XNAS:VIA Viacom Inc Class A Quarterly Report 10-Q Filing - 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     For the transition period from                      to                     

Commission File Number 001-32686

 

 

VIACOM INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE   20-3515052

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

1515 Broadway

New York, NY 10036

(212) 258-6000

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes x    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No x

 

Class of Stock

  

Shares Outstanding

as of April 15, 2012

Class A Common stock, par value $0.001 per share

   51,410,792

Class B Common stock, par value $0.001 per share

   476,409,467

 

 

 

 


Table of Contents

VIACOM INC.

INDEX TO FORM 10-Q

 

         Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Earnings for the quarter and six months ended March 31, 2012 and 2011

     1   
 

Consolidated Balance Sheets as of March 31, 2012 and September 30, 2011

     2   
 

Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011

     3   
  Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the quarter and six months ended March 31, 2012 and 2011      4   
 

Notes to Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition

     16   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     28   

Item 4.

 

Controls and Procedures

     28   

PART II—OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     29   

Item 1A.

 

Risk Factors

     29   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     29   

Item 6.

 

Exhibits

     30   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

VIACOM INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

      Quarter Ended
March 31,
    Six Months Ended
March 31,
 
(in millions, except per share amounts)        2012             2011             2012             2011      

Revenues

   $ 3,331     $ 3,267     $ 7,283     $ 7,095  

Expenses:

        

Operating

     1,645       1,721       3,830       3,738  

Selling, general and administrative

     695       719       1,384       1,419  

Depreciation and amortization

     59       67       121       138  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     2,399       2,507       5,335       5,295  

Operating income

     932       760       1,948       1,800  

Interest expense, net

     (103     (102     (208     (206

Equity in net earnings of investee companies

     5       15       15       39  

Loss on extinguishment of debt

     (21     (87     (21     (87

Other items, net

     (1     (7     (5     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before provision for income taxes

     812       579       1,729       1,539  

Provision for income taxes

     (213     (197     (529     (528
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings from continuing operations

     599       382       1,200       1,011  

Discontinued operations, net of tax

     (3     -        (382     (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (Viacom and noncontrolling interests)

     596       382       818       1,001  

Net earnings attributable to noncontrolling interests

     (11     (6     (21     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Viacom

   $ 585     $ 376     $ 797     $ 986  
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Viacom:

        

Net earnings from continuing operations

   $ 588     $ 376     $ 1,179      $ 996  

Discontinued operations, net of tax

     (3     -        (382     (10
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Viacom

   $ 585     $ 376     $ 797     $ 986  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share attributable to Viacom:

        

Continuing operations

   $ 1.09     $ 0.63     $ 2.17     $ 1.66  

Discontinued operations

   $ -      $ -      $ (0.71   $ (0.01

Net earnings

   $ 1.09     $ 0.63     $ 1.46     $ 1.65  

Diluted earnings per share attributable to Viacom:

        

Continuing operations

   $ 1.08     $ 0.63     $ 2.14     $ 1.65  

Discontinued operations

   $ (0.01   $ -      $ (0.69   $ (0.02

Net earnings

   $ 1.07     $ 0.63     $ 1.45     $ 1.63  

Weighted average number of common shares outstanding:

        

Basic

     537.5       594.4       544.1       599.0  

Diluted

     544.4       601.1       550.8       604.6  

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

   $ 0.25     $ 0.15     $ 0.50     $ 0.30  

 

 

See accompanying notes to Consolidated Financial Statements

 

1


Table of Contents

VIACOM INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(in millions, except par value)    March 31,
2012
    September 30,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $             1,135     $             1,021  

Receivables, net

     2,638       2,732  

Inventory, net

     841       828  

Deferred tax assets, net

     35       41  

Prepaid and other assets

     318       639  
  

 

 

   

 

 

 

Total current assets

     4,967       5,261  

Property and equipment, net

     1,048       1,057  

Inventory, net

     4,213       4,239  

Goodwill

     11,041       11,064  

Intangibles, net

     356       392  

Deferred tax assets, net

     12       -   

Other assets

     790       788  
  

 

 

   

 

 

 

Total assets

   $ 22,427     $ 22,801  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Accounts payable

   $ 313     $ 427  

Accrued expenses

     936       1,152  

Participants’ share and residuals

     1,104       1,158  

Program rights obligations

     532       475  

Deferred revenue

     215       187  

Current portion of debt

     21       23  

Other liabilities

     1,042       520  
  

 

 

   

 

 

 

Total current liabilities

     4,163       3,942  

Noncurrent portion of debt

     7,757       7,342  

Participants’ share and residuals

     489       487  

Program rights obligations

     691       771  

Deferred tax liabilities, net

     -        123  

Other liabilities

     1,384       1,351  

Redeemable noncontrolling interest

     151       152  

Commitments and contingencies (Note 9)

    

Viacom stockholders’ equity:

    

Class A Common stock, par value $0.001, 375.0 authorized; 51.4 and 51.4 outstanding, respectively

     -        -   

Class B Common stock, par value $0.001, 5,000.0 authorized; 478.8 and 506.9 outstanding, respectively

     1       1  

Additional paid-in capital

     8,673       8,614  

Treasury stock, 238.1 and 207.2 common shares held in treasury, respectively

     (9,625     (8,225

Retained earnings

     8,947       8,418  

Accumulated other comprehensive loss

     (193     (164
  

 

 

   

 

 

 

Total Viacom stockholders’ equity

     7,803       8,644  

Noncontrolling interests

     (11     (11
  

 

 

   

 

 

 

Total equity

     7,792       8,633  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 22,427     $ 22,801  
  

 

 

   

 

 

 

 

 

See accompanying notes to Consolidated Financial Statements

 

2


Table of Contents

VIACOM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

      Six Months Ended
March 31,
 
(in millions)            2012                     2011          

OPERATING ACTIVITIES

    

Net earnings (Viacom and noncontrolling interests)

   $ 818     $ 1,001  

Discontinued operations, net of tax

     382       10  
  

 

 

   

 

 

 

Net earnings from continuing operations

     1,200       1,011  

Reconciling items:

    

Depreciation and amortization

     121       138  

Feature film and program amortization

     2,247       2,159  

Equity-based compensation

     57       63  

Equity in net income and distributions from investee companies

     (11     (34

Deferred income taxes

     (137     180  

Operating assets and liabilities, net of acquisitions:

    

Receivables

     77       (6

Inventory, program rights and participations

     (2,300     (2,104

Accounts payable and other current liabilities

     175       165  

Other, net

     78       (108

Discontinued operations, net

     (3     (20
  

 

 

   

 

 

 

Cash provided by operations

     1,504       1,444  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Acquisitions and investments

     (17     (59

Capital expenditures

     (63     (42
  

 

 

   

 

 

 

Net cash flow used in investing activities

     (80     (101
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Borrowings

     1,722       982  

Debt repayments

     (892     (582

Commercial paper

     (423     -   

Purchase of treasury stock

     (1,404     (852

Dividends paid

     (278     (182

Excess tax benefits on equity-based compensation awards

     27       -   

Other, net

     (53     (3
  

 

 

   

 

 

 

Net cash flow used in financing activities

     (1,301     (637
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (9     12  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     114       718  

Cash and cash equivalents at beginning of period

     1,021       837  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,135     $ 1,555  
  

 

 

   

 

 

 

 

 

See accompanying notes to Consolidated Financial Statements

 

3


Table of Contents

VIACOM INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

 

                 
(in millions)   Common
Stock
Outstanding
(shares)
    Common
Stock/APIC
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total Viacom
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

December 31, 2011

    543.0     $ 8,651     $ (8,925   $ 8,492     $ (204   $ 8,014     $ (11   $ 8,003  

Net earnings

          585         585       11       596  

Translation adjustments

            5       5       -        5  

Defined benefit pension plans

            3       3       -        3  

Other

            3       3       -        3  
           

 

 

   

 

 

   

 

 

 

Comprehensive income

              596       11       607  

Noncontrolling interests

          5         5       (11     (6

Dividends declared

          (135       (135     -        (135

Purchase of treasury stock

    (14.7       (700         (700     -        (700

Equity-based compensation and other

    1.9       23             23       -        23  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2012

    530.2     $ 8,674     $ (9,625   $ 8,947     $ (193   $ 7,803     $ (11   $ 7,792  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                 
(in millions)   Common
Stock
Outstanding
(shares)
    Common
Stock/APIC
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total Viacom
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

December 31, 2010

    598.4     $ 8,389     $ (6,125   $ 7,294     $ (86   $ 9,472      $ (22   $ 9,450  

Net earnings

          376         376        6       382  

Translation adjustments

            53       53        1       54  

Defined benefit pension plans

            2       2        -        2  

Other

            (5     (5     -        (5
           

 

 

   

 

 

   

 

 

 

