||
| Other | 16 | — | 16 | ||||||||
| Balance at September 30, 2015 | $ | 9,863 | $ | 1,593 | $ | 11,456 | |||||
Goodwill (in millions) | Media Networks | Filmed Entertainment | Total | ||||||||
| Balance at September 30, 2016 | $ | 9,807 | $ | 1,593 | $ | 11,400 | |||||
| Acquisitions | 279 | — | 279 | ||||||||
| Foreign currency translation | (14 | ) | — | (14 | ) | ||||||
| Balance at September 30, 2017 | 10,072 | 1,593 | 11,665 | ||||||||
| Acquisitions | 56 | — | 56 | ||||||||
| Foreign currency translation | (112 | ) | — | (112 | ) | ||||||
| Balance at September 30, 2018 | $ | 10,016 | $ | 1,593 | $ | 11,609 | |||||
75
Intangibles
The following table details our intangible asset balances by major asset classes:
Intangibles (in millions) | September 30, | September 30, | ||||||||||||
| 2015 | 2014 | 2018 | 2017 | |||||||||||
| Finite-lived intangible assets: | ||||||||||||||
| Trade names | $ | 175 | $ | 181 | $ | 194 | $ | 189 | ||||||
| Licenses | 131 | 150 | 149 | 159 | ||||||||||
| Subscriber agreements | 54 | 57 | 55 | 55 | ||||||||||
| Other intangible assets | 152 | 153 | 185 | 154 | ||||||||||
| Total finite-lived intangible assets | 512 | 541 | ||||||||||||
| 583 | 557 | |||||||||||||
| Accumulated amortization on finite-lived intangible assets: | ||||||||||||||
| Trade names | (63 | ) | (52 | ) | (87 | ) | (78 | ) | ||||||
| Licenses | (8 | ) | (2 | ) | (28 | ) | (21 | ) | ||||||
| Subscriber agreements | (40 | ) | (38 | ) | (51 | ) | (49 | ) | ||||||
| Other intangible assets | (116 | ) | (105 | ) | (138 | ) | (131 | ) | ||||||
| Total accumulated amortization on finite-lived intangible assets | (227 | ) | (197 | ) | ||||||||||
| (304 | ) | (279 | ) | |||||||||||
| Finite-lived intangible assets, net | $ | 285 | $ | 344 | 279 | 278 | ||||||||
| Indefinite-lived intangible assets | 55 | 55 | 34 | 35 | ||||||||||
| Total intangibles, net | $ | 340 | $ | 399 | $ | 313 | $ | 313 | ||||||
Amortization expense relating to intangible assets was $34$31 million for 2015, $402018, $29 million for 20142017 and $63$33 million for 2013.2016. We expect our aggregate annual amortization expense for existing intangible assets subject to amortization at September 30, 20152018 to be as follows for each of the next five fiscal years:
Amortization of Intangibles (in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||||||||
| Amortization expense | $33 | $30 | $26 | $22 | $20 | $ | 31 | $ | 32 | $ | 25 | $ | 21 | $ | 19 | |||||||||||||
NOTE 8. DEBT
Our total debt consists of the following:
Debt (in millions) | September 30, | September 30, | ||||||||||||
| 2015 | 2014 | 2018 | 2017 | |||||||||||
| Senior Notes and Debentures: | ||||||||||||||
| Senior notes due February 2015, 1.250% | $ | — | $ | 600 | ||||||||||
| Senior notes due September 2015, 4.250% | — | 250 | ||||||||||||
| Senior notes due April 2016, 6.250% | 368 | 916 | ||||||||||||
| Senior notes due December 2016, 2.500% | 399 | 398 | ||||||||||||
| Senior notes due April 2017, 3.500% | 498 | 497 | ||||||||||||
| Senior notes due October 2017, 6.125% | 499 | 498 | ||||||||||||
| Senior notes due September 2018, 2.500% | 497 | 495 | ||||||||||||
| Senior notes due April 2019, 2.200% | 398 | 398 | ||||||||||||
| Senior notes due September 2019, 5.625% | 550 | 551 | 550 | 550 | ||||||||||
| Senior notes due December 2019, 2.750% | 398 | — | 252 | 252 | ||||||||||
| Senior notes due March 2021, 4.500% | 494 | 492 | 497 | 496 | ||||||||||
| Senior notes due December 2021, 3.875% | 592 | 591 | 596 | 595 | ||||||||||
| Senior notes due February 2022, 2.250% | 102 | 188 | ||||||||||||
| Senior notes due June 2022, 3.125% | 296 | 295 | 194 | 297 | ||||||||||
| Senior notes due March 2023, 3.250% | 297 | 296 | 181 | 298 | ||||||||||
| Senior notes due September 2023, 4.250% | 1,233 | 1,230 | 1,239 | 1,237 | ||||||||||
| Senior notes due April 2024, 3.875% | 543 | 543 | 488 | 545 | ||||||||||
| Senior notes due October 2026, 3.450% | 474 | 587 | ||||||||||||
| Senior debentures due December 2034, 4.850% | 592 | — | 281 | 585 | ||||||||||
| Senior debentures due April 2036, 6.875% | 1,066 | 1,065 | 1,068 | 1,067 | ||||||||||
| Senior debentures due October 2037, 6.750% | 75 | 75 | 75 | 75 | ||||||||||
| Senior debentures due February 2042, 4.500% | 244 | 243 | 62 | 102 | ||||||||||
| Senior debentures due March 2043, 4.375% | 1,085 | 1,081 | 1,102 | 1,096 | ||||||||||
| Senior debentures due June 2043, 4.875% | 246 | 246 | 32 | 37 | ||||||||||
| Senior debentures due September 2043, 5.850% | 1,228 | 1,227 | 1,230 | 1,229 | ||||||||||
| Senior debentures due April 2044, 5.250% | 544 | 544 | 345 | 545 | ||||||||||
| Junior Debentures: | ||||||||||||||
| Junior subordinated debentures due February 2057, 5.875% | 642 | 642 | ||||||||||||
| Junior subordinated debentures due February 2057, 6.250% | 642 | 642 | ||||||||||||
| Capital lease and other obligations | 143 | 168 | 30 | 54 | ||||||||||
| Total debt | 12,285 | 12,699 | 10,082 | 11,119 | ||||||||||
| Less current portion | (18 | ) | (18 | ) | 567 | 19 | ||||||||
| Total noncurrent portion of debt | $ | 12,267 | $ | 12,681 | ||||||||||
| Noncurrent portion | $ | 9,515 | $ | 11,100 | ||||||||||
The amounts classified in the current portion of debt consist of the portion of capital leases payable in the next twelve months.