Comprehensive income

              426        7       433  

Noncontrolling interests

              -        (5     (5

Dividends declared

          (91       (91     -        (91

Purchase of treasury stock

    (11.4       (500         (500     -        (500

Equity-based compensation and other

    1.1       46             46        -        46  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2011

    588.1     $ 8,435     $ (6,625   $ 7,579     $ (36   $ 9,353      $ (20   $ 9,333  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See accompanying notes to Consolidated Financial Statements

 

4


Table of Contents

VIACOM INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Unaudited)

 

 

                 
(in millions)   Common
Stock
Outstanding
(shares)
    Common
Stock/APIC
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total Viacom
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

September 30, 2011

    558.3     $ 8,615     $ (8,225   $ 8,418     $ (164   $ 8,644     $ (11   $ 8,633  

Net earnings

          797         797       21       818  

Translation adjustments

            (38     (38     -        (38

Defined benefit pension plans

            5       5       -        5  

Other

            4       4       -        4  
           

 

 

   

 

 

   

 

 

 

Comprehensive income

              768       21       789  

Noncontrolling interests

          5         5       (21     (16

Dividends declared

          (273       (273     -        (273

Purchase of treasury stock

    (30.9       (1,400         (1,400     -        (1,400

Equity-based compensation and other

    2.8       59             59       -        59  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2012

    530.2     $ 8,674     $ (9,625   $ 8,947     $ (193   $ 7,803     $ (11   $ 7,792  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
               
                 
(in millions)   Common
Stock
Outstanding
(shares)
    Common
Stock/APIC
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total Viacom
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

September 30, 2010

    608.5     $ 8,347     $ (5,725   $ 6,775     $ (114   $ 9,283     $ (24   $ 9,259  

Net earnings

          986         986       15       1,001  

Translation adjustments

            81       81       2       83  

Defined benefit pension plans

            3       3       -        3  

Other

            (6     (6     -        (6
           

 

 

   

 

 

   

 

 

 

Comprehensive income

              1,064       17       1,081  

Noncontrolling interests

              -        (13     (13

Dividends declared

          (182       (182     -        (182

Purchase of treasury stock

    (21.8       (900         (900     -        (900

Equity-based compensation and other

    1.4       88             88       -        88  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2011

    588.1     $ 8,435     $ (6,625   $ 7,579     $ (36   $ 9,353     $ (20   $ 9,333  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See accompanying notes to Consolidated Financial Statements

 

5


Table of Contents

VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Viacom Inc. including its consolidated subsidiaries (“Viacom” or the “Company”) is a leading global entertainment content company that connects with audiences through compelling content across television, motion picture, online and mobile platforms in over 160 countries and territories. Viacom operates through two reporting segments: Media Networks, which includes Music and Logo, Nickelodeon, Entertainment and BET Networks; and Filmed Entertainment. The Media Networks segment provides entertainment content and related branded products for consumers in targeted demographics attractive to advertisers, content distributors and retailers. The Filmed Entertainment segment produces, finances and distributes motion pictures and other entertainment content under the Paramount Pictures, Paramount Vantage, Paramount Classics, Insurge Pictures, MTV Films and Nickelodeon Movies brands. It also acquires films for distribution and has distribution relationships with third parties.

Basis of Presentation

Unaudited Interim Financial Statements

The accompanying unaudited consolidated quarterly financial statements have been prepared on a basis consistent with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the results of operations, financial position and cash flows for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results expected for the fiscal year ending September 30, 2012 (“fiscal 2012”) or any future period. These statements should be read in conjunction with the Company’s Form 10-K for the year ended September 30, 2011, as filed with the SEC on November 10, 2011 (the “2011 Form 10-K”).

Use of Estimates

Preparing financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the reporting periods presented. Significant estimates inherent in the preparation of the accompanying Consolidated Financial Statements include estimates of film ultimate revenues, product returns, allowance for doubtful accounts, potential outcome of uncertain tax positions, fair value of acquired assets and liabilities, fair value of equity-based compensation and pension benefit assumptions. Estimates are based on past experience and other considerations reasonable under the circumstances. Actual results may differ from these estimates.

Reclassification

Certain amounts have been reclassified to conform to the fiscal 2012 presentation.

NOTE 2. EARNINGS PER SHARE

Basic earnings per common share excludes potentially dilutive securities and 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 potential dilutive effect of equity-based compensation awards based upon the application of the treasury stock method. Anti-dilutive common shares were excluded from the calculation of diluted earnings per common share.

 

6


Table of Contents

VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The following table sets forth the computation of the common shares outstanding used in determining basic and diluted earnings per common share and anti-dilutive shares:

 

Common Shares Outstanding and Anti-Dilutive Common Shares    Quarter Ended
March 31,
     Six Months Ended
March 31,
 
(in millions)        2012              2011              2012              2011      

 

 

Weighted average common shares outstanding, basic

     537.5        594.4        544.1        599.0  

Dilutive effect of equity-based compensation awards

     6.9        6.7        6.7        5.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding, diluted

     544.4        601.1        550.8        604.6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive common shares

     9.8        17.2        13.6        22.6  

 

 

NOTE 3. INVENTORY

 

Inventory

(in millions)

  

        March 31,

        2012

   

September 30,

2011

 

 

 

Film inventory:

    

Released, net of amortization

   $ 721     $ 812  

Completed, not yet released

     31       139  

In process and other

     704       529  
  

 

 

   

 

 

 

Total film inventory, net of amortization

     1,456       1,480  

Original programming:

    

Released, net of amortization

     1,312       1,183  

In process and other

     474       513  
  

 

 

   

 

 

 

Total original programming, net of amortization

     1,786       1,696  

Acquired program rights, net of amortization

     1,680       1,760  

Merchandise and other inventory, net of allowance of $74 and $73

     132       131  
  

 

 

   

 

 

 

Total inventory, net

     5,054       5,067  

Less current portion

     (841     (828
  

 

 

   

 

 

 

Total inventory-noncurrent, net

   $ 4,213     $ 4,239  
  

 

 

   

 

 

 

 

 

NOTE 4. DEBT

 

Debt

(in millions)

           March 31,
         2012
   

September 30,

2011

 

 

 

Senior Notes and Debentures:

    

Senior notes due September 2014, 4.375%

   $ 598     $ 597  

Senior notes due February 2015, 1.250%

     499       -   

Senior notes due September 2015, 4.250%

     250       250  

Senior notes due April 2016, 6.250%

     916       916  

Senior notes due December 2016, 2.500%

     398       -   

Senior notes due April 2017, 3.500%

     496       496  

Senior notes due October 2017, 6.125%

     498       498  

Senior notes due September 2019, 5.625%

     553       553  

Senior notes due March 2021, 4.500%

     492       492  

Senior notes due December 2021, 3.875%

     590       -   

Senior debentures due April 2036, 6.875%

     1,736       1,736  

Senior debentures due October 2037, 6.750%

     248       248  

Senior debentures due February 2042, 4.500%

     245       -   

Senior notes due December 2055, 6.850%

     -        750  

Commercial paper

     -        423  

Capital lease and other obligations

     259       406  
  

 

 

   

 

 

 

Total debt

     7,778       7,365  

Less current portion

     (21     (23
  

 

 

   

 

 

 

Total noncurrent portion

   $ 7,757     $ 7,342  
  

 

 

   

 

 

 

 

 

 

7


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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Senior Notes and Debentures

During the six months ended March 31, 2012, we issued a total of $1.750 billion of senior notes and debentures. In December 2011, we issued $400 million aggregate principal amount of 2.500% Senior Notes due 2016 at a price equal to 99.366% of the principal amount and $600 million aggregate principal amount of 3.875% Senior Notes due 2021 at a price equal to 98.361% of the principal amount. In February 2012, we issued $500 million aggregate principal amount of 1.250% Senior Notes due 2015 at a price equal to 99.789% of the principal amount and $250 million aggregate principal amount of 4.500% Senior Debentures due 2042 at a price equal to 98.063% of the principal amount.

On January 9, 2012, we redeemed all $750 million of our outstanding 6.850% Senior Notes due December 2055 (the “2055 Notes”) at a redemption price equal to 100% of the principal amount of each 2055 Note, plus accrued interest thereon. As a result of the redemption, we expensed the unamortized issuance costs associated with the 2055 Notes, which resulted in a pre-tax extinguishment loss of $21 million.

At March 31, 2012, the total unamortized net discount related to the senior notes and debentures was $49 million. The fair value of the Company’s senior notes and debentures exceeded the carrying value by approximately $1.1 billion at March 31, 2012. The valuation of the Company’s publicly traded debt is based on quoted prices in active markets.

Credit Facilities

In December 2011, we entered into an amendment to our $2.0 billion three-year revolving credit agreement, dated as of October 8, 2010, which modifies certain provisions of the original agreement to, among other things, (i) increase the amount of the credit facility from $2.0 billion to $2.1 billion, (ii) extend the maturity date of the credit facility from October 2013 to December 2015 and (iii) reduce the LIBOR-based borrowing rates under the credit facility to LIBOR plus a margin ranging from 0.5% to 1.5% based on our current public debt rating. The facility has one principal financial covenant that requires the Company’s interest coverage for the most recent four consecutive fiscal quarters to be at least 3.0x, which the Company met at March 31, 2012.

In November 2011, we entered into two 364-day bank credit facilities for an aggregate amount of $600 million. The facilities will be used for general corporate purposes. The facilities contain covenants that are substantially the same as those contained in our $2.1 billion revolving credit facility. Borrowing rates under the facilities are determined at the time of each borrowing and are generally based on LIBOR plus a margin.

At March 31, 2012, there were no amounts outstanding under our credit facilities.

NOTE 5. FINANCIAL INSTRUMENTS

At March 31, 2012, the Company’s financial assets and liabilities reflected in the Consolidated Financial Statements at fair value consist of marketable securities and derivatives. Fair value for marketable securities is determined utilizing a market approach based on quoted market prices in active markets at period end. Fair value for derivatives is determined utilizing a market-based approach.

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The following table summarizes the valuation of the Company’s financial assets and liabilities as of March 31, 2012 and September 30, 2011:

 

Financial Asset (Liability)           Quoted Prices In
Active Markets for
Identical Assets
    

Significant Other
Observable

Inputs

    Significant
Unobservable
Inputs
 
(in millions)            Total             Level 1      Level 2     Level 3  

 

 

March 31, 2012

         

Marketable securities

   $ 87     $ 87      $ -      $ -   

Derivatives

     (2     -         (2     -   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 85     $ 87      $ (2   $ -   
  

 

 

   

 

 

    

 

 

   

 

 

 

September 30, 2011

         

Marketable securities

   $ 68     $ 68      $ -      $ -   

Derivatives

     (4     -         (4     -   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 64     $ 68      $ (4   $ -   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

 

NOTE 6. PENSION BENEFITS

Net periodic benefit costs for the Company under its defined benefit pension plans consist of the following:

 

Net Periodic Benefit Costs

(in millions)

   Quarter Ended
March 31,
    Six Months Ended
March 31,
 
   2012     2011     2012     2011  

 

 

Service cost

   $ 8     $ 7     $ 16     $ 14  

Interest cost

     12       11       24       22  

Expected return on plan assets

     (9     (9     (18     (18

Recognized actuarial loss

     5       3       9       6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit costs

   $ 16     $ 12     $ 31     $ 24  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

NOTE 7. RESTRUCTURING

As of September 30, 2011, the Company had recorded $124 million of restructuring liabilities related to the restructuring plan undertaken and other employee separation costs incurred in 2011, as further described in Note 11 of the 2011 Form 10-K. There have been no significant changes to the plan. We expect that the restructuring plan will be substantially completed by September 30, 2012.

The Company’s restructuring liabilities as of March 31, 2012 by reporting segment are as follows:

 

Restructuring Liabilities

(in millions)

   Media
Networks
    Filmed
Entertainment
    Total  
      

 

 

September 30, 2011

   $ 80     $ 44     $ 124  

Severance payments

     (28     (23     (51

Lease payments

     (2     (4     (6
  

 

 

   

 

 

   

 

 

 

March 31, 2012

   $ 50     $ 17     $ 67  
  

 

 

   

 

 

   

 

 

 

 

 

NOTE 8. RELATED PARTY TRANSACTIONS

National Amusements, Inc. (“NAI”), directly and through a wholly-owned subsidiary, is the controlling stockholder of both Viacom and CBS Corporation (“CBS”). Sumner M. Redstone, the controlling shareholder, Chairman and Chief Executive Officer of NAI, serves as our Executive Chairman and Founder and as the

 

9


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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Executive Chairman and Founder of CBS. Shari Redstone, who is Sumner Redstone’s daughter, is the President and a director of NAI, and serves as non-executive Vice Chair of the Board of Directors of both Viacom and CBS. George Abrams, one of the Company’s directors, serves on the boards of both NAI and Viacom, and Frederic Salerno, another of the Company’s directors, serves on the boards of both Viacom and CBS. Philippe Dauman, the Company’s President and Chief Executive Officer, also serves on the boards of both NAI and Viacom. Transactions between Viacom and related parties are overseen by the Company’s Governance and Nominating Committee.

Viacom and NAI Related Party Transactions

NAI licenses films in the ordinary course of business for its motion picture theaters from all major studios, including Paramount. During the six months ended March 31, 2012 and 2011, Paramount earned revenues from NAI in connection with these licenses in the aggregate amounts of approximately $11 million and $12 million, respectively.

Viacom and CBS Corporation Related Party Transactions

In the ordinary course of business, the Company is involved in transactions with CBS and its various businesses that result in the recognition of revenues and expenses by Viacom. Transactions with CBS are settled in cash.

Paramount earns revenues and recognizes expenses associated with the distribution of certain television products into the home entertainment market on behalf of CBS. Under the terms of the agreement, Paramount is entitled to retain a fee based on a percentage of gross receipts and is generally responsible for all out-of-pocket costs, which are recoupable prior to any participation payments to CBS. Paramount also earns revenues from CBS through leasing of studio space and licensing of certain film products. Additionally, the Media Networks segment recognizes advertising revenues from CBS.

The Media Networks segment purchases television programming from CBS. The cost of such purchases is initially recorded as acquired program rights inventory and amortized over the estimated period that revenues will be generated. Both of the Company’s segments recognize advertising expenses related to the placement of advertisements with CBS.

The following table summarizes the transactions with CBS as included in the Company’s Consolidated Financial Statements:

 

      Quarter Ended      Six Months Ended  
CBS Related Party Transactions    March 31,      March 31,  
(in millions)    2012      2011      2012      2011  

 

 

Consolidated Statements of Earnings

           

Revenues

   $                 54      $                 79      $                 144      $                 187  

Operating expenses

   $ 72      $ 96      $ 181      $ 226  
           
                    March 31,
2012
     September 30,
2011
 

Consolidated Balance Sheets

           

Accounts receivable

         $ 5      $ 6  

Other assets

           1        1  
        

 

 

    

 

 

 

Total due from CBS

         $ 6      $ 7  
        

 

 

    

 

 

 

Accounts payable

         $ 3      $ 1  

Participants’ share and residuals, current

           162        162  

Program rights obligations, current

           94        73  

Program rights obligations, noncurrent

           185        243  

Other liabilities

           33        37  
        

 

 

    

 

 

 

Total due to CBS

         $ 477      $ 516  
        

 

 

    

 

 

 

 

 

 

10


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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Other Related Party Transactions

In the ordinary course of business, the Company is involved in related party transactions with equity investees, principally related to investments in unconsolidated variable interest entities (“VIEs”). These related party transactions primarily relate to the provision of advertising services, licensing of film and programming content, distribution of films and provision of certain administrative support services for which the impact on the Company’s Consolidated Financial Statements is as follows:

 

      Quarter Ended     Six Months Ended  
Other Related Party Transactions    March 31,     March 31,  
(in millions)    2012     2011     2012     2011  
   

Consolidated Statements of Earnings

        

Revenues

   $             57     $             48     $             117     $         86  

Operating expenses

   $ 35     $ 22     $ 53     $ 31  

Selling, general and administrative

   $ (4   $ (4   $ (8   $ (8
                  March 31,
2012
    September 30,
2011
 

Consolidated Balance Sheets

        

Accounts receivable

       $ 97     $ 88  

Other assets

         1       2  
      

 

 

   

 

 

 

Total due from other related parties

       $ 98     $ 90  
      

 

 

   

 

 

 

Accounts payable

       $ 14     $ 32  

Other liabilities

         11       10  
      

 

 

   

 

 

 

Total due to other related parties

       $ 25     $ 42  
      

 

 

   

 

 

 

 

 

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

NOTE 9. COMMITMENTS AND CONTINGENCIES

Commitments

As more fully described in Notes 3 and 15 of the 2011 Form 10-K, the Company’s commitments primarily consist of programming and talent commitments, operating and capital lease arrangements, and purchase obligations for goods and services. These arrangements result from the Company’s normal course of business and represent obligations that may be payable over several years. Additionally, the Company is subject to a redeemable put option, payable in a foreign currency, with respect to an international subsidiary. The put option expires in January 2016, and is classified as Redeemable noncontrolling interest in the Consolidated Balance Sheets. Our minimum rental payments under noncancelable leases have increased by approximately $900 million principally due to the April 2012 extension of our world headquarters office lease through June 2031.

Contingencies

The Company has certain indemnification obligations with respect to leases associated with the previously discontinued operations of Famous Players and Blockbuster Inc. In addition, Viacom has certain indemnities provided by the acquirer of Famous Players. At March 31, 2012, these lease commitments, substantially all of which relate to Famous Players, amounted to approximately $600 million. The amount of lease commitments varies over time depending on expiration or termination of individual underlying leases, or of the related indemnification obligation, and foreign exchange rates, among other things. The Company may also have exposure for certain other expenses related to the leases, such as property taxes and common area maintenance. The Company has recorded a liability of approximately $200 million with respect to such obligations. Based on the Company’s consideration of financial information available to it, the lessees’ historical performance in meeting their lease obligations and the underlying economic factors impacting the lessees’ business models, the Company believes its accrual is sufficient to meet any future obligations.

 

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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Legal Matters

Litigation is inherently uncertain and always difficult to predict. However, based on the Company’s understanding and evaluation of the relevant facts and circumstances, the Company believes that the legal matters described below and other litigation to which the Company is a party are not likely, in the aggregate, to have a material adverse effect on its results of continuing operations, financial position or operating cash flows.

In March 2007, the Company filed a complaint in the United States District Court for the Southern District of New York against Google Inc. (“Google”) and its wholly-owned subsidiary YouTube, alleging that Google and YouTube violated and continue to violate the Company’s copyrights. The Company is seeking both damages and injunctive relief. In March 2010, the Company and Google filed motions for summary judgment, and in June 2010, Google’s motion was granted. In April 2012, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s decision and remanded the case to the District Court.

In September 2007, Brantley, et al. v. NBC Universal, Inc., et al., was filed in the United States District Court for the Central District of California against the Company and several other program content providers on behalf of a purported nationwide class of cable and satellite subscribers. The plaintiffs also sued several major cable and satellite program distributors. Plaintiffs allege that separate contracts between the program providers and the cable and satellite operator defendants providing for the sale of programming in specific tiers each unreasonably restrain trade in a variety of markets in violation of the Sherman Act. In June 2011, the Court of Appeals for the Ninth Circuit affirmed the District Court’s decision dismissing, with prejudice, the plaintiffs’ third amended complaint. The plaintiffs filed a petition for a rehearing of the case by the full Court of Appeals and oral argument was heard in October 2011. On October 31, 2011, the Court of Appeals withdrew its decision in light of the subsequent death of one of the judges on the panel. A new panel was formed and, on March 30, 2012, the District Court’s decision dismissing, with prejudice, the plaintiffs’ third amended complaint was once again affirmed.

Our 2006 acquisition agreement with Harmonix Music Systems, Inc. (“Harmonix”), a developer of music-based games, including the Rock Band franchise, provided that to the extent financial results exceeded specific contractual targets against a defined gross profit metric for the calendar years 2007 and 2008, former Harmonix shareholders would be eligible for incremental earn-out payments. In 2008, we paid $150 million, subject to adjustment, under this earn-out agreement related to 2007 performance. A private dispute resolution process was commenced as provided in the acquisition agreement to determine the final amount of the earn-out. On December 19, 2011, the resolution accountants in the private dispute resolution process issued their determination, finding that we owe an additional $383 million under the agreement, as compared to the additional $700 million sought by the former shareholders. We recorded a reserve of $383 million in the quarter ended December 31, 2011, which is reflected in Other liabilities—current on the Consolidated Balance Sheet as of March 31, 2012.

On December 27, 2011, we commenced a lawsuit in the Delaware Court of Chancery to vacate the determination of the resolution accountants on the grounds that they improperly failed to consider arguments and evidence put before them. In responsive pleadings and motions, the shareholder representative has sought confirmation of the determination of the resolution accountants and has opposed our efforts to vacate that determination as well as our efforts in a related and now stayed September 2011 lawsuit to obtain a refund of a substantial portion of the $150 million payment made in 2008.

Approximately $13 million is being held in escrow to secure the former shareholders’ indemnification obligations to us under the acquisition agreement. We believe we are entitled to all the funds being held in escrow and that we are also entitled to reduce the earn-out payment to the extent the amount the Company is

 

12


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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

entitled to recover under the former shareholders’ indemnification obligations exceeds the amount held in escrow. In December 2010, the shareholder representative filed a lawsuit in the Court of Chancery for the State of Delaware seeking the release of the funds being held in escrow. The lawsuit also asserted certain other claims. In May 2011, we filed a motion to dismiss the portion of the shareholder representative’s amended complaint that related to the other claims as meritless, and in November 2011, the court dismissed those claims. We continue to vigorously oppose the remaining claims in the lawsuit regarding the funds held in escrow and to seek full indemnification under the acquisition agreement.

NOTE 10. DISCONTINUED OPERATIONS

Discontinued operations activity for the six months ended March 31, 2012 principally reflects the $383 million charge related to the earn-out dispute with the former shareholders of Harmonix, which we sold in December 2010. If paid, the charge will generate a tax benefit of approximately $135 million, which will be available to offset qualifying future cash taxes.

The pre-tax loss from discontinued operations for the six months ended March 31, 2011 includes a $12 million loss from operations for the period through the date of the sale of Harmonix and a $14 million loss on disposal. For tax purposes, the disposal generated a tax benefit of approximately $115 million, of which approximately $75 million has been recognized as of March 31, 2012 and $40 million will be available to offset qualifying future cash taxes.

 

Discontinued Operations                    Six Months Ended
March 31,
 
(in millions)                        2012                  2011        

 

 

Revenues from discontinued operations

         $ -       $ 49  

Pre-tax loss from discontinued operations

         $ (383    $ (23

Income tax provision

           1        13  
        

 

 

    

 

 

 

Net loss from discontinued operations

         $ (382    $ (10
        

 

 

    

 

 

 
   

NOTE 11. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

 

 

  

Supplemental Cash Flow Information    Quarter Ended
March 31,
     Six Months Ended
March 31,
 
(in millions)          2012                  2011                  2012                  2011        

 

 

Cash paid for interest

   $ 55      $ 65      $ 201      $ 219  

Cash paid for income taxes*

   $ 113      $ 86      $ 73      $ 233  
   

*The six months ended March 31, 2012 includes approximately $100 million related to a federal tax refund resulting from the carryback of capital losses against taxes previously paid on capital gains.

 

   

Redeemable Noncontrolling Interest    Quarter Ended
March 31,
     Six Months Ended
March 31,
 
(in millions)          2012                  2011                  2012                  2011        

 

 

Beginning balance

   $ 148      $ 133      $ 152      $ 131  

Net earnings

     6        2        11        7  

Distributions

     -         (6      (9      (10

Translation adjustment

     2        3        2        4  

Redemption value adjustment

     (5      -         (5      -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 151      $ 132      $ 151      $ 132  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

13


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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Accounts Receivable

At March 31, 2012, there were approximately $378 million of noncurrent trade receivables in the Filmed Entertainment segment included within Other assets in the Company’s Consolidated Balance Sheet principally related to long-term television license arrangements and certain amounts due from MVL Productions LLC (“Marvel”), a subsidiary of The Walt Disney Company, in connection with the sale of distribution rights. Such amounts are due in accordance with the underlying terms of the respective agreements and are principally from investment grade companies with which the Company has historically done business under similar terms, for which credit loss allowances are generally not considered necessary.

Investments in Variable Interest Entities

Unconsolidated Variable Interest Entities

At March 31, 2012 and September 30, 2011, the Company’s aggregate investment carrying value in unconsolidated VIEs was $157 million and $137 million, respectively. The impact of the Company’s unconsolidated VIEs on its Consolidated Financial Statements, including related party transactions, is further described in Note 8.

Consolidated Variable Interest Entities

As of March 31, 2012 and September 30, 2011, there are $25 million and $25 million of assets and $87 million and $86 million of liabilities, respectively, included within the Company’s Consolidated Balance Sheets in respect of Tr3s’ investment interest in a Hispanic-oriented television broadcaster. The entity’s revenues, expenses and operating income for the quarter and six months ended March 31, 2012 and 2011 were not significant to the Company.

Income Taxes

During the quarter and six months ended March 31, 2012, we recognized $66 million of discrete tax benefits upon determining that certain operating and capital loss carryforward benefits are now more likely than not to be realized.

NOTE 12. REPORTING SEGMENTS

The following tables set forth the Company’s financial performance by reporting segment. The Company’s reporting segments have been determined in accordance with the Company’s internal management structure. The Company manages its operations through two reporting segments: (i) Media Networks and (ii) Filmed Entertainment. Typical intersegment transactions include the purchase of advertising by the Filmed Entertainment segment on Media Networks’ properties and the purchase of Filmed Entertainment’s feature films exhibition rights by Media Networks. The elimination of such intercompany transactions in the Consolidated Financial Statements is included within eliminations in the table below.

 

14


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VIACOM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The Company’s measure of segment performance is adjusted operating income (loss). Adjusted operating income (loss) is defined as operating income (loss), less equity-based compensation and certain other items identified as affecting comparability, including restructuring and asset impairment, when applicable.

 

Revenues by Segment

   Quarter Ended
March 31,
    Six Months Ended March 31,  
(in millions)          2012                 2011                 2012                 2011        

 

 

Media Networks

   $ 2,190     $ 2,082     $ 4,638     $ 4,462  

Filmed Entertainment

     1,169       1,226       2,727       2,723  

Eliminations

     (28     (41     (82     (90
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 3,331     $ 3,267     $ 7,283     $ 7,095  
  

 

 

   

 

 

   

 

 

   

 

 

 
   
   
     Quarter Ended
March  31,
    Six Months Ended March 31,  
(in millions)          2012                 2011                 2012                 2011        

 

 

Media Networks

   $ 893     $ 806     $ 2,022     $ 1,857  

Filmed Entertainment

     115       39       84       107  

Corporate expenses

     (48     (53     (101     (102

Equity-based compensation

     (28     (33     (57     (63

Eliminations

     -        1       -        1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     932       760       1,948       1,800  

Interest expense, net

     (103)        (102     (208     (206

Equity in net earnings of investee companies

     5       15       15       39  

Loss on extinguishment of debt

     (21     (87     (21     (87

Other items, net

     (1     (7     (5     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations before provision for income taxes

   $ 812     $ 579     $ 1,729     $ 1,539  
  

 

 

   

 

 

   

 

 

   

 

 

 
   
   
Total Assets               

March 31,

2012

   

September 30,

2011

 
(in millions)         

 

 

Media Networks

       $ 16,447      $ 16,404   

Filmed Entertainment

         5,473       5,593  

Corporate/Eliminations

         507       804  
      

 

 

   

 

 

 

Total assets

       $ 22,427     $ 22,801  
      

 

 

   

 

 

 
   
   
Revenues by Component    Quarter Ended
March 31,
    Six Months Ended March 31,  
(in millions)          2012                 2011                 2012                 2011        

 

 

Advertising

   $ 1,073     $ 1,076     $ 2,427     $ 2,469  

Feature film

     1,058       1,147       2,524       2,475  

Affiliate fees

     992       851       1,935       1,665  

Ancillary

     236       234       479       576  

Eliminations

     (28     (41     (82     (90
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 3,331     $ 3,267     $ 7,283     $ 7,095  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

15


Table of Contents

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Management’s discussion and analysis of results of operations and financial condition is provided as a supplement to and should be read in conjunction with the unaudited consolidated financial statements and related notes to enhance the understanding of our results of operations, financial condition and cash flows. Additional context can also be found in our Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission (“SEC”) on November 10, 2011 (the “2011 Form 10-K”). References in this document to “Viacom,” “Company,” “we,” “us” and “our” mean Viacom Inc. and our consolidated subsidiaries through which our various businesses are conducted, unless the context requires otherwise.

Significant components of management’s discussion and analysis of results of operations and financial condition include:

Overview. The overview section provides a summary of Viacom’s business.

Consolidated Results of Operations. The consolidated results of operations section provides an analysis of our results on a consolidated basis for the quarter and six months ended March 31, 2012 compared to the quarter and six months ended March 31, 2011.

Segment Results of Operations. The segment results of operations section provides an analysis of our results on a reportable segment basis for the quarter and six months ended March 31, 2012 compared to the quarter and six months ended March 31, 2011.

Liquidity and Capital Resources. The liquidity and capital resources section provides a discussion of our cash flows for the six months ended March 31, 2012 compared to the six months ended March 31, 2011 and an update on our indebtedness.

OVERVIEW

We are a leading global entertainment content company that connects with audiences through compelling content across television, motion picture, online and mobile platforms in over 160 countries and territories. With media networks reaching approximately 700 million global subscribers, Viacom’s leading brands include MTV®, VH1®, CMT®, Logo®, BET®, CENTRIC®, Nickelodeon®, Nick Jr.®, TeenNick®, Nicktoons®, Nick at Nite™, COMEDY CENTRAL®, TV Land®, SPIKE®, Tr3s®, Paramount Channel™ and VIVA™. Paramount Pictures®, celebrating its 100th year in 2012, is a major global producer and distributor of filmed entertainment. Viacom operates a large portfolio of branded digital media experiences, including many of the world’s most popular properties for entertainment, community and casual online gaming.

We manage our operations through two reporting segments: Media Networks and Filmed Entertainment. Our measure of segment performance is adjusted operating income (loss). We define adjusted operating income (loss) for our segments as operating income (loss), less equity-based compensation and certain other items identified as affecting comparability, including restructuring charges and asset impairment, when applicable. Equity-based compensation is excluded from our segment measure of performance since it is set and approved by the Compensation Committee of Viacom’s Board of Directors in consultation with corporate executive management, and is included as a component of consolidated adjusted operating income.

When applicable, we use consolidated adjusted operating income, adjusted net earnings from continuing operations attributable to Viacom and adjusted diluted earnings per share (“EPS”) from continuing operations, among other measures, to evaluate our actual operating performance and for planning and forecasting of future periods. We believe that the adjusted results provide relevant and useful information for investors because they clarify our actual operating performance, make it easier to compare Viacom’s 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 generally accepted accounting principles (“GAAP”), they

 

16


Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

should not be considered in isolation of, or as a substitute for, operating income, net earnings from continuing operations attributable to Viacom and diluted EPS as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies. For a reconciliation of our adjusted measures and discussion of the items affecting comparability, refer to the section entitled “Factors Affecting Comparability”.

CONSOLIDATED RESULTS OF OPERATIONS

Our consolidated results of operations are presented below for the quarter and six months ended March 31, 2012 and 2011.

 

     Quarter Ended
March 31,
    Better/
(Worse)
    Six Months
Ended March 31,
    Better/
(Worse)
 
(in millions, except per share amounts)   2012     2011     $     %     2012     2011     $     %  

 

 

Revenues

  $   3,331     $   3,267     $   64       2   $   7,283     $   7,095     $   188       3

Operating income

    932       760       172       23       1,948       1,800       148       8  

Net earnings from continuing operations attributable to Viacom

    588       376       212       56       1,179       996       183       18  

Adjusted net earnings from continuing operations attributable to Viacom

    535       430       105       24       1,126       1,050       76       7  

Diluted EPS from continuing operations

    1.08       0.63       0.45       71       2.14       1.65       0.49       30  

Adjusted diluted EPS from continuing operations

  $ 0.98     $ 0.72     $  0.26       36   $ 2.04     $ 1.74     $ 0.30       17

 

 

Revenues

Worldwide revenues increased $64 million, or 2%, to $3.331 billion in the quarter ended March 31, 2012, driven by an increase in Media Networks revenues, partially offset by a decrease in Filmed Entertainment revenues. The increase of $108 million in Media Networks revenues reflects higher affiliate fee revenues, partially offset by lower ancillary revenues. The decrease of $57 million in Filmed Entertainment revenues reflects lower theatrical and television license fee revenues, partially offset by higher ancillary revenues.

Worldwide revenues increased $188 million, or 3%, to $7.283 billion in the six months ended March 31, 2012, driven by an increase in Media Networks revenues of $176 million, reflecting higher affiliate fee revenues, partially offset by lower ancillary and advertising revenues. Filmed Entertainment revenues were substantially flat with higher theatrical revenues offset by lower ancillary and home entertainment revenues.

Operating Income

Operating income increased $172 million, or 23%, to $932 million in the quarter ended March 31, 2012. Media Networks adjusted operating income increased $87 million, principally reflecting the overall increase in revenues. Filmed Entertainment adjusted operating income increased $76 million, principally reflecting lower distribution costs, partially offset by the revenue decline.

Operating income increased $148 million, or 8%, to $1.948 billion in the six months ended March 31, 2012. Media Networks adjusted operating income increased $165 million, principally reflecting the overall increase in revenues. Filmed Entertainment adjusted operating income decreased $23 million, reflecting the difficult comparison against the benefit from the sale of the distribution rights to The Avengers and Iron Man 3 to Marvel in the prior year, partially offset by this year’s increased theatrical revenues.

There were no adjustments to operating income in the quarter and six months ended March 31, 2012 and 2011.

See the section entitled “Segment Results of Operations” for a more in-depth discussion of the revenues, expenses and adjusted operating income (loss) for each of the Media Networks and Filmed Entertainment segments.

 

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Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

Net Earnings from Continuing Operations Attributable to Viacom

Adjusted net earnings from continuing operations attributable to Viacom increased $105 million, or 24%, and $76 million, or 7%, in the quarter and six months ended March 31, 2012, respectively, principally due to the increase in tax-effected operating income described above, partially offset by lower equity income due to a Viacom 18 equity loss that reflects costs associated with the launch of new channels. Our effective income tax rate was 34.5% in the quarter and six months ended March 31, 2012 and 2011, excluding the impact of discrete items. Adjusted diluted EPS from continuing operations increased $0.26 per diluted share to $0.98 for the quarter and $0.30 per diluted share to $2.04 for the six months ended March 31, 2012, reflecting fewer outstanding shares due to our ongoing stock repurchase program and the increase in adjusted net earnings from continuing operations.

Including the impact of the loss on extinguishment of debt in both years and the current year discrete tax benefits, net earnings from continuing operations attributable to Viacom increased $212 million, or 56%, in the quarter, and $183 million, or 18%, in the six months ended March 31, 2012. Diluted EPS from continuing operations increased $0.45 per diluted share to $1.08 for the quarter and $0.49 per diluted share to $2.14 for the six months ended March 31, 2012. See the section entitled “Factors Affecting Comparability” for a reconciliation of our adjusted measures to our reported results.

Discontinued Operations, Net of Tax

The $382 million loss from discontinued operations for the six months ended March 31, 2012 reflects a $383 million charge related to the earn-out dispute with the former shareholders of Harmonix, which we sold in December 2010. The $10 million loss from discontinued operations in the six months ended March 31, 2011 includes a $12 million loss from operations for the period through the date of the sale of Harmonix and a $14 million loss on disposal, partially offset by the related tax benefit.

SEGMENT RESULTS OF OPERATIONS

Transactions between reportable segments are accounted for as third-party arrangements for the purposes of presenting segment results of operations. Typical intersegment transactions include the purchase of advertising by the Filmed Entertainment segment on Media Networks’ properties and the purchase of Filmed Entertainment’s feature films exhibition rights by Media Networks.

Media Networks

 

      Quarter Ended
March 31,
     Better/(Worse)     Six Months Ended
March 31,
     Better/(Worse)  
(in millions)    2012      2011      $     %     2012      2011      $     %  

 

 

Revenues by Component

                    

Advertising

   $     1,073      $     1,076      $ (3     -      $     2,427      $     2,469      $ (42     (2 )% 

Affiliate fees

     992        851        141       17     1,935        1,665        270       16  

Ancillary

     125        155        (30     (19     276        328        (52     (16
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total revenues by component

   $ 2,190      $ 2,082      $         108       5   $ 4,638      $ 4,462      $ 176       4
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Expenses

                    

Operating

   $ 768      $ 715      $ (53     (7 )%    $ 1,550      $ 1,493      $ (57     (4 )% 

Selling, general and administrative

     493        517        24       5       991        1,020        29       3  

Depreciation and amortization

     36        44        8           18       75        92        17           18  
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total expenses

   $ 1,297      $ 1,276      $ (21     (2 )%    $ 2,616      $ 2,605      $ (11     -   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Adjusted Operating Income

   $ 893      $ 806      $ 87       11   $ 2,022      $ 1,857      $         165       9
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

 

 

 

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Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

Revenues

Our Media Networks segment generates revenues principally in three categories: (i) the sale of advertising time related to our content and associated marketing services, (ii) affiliate fees from cable television operators, direct-to-home satellite television operators, digital distributors and mobile networks and (iii) ancillary revenues, which include consumer products licensing, brand licensing, home entertainment sales of our programming, television syndication and casual gaming. Our advertising revenues may be affected by the strength of advertising markets and general economic conditions and may fluctuate depending on the success of our programming, as measured by viewership, at any given time. Audience measurement ratings may vary due to the timing of availability of new episodes of popular programming, success of our programming, performance of competing programs and methods used by third parties to measure ratings.

Worldwide revenues increased $108 million, or 5%, to $2.190 billion in the quarter, and $176 million, or 4%, to $4.638 billion in the six months ended March 31, 2012, driven by increases in affiliate fee revenues, partially offset by decreases in ancillary and advertising revenues. Domestic revenues were $1.859 billion in the quarter, an increase of $93 million, or 5%, and $3.902 billion in the six months ended March 31, 2012, an increase of $151 million, or 4%. International revenues were $331 million in the quarter, an increase of $15 million, or 5%, and $736 million in the six months ended March 31, 2012, an increase of $25 million, or 4%. Foreign exchange had a 1-percentage point unfavorable impact on international revenues in both periods.

Advertising

Worldwide advertising revenues were substantially flat at $1.073 billion in the quarter ended March 31, 2012. Domestic advertising revenues increased 1%, reflecting modest increases in commercial units sold and pricing. International advertising revenues decreased 9% in the quarter, including lower revenues from certain production and promotional events. Foreign exchange also had a 4-percentage point unfavorable impact on international revenues. Due to scheduling changes related to event programming, advertising revenues for our fiscal third quarter are expected to reflect a difficult comparison to the prior year quarter, which included both the Nickelodeon Kids Choice Awards and BET Awards. In the current year, the Nickelodeon Kids Choice Awards aired in our fiscal second quarter and the BET Awards are scheduled to air in our fiscal fourth quarter.

Worldwide advertising revenues decreased $42 million, or 2%, to $2.427 billion in the six months ended March 31, 2012. Domestic advertising revenues decreased 1%, primarily driven by lower commercial units sold. During the period, lower commercial units sold reduced domestic revenues by 6%, reflecting a combination of lower ratings and market demand. Lower ratings resulted in fewer commercial units being available for sale as units were used to achieve ratings guarantees. The impact of the decline in units sold was substantially offset by higher pricing. International advertising revenues decreased 6% in the six months, including lower revenues from certain production and promotional events. Foreign exchange also had a 2-percentage point unfavorable impact on international revenues.

Affiliate Fees

Worldwide affiliate fees increased $141 million, or 17%, to $992 million in the quarter, and $270 million, or 16%, to $1.935 billion in the six months ended March 31, 2012, principally reflecting the benefit from the availability of certain programming related to digital distribution arrangements and rate increases. Domestic affiliate revenues increased 15% in both periods, and international revenues increased 24% in the quarter and 21% in the six months. Excluding the impact of digital distribution arrangements, domestic affiliate revenue growth was in the high-single digits in both periods. The growth in total affiliate fee revenues for our fiscal third quarter is expected to be affected by a difficult comparison to the prior year quarter, which benefited from the availability of a significant amount of programming under our digital distribution arrangements.

 

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Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

Ancillary

Worldwide ancillary revenues decreased $30 million, or 19%, to $125 million in the quarter, and $52 million, or 16%, to $276 million in the six months ended March 31, 2012, principally reflecting lower home entertainment revenues.

Expenses

Media Networks segment expenses consist of operating expenses, selling, general and administrative (“SG&A”) expenses and depreciation and amortization. Operating expenses comprise costs related to original and acquired programming, including programming amortization, expenses associated with the manufacturing and distribution of home entertainment products and consumer products licensing, participation fees 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.

Total expenses increased $21 million, or 2%, to $1.297 billion in the quarter driven by an increase in operating expenses, partially offset by a decrease in SG&A expenses. Total expenses were substantially flat in the six months ended March 31, 2012.

Operating

Operating expenses increased $53 million, or 7%, to $768 million in the quarter, and $57 million, or 4%, to $1.550 billion in the six months ended March 31, 2012. Programming expenses increased $52 million, or 8%, in the quarter, and $39 million, or 3%, in the six months, principally reflecting expenses associated with our continuing investment in programming. Distribution and other expenses, including participations related to digital distribution arrangements, were substantially flat in the quarter and increased $18 million, or 11%, in the six months ended March 31, 2012.

Selling, General and Administrative

SG&A expenses decreased $24 million, or 5%, to $493 million in the quarter, and $29 million, or 3%, to $991 million in the six months ended March 31, 2012, principally due to lower incentive-based compensation accruals, as well as savings from our 2011 restructuring actions, partially offset by higher advertising and promotional expenses related to marketing original programming.

Depreciation and amortization

Depreciation and amortization decreased $8 million, or 18%, to $36 million in the quarter, and $17 million, or 18%, to $75 million in the six months ended March 31, 2012, as a result of decreased capital expenditures in prior periods and lower intangible asset amortization.

Adjusted Operating Income

Adjusted operating income increased $87 million, or 11%, to $893 million in the quarter, and $165 million, or 9%, to $2.022 billion in the six months ended March 31, 2012, principally reflecting the overall increase in revenues.

 

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Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

Filmed Entertainment

 

      Quarter Ended
March 31,
     Better/(Worse)     Six Months Ended
March 31,
     Better/(Worse)  
(in millions)        2012              2011          $     %         2012              2011          $     %  
   

Revenues by Component

                    

Theatrical

   $ 326      $ 401      $ (75     (19 )%    $ 896      $ 817      $         79       10

Home entertainment

     415        410        5       1       1,013        1,048        (35     (3

Television license fees

     317        336        (19     (6     615        610        5       1  

Ancillary

     111        79        32       41       203        248        (45     (18
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total revenues by component

   $       1,169      $     1,226      $ (57     (5 )%    $ 2,727      $ 2,723      $ 4       -   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Expenses

                    

Operating

   $ 905      $ 1,047      $ 142       14   $ 2,362      $ 2,335      $ (27     (1 )% 

Selling, general & administrative

     127        118        (9     (8     237        237        -        -   

Depreciation & amortization

     22        22        -        -        44        44        -        -   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total expenses

   $ 1,054      $ 1,187      $     133       11   $     2,643      $     2,616      $ (27     (1 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Adjusted Operating Income

   $ 115      $ 39      $ 76       195   $ 84      $ 107      $ (23     (21 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

 

 

Revenues

Our Filmed Entertainment segment generates revenues worldwide principally from: (i) the theatrical release and/or distribution of motion pictures, (ii) home entertainment, which includes sales of DVD, Blu-ray and other products relating to the motion pictures we release theatrically and direct-to-DVD, as well as certain other programming, including content we distribute on behalf of third parties, (iii) television and digital license fees paid worldwide by third parties for film exhibition rights during the various other distribution windows and through digital distributors and (iv) ancillary revenues from providing production services to third parties, primarily at Paramount’s studio lot, licensing of its brands for consumer products and theme parks, distribution of content specifically developed for digital platforms and game distribution.

Worldwide revenues decreased $57 million, or 5%, to $1.169 billion in the quarter ended March 31, 2012, driven by lower theatrical and television license fee revenues, partially offset by higher ancillary revenues. Domestic revenues were $556 million, a decrease of $116 million, or 17%. International revenues were $613 million, an increase of $59 million, or 11%, with a 1-percentage point unfavorable impact from foreign exchange.

Worldwide revenues were substantially flat at $2.727 billion in the six months ended March 31, 2012, reflecting lower ancillary and home entertainment revenues, offset by higher theatrical revenues. Domestic revenues were $1.234 billion, a decrease of $222 million, or 15%. International revenues were $1.493 billion, an increase of $226 million, or 18%, with a 1-percentage point unfavorable impact from foreign exchange.

Theatrical

Worldwide theatrical revenues decreased $75 million, or 19%, to $326 million in the quarter ended March 31, 2012, reflecting the mix of our current quarter releases. During the quarter, we released three films, The Devil Inside, A Thousand Words and Jeff, Who Lives at Home. In the comparable period of 2011, we released Rango, No Strings Attached and Justin Bieber: Never Say Never. Revenues from our current quarter releases were $149 million lower than the prior year quarter as such films were less widely distributed than those in the prior year quarter. The decline in revenues from our current quarter releases was partially offset by higher carryover revenues of $74 million attributable to prior period releases, including Mission: Impossible – Ghost Protocol. Domestic theatrical revenues decreased 50%, while international theatrical revenues increased 13%, principally reflecting the timing of our international releases.

 

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Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

Worldwide theatrical revenues increased $79 million, or 10%, to $896 million in the six months ended March 31, 2012, principally driven by the strength of our current year releases. During the six months ended March 31, 2012, we released eleven films, including Mission: Impossible - Ghost Protocol, DreamWorks Animation’s Puss in Boots and Paranormal Activity 3, as compared to ten films in the prior year. International theatrical revenues increased 39%, while domestic theatrical revenues decreased 17% reflecting the comparison against the strong domestic performance of True Grit and The Fighter in the prior year.

Home Entertainment

Worldwide home entertainment revenues increased $5 million, or 1%, to $415 million in the quarter ended March 31, 2012. During the quarter, we released seven titles, including DreamWorks Animation’s Puss in Boots, The Adventures of Tintin and Hugo, as compared to nine titles in the prior year quarter. Domestic home entertainment revenues decreased 5%, while international home entertainment revenues increased 13%.

Worldwide home entertainment revenues decreased $35 million, or 3%, to $1.013 billion in the six months ended March 31, 2012. Current year releases included Marvel’s Captain America: The First Avenger, DreamWorks Animation’s Kung Fu Panda 2 and Puss in Boots, Super 8, The Adventures of Tintin and Hugo. The decrease in revenues was principally driven by lower revenues from our third-party distribution arrangements, partially offset by the strength of the international release of Transformers: Dark of the Moon. Domestic and international home entertainment revenues both decreased 3%.

Television License Fees

Worldwide television license fees decreased $19 million, or 6%, to $317 million in the quarter, and increased $5 million, or 1%, to $615 million in the six months ended March 31, 2012, driven by the number and mix of available titles.

Ancillary

Worldwide ancillary revenues increased $32 million, or 41%, to $111 million in the quarter ended March 31, 2012, principally driven by higher digital revenues.

Worldwide ancillary revenues decreased $45 million, or 18%, to $203 million in the six months ended March 31, 2012, principally driven by the difficult comparison against the sale of the distribution rights to The Avengers and Iron Man 3 to Marvel in the prior year for approximately $115 million, partially offset by higher digital and merchandising revenues.

Expenses

Filmed Entertainment segment expenses consist of operating expenses, SG&A expenses and depreciation and amortization. Operating expenses principally include the amortization of film costs of our released feature films (including participations accrued under our third-party distribution arrangements), print and advertising expenses and other distribution costs. SG&A expenses include employee compensation, facility and occupancy costs, professional service fees and other overhead costs. Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets.

Total expenses decreased $133 million, or 11%, to $1.054 billion in the quarter driven by a decrease in operating expenses. Total expenses increased $27 million, or 1%, to $2.643 billion in the six months ended March 31, 2012, due to the increase in operating expenses.

Operating

Operating expenses decreased $142 million, or 14%, to $905 million in the quarter ended March 31, 2012, principally due to the mix of theatrical releases. Distribution and other costs, principally print and advertising expenses, decreased $127 million, or 24%, and film costs decreased $15 million, or 3%.

 

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Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

Operating expenses increased $27 million, or 1%, to $2.362 billion in the six months ended March 31, 2012, principally due to the mix of theatrical releases. Film costs increased $34 million, or 3%, and distribution and other costs, principally print and advertising expenses, decreased $7 million, or 1%.

Selling, General and Administrative

SG&A expenses increased $9 million, or 8%, to $127 million in the quarter, principally driven by the timing of accrued incentive compensation, and were flat in the six months ended March 31, 2012.

Adjusted Operating Income

Adjusted operating income increased $76 million to $115 million in the quarter ended March 31, 2012, principally reflecting the lower distribution costs, partially offset by the revenue decline.

Adjusted operating income decreased $23 million, or 21%, to $84 million in the six months ended March 31, 2012, primarily reflecting the difficult comparison against the benefit from the sale of the distribution rights to The Avengers and Iron Man 3 to Marvel in the prior year, partially offset by this year’s increased theatrical revenues. In the prior year, absent the Marvel benefit, Filmed Entertainment would have generated an operating loss principally reflecting the impact of print and advertising expenses associated with theatrical releases in the period.

FACTORS AFFECTING COMPARABILITY

The consolidated financial statements as of and for the quarter and six months ended March 31, 2012 and 2011 reflect our results of operations, financial position and cash flows reported in accordance with U.S. GAAP. Results for the aforementioned periods, as discussed in the section entitled “Overview”, have been affected by certain items identified as affecting comparability.

The following tables reconcile our adjusted measures to our reported results for the quarter and six months ended March 31, 2012 and 2011.

 

      Quarter Ended
March 31, 2012
 
(in millions, except per share amounts)    Operating
Income
     Pre-tax Earnings
from Continuing
Operations(1)
    Net Earnings from
Continuing Operations
Attributable to Viacom(2)
    Diluted EPS
from
Continuing
Operations
 

Reported results

   $         932       $                 812      $ 588      $          1.08  

Factors Affecting Comparability:

         

Extinguishment of debt

     -         21        13        0.02  

Discrete tax benefits

     -         -        (66     (0.12
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted results

   $ 932       $ 833      $ 535      $ 0.98  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

      Six Months Ended
March 31, 2012
 
(in millions, except per share amounts)    Operating
Income
     Pre-tax Earnings
from Continuing
Operations(1)
    Net Earnings from
Continuing Operations
Attributable to Viacom(2)
    Diluted EPS
from
Continuing
Operations
 

Reported results

   $       1,948      $                   1,729      $                   1,179      $             2.14   

Factors Affecting Comparability:

         

Extinguishment of debt

     -         21        13        0.02  

Discrete tax benefits

     -         -        (66     (0.12
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted results

   $ 1,948      $ 1,750      $ 1,126      $ 2.04  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

23


Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

      Quarter Ended
March 31, 2011
 
(in millions, except per share amounts)    Operating
Income
     Pre-tax Earnings
from Continuing
Operations(1)
    Net Earnings from
Continuing Operations
Attributable to Viacom(2)
    Diluted  EPS
from
Continuing
Operations
 

Reported results

   $     760      $         579      $             376      $     0.63  

Factors Affecting Comparability:

         

Extinguishment of debt

     -         87        54        0.09  
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted results

   $ 760      $ 666      $ 430      $ 0.72  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

      Six Months Ended
March 31, 2011
 
(in millions, except per share amounts)    Operating
Income
     Pre-tax Earnings
from Continuing
Operations(1)
    Net Earnings from
Continuing Operations
Attributable to Viacom(2)
    Diluted  EPS
from
Continuing
Operations
 

Reported results

   $ 1,800      $         1,539      $             996      $     1.65  

Factors Affecting Comparability:

         

Extinguishment of debt

     -         87        54        0.09  
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted results

   $ 1,800      $ 1,626      $ 1,050      $ 1.74  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

(1) 

Pre-tax earnings from continuing operations represent earnings before provision for income taxes.

(2) 

The tax impact has been calculated using the rates applicable to the adjustments presented.

Extinguishment of Debt

During the quarter, we redeemed all $750 million of our outstanding 6.850% Senior Notes due December 2055 (the “2055 Notes”) at a redemption price equal to 100% of the principal amount of each 2055 Note, plus accrued interest thereon. As a result of the redemption, we expensed the unamortized issuance costs associated with the 2055 Notes, which resulted in a pre-tax extinguishment loss of $21 million.

In the quarter ended March 31, 2011, we repurchased $582 million of the $1.5 billion aggregate principal of our 6.250% Senior Notes due 2016 at a purchase price of $1,153.50 per $1,000, which resulted in a pre-tax extinguishment loss of $87 million.

Discrete Tax Items

Our effective income tax rate was 34.5%, excluding the impact of discrete items, in the quarter and six months ended March 31, 2012. Discrete tax benefits of $66 million, taken together with the effective income tax rate impact of the loss on extinguishment of debt, contributed 8.3 and 3.9 percentage points of tax benefit, which reconciles to the reported effective rate of 26.2% and 30.6%, respectively. The discrete tax benefits were recognized upon determining that certain operating and capital loss carryforward benefits are now more likely than not to be realized.

In the quarter and six months ended March 31, 2011, our effective income tax rate was 34.5%, excluding the effective income tax rate impact of the loss on extinguishment of debt. The discrete effective income tax rate impact of the loss was 0.5 and 0.2 incremental percentage points of tax benefit, which reconciles to the reported effective rate of 34.0% and 34.3%, respectively.

 

24


Table of Contents

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. Our principal uses of cash in operations include the creation of new programming and film content, acquisitions of third-party content, and interest and tax payments. We also use cash for capital expenditures, acquisitions of businesses, quarterly cash dividends and discretionary share repurchases under our stock repurchase program, as deemed appropriate. Our cash flows from operations, together with our credit facilities, provide us with adequate resources to fund our anticipated ongoing cash requirements.

We have and 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 facilities 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.

Cash Flows

Cash and cash equivalents increased by $114 million in the six months ended March 31, 2012.

Operating Activities

Cash provided by operations was $1.504 billion for the six months ended March 31, 2012, an increase of $60 million compared with the same period in 2011. The increase principally reflects higher operating income, lower income tax payments, including an income tax refund related to the carryback of capital losses and the impact of timing of payments, and the comparison against the payment of a premium on our debt extinguishment in the prior year, partially offset by higher film participation payments, the timing of annual incentive compensation payments as a result of our prior year fiscal year end change and payments related to our 2011 restructuring actions.

Investing Activities

Cash used in investing activities was $80 million for the six months ended March 31, 2012, compared with $101 million in the six months ended March 31, 2011. The decrease is due to lower spending on acquisitions and investments, partially offset by an increase in capital expenditures. In 2011, cash used in investing activities included $59 million related to acquisitions and investments principally reflecting an investment in a European television programmer.

Financing Activities

Cash used in financing activities was $1.301 billion for the six months ended March 31, 2012, compared with $637 million in the same period in 2011. The net outflow was primarily driven by the settlement of share repurchases and dividends. During the six months ended March 31, 2012, we repurchased 30.9 million shares for an aggregate price of $1.400 billion and paid $278 million in dividends. From April 1, 2012 through May 2, 2012, we repurchased an additional 4.4 million shares for an aggregate purchase price of $204 million. The net impact of our issuance of $1.750 billion of senior notes and debentures and debt repayments contributed a partially offsetting inflow.

 

25


Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

As of May 2, 2012, we had $5.9 billion remaining in our $10.0 billion stock repurchase program. The remaining share repurchases under the program are expected to be funded through a combination of cash generated by operations, borrowings under our credit facilities and external financing, as deemed appropriate.

Capital Resources

Capital Structure and Debt

At March 31, 2012, total debt was $7.778 billion, an increase of $413 million from $7.365 billion at September 30, 2011. The increase in debt reflects the impact of new issuances of senior notes and debentures, partially offset by repayments. Together, these transactions result in a reduction of the weighted-average borrowing cost of our public debt.

During the six months ended March 31, 2012, we took advantage of favorable market conditions and issued a total of $1.750 billion of senior notes and debentures. In December 2011, we issued $400 million aggregate principal amount of 2.500% Senior Notes due 2016 at a price equal to 99.366% of the principal amount and $600 million aggregate principal amount of 3.875% Senior Notes due 2021 at a price equal to 98.361% of the principal amount. In February 2012, we issued $500 million aggregate principal amount of 1.250% Senior Notes due 2015 at a price equal to 99.789% of the principal amount and $250 million aggregate principal amount of 4.500% Senior Debentures due 2042 at a price equal to 98.063% of the principal amount. We used the net proceeds from these offerings for general corporate purposes, including the repayment of outstanding indebtedness and the repurchase of shares under our stock repurchase program.

On January 9, 2012, we redeemed all $750 million of our outstanding 6.850% Senior Notes due December 2055 at a redemption price equal to 100% of the principal amount of each 2055 Note, plus accrued interest thereon.

Credit Facilities

In December 2011, we entered into an amendment to our $2.0 billion three-year revolving credit agreement, dated as of October 8, 2010, which modifies certain provisions of the original agreement to, among other things, (i) increase the amount of the credit facility from $2.0 billion to $2.1 billion, (ii) extend the maturity date of the credit facility from October 2013 to December 2015 and (iii) reduce the LIBOR-based borrowing rates under the credit facility to LIBOR plus a margin ranging from 0.5% to 1.5% based on our current public debt rating. The facility has one principal financial covenant that requires the Company’s interest coverage for the most recent four consecutive fiscal quarters to be at least 3.0x, which the Company met at March 31, 2012.

In November 2011, we entered into two 364-day bank credit facilities for an aggregate amount of $600 million. The facilities will be used for general corporate purposes. The facilities contain covenants that are substantially the same as those contained in our $2.1 billion revolving credit facility. Borrowing rates under the facilities are determined at the time of each borrowing and are generally based on LIBOR plus a margin.

At March 31, 2012, there were no amounts outstanding under our credit facilities.

Commitments and Contingencies

Legal Matters

Our 2006 acquisition agreement with Harmonix provided that to the extent financial results exceeded specific contractual targets against a defined gross profit metric for the calendar years 2007 and 2008, former Harmonix shareholders would be eligible for incremental earn-out payments. In 2008, we paid $150 million, subject to adjustment, under this earn-out agreement related to 2007 performance. A private dispute resolution process was commenced as provided in the acquisition agreement to determine the final amount of the earn-out. On December 19, 2011, the resolution accountants in the private dispute resolution process issued their determination, finding that we owe an additional $383 million under the agreement, as compared to the

 

26


Table of Contents

Management’s Discussion and Analysis

of Results of Operations and Financial Condition

(continued)

 

additional $700 million sought by the former shareholders. We recorded a reserve of $383 million in the quarter ended December 31, 2011, which is reflected in Other liabilities - current on the Consolidated Balance Sheet as of March 31, 2012.

On December 27, 2011, we commenced a lawsuit in the Delaware Court of Chancery to vacate the determination of the resolution accountants on the grounds that they improperly failed to consider arguments and evidence put before them. In responsive pleadings and motions, the shareholder representative has sought confirmation of the determination of the resolution accountants and has opposed our efforts to vacate that determination as well as our efforts in a related and now stayed September 2011 lawsuit to obtain a refund of a substantial portion of the $150 million payment made in 2008.

Approximately $13 million is being held in escrow to secure the former shareholders’ indemnification obligations to us under the acquisition agreement. We believe we are entitled to all the funds being held in escrow and that we are also entitled to reduce the earn-out payment to the extent the amount the Company is entitled to recover under the former shareholders’ indemnification obligations exceeds the amount held in escrow. In December 2010, the shareholder representative filed a lawsuit in the Court of Chancery for the State of Delaware seeking the release of the funds being held in escrow. The lawsuit also asserted certain other claims. In May 2011, we filed a motion to dismiss the portion of the shareholder representative’s amended complaint that related to the other claims as meritless, and in November 2011, the court dismissed those claims. We continue to vigorously oppose the remaining claims in the lawsuit regarding the funds held in escrow and to seek full indemnification under the acquisition agreement.

Contractual Obligations

Our minimum rental payments under noncancelable leases have increased by approximately $900 million principally due to the April 2012 extension of our world headquarters office lease through June 2031.

OTHER MATTERS

Related Parties

In the ordinary course of business we enter into transactions with related parties, including NAI, CBS