In December 2014,2018, we issued a total of $1.0redeemed $1.039 billion of senior notes and debentures as follows:for a redemption price of $1.000 billion. As a result, we recognized a net pre-tax extinguishment gain of $25 million, net of $14 million of unamortized debt costs and transaction fees included in Other items, net in the Consolidated Statements of Earnings.
In 2017, we issued $2.6 billion of junior debentures and senior notes. Our 5.875% Junior subordinated debentures due February 2057 and 6.250% Junior subordinated debentures due February 2057 accrue interest at the stated fixed rates until February 28, 2022 and February 28, 2027, respectively, on which dates the rates will switch to floating rates based on three-month LIBOR plus 3.895% and 3.899%, respectively, reset quarterly. These debentures can be called by us at any time after the expiration of the fixed-rate period.
The interest rate payable on our 2.250% Senior notes due February 2022 and 3.450% Senior notes due October 2026, collectively the “Senior Notes”, will be subject to adjustment from time to time if Moody’s Investors Services, Inc. or S&P Global Ratings downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Senior Notes. The interest rate on these Senior Notes due December 2019 with an aggregate principal amountwould increase by 0.25% upon each credit agency downgrade up to a maximum of $400 million at a price equal to 99.986%2.00%, and would similarly be decreased for subsequent upgrades.
In 2017, we redeemed $3.331 billion of the principal amount.
Our outstanding senior notes and debentures provide for certain covenant packages typical for an investment grade company. There is onean acceleration trigger for certainthe majority of the senior notes and debentures in the event of a change in control under certain specified circumstances coupled with ratings downgrades due to the change in control.control, as well as certain optional redemption provisions for our junior debentures.
At September 30, 20152018 and 2014,2017, the total unamortized discount and issuance fees and expenses related to the fixed rate seniorour outstanding notes and debentures was $478$431 million and $489$457 million, respectively.
The fair value of our senior notes and debentures was approximately $12.0$10.5 billion and $13.7$11.6 billion as of September 30, 20152018 and 2014,2017, respectively. The valuation of our publicly traded debt is based on quoted prices in active markets.
Credit Facility
Commercial Paper
At September 30, 20152018 and 2014,2017, there was no commercial paper outstanding.
Maturities of Debt Excluding Capital Leases (in millions) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | After 5 Years | ||||||
| Debt | $368 | $900 | $1,000 | $950 | $400 | $9,002 | ||||||
NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFITS
Our defined benefit pension plans principally consist of both funded and unfunded noncontributory plans, covering the majority of domestic employees and retirees.which are currently frozen to future benefit accruals. The funded plan provides a defined benefit based on a percentage of eligible compensation for periods of service. The funded defined benefit pension plan and unfunded pension plans are currently frozen to future benefit accruals.
The following tables summarize changes in the benefit obligation, the plan assets and the funded status of our pension plans utilizing a measurement date as of September 30, 20152018 and 2014,2017, respectively:
Change in Benefit Obligation (in millions) | Year Ended September 30, | Year Ended September 30, | ||||||||||||
| 2015 | 2014 | 2018 | 2017 | |||||||||||
| Benefit obligation, beginning of period | $ | 1,060 | $ | 893 | $ | 999 | $ | 1,014 | ||||||
| Service cost | — | — | ||||||||||||
| Interest cost | 43 | 46 | 35 | 33 | ||||||||||
| Actuarial (gain)/loss | (38 | ) | 159 | |||||||||||
| Actuarial gain | (47 | ) | (10 | ) | ||||||||||
| Benefits paid | (128 | ) | (38 | ) | (42 | ) | (38 | ) | ||||||
| Benefit obligation, end of period | $ | 937 | $ | 1,060 | $ | 945 | $ | 999 | ||||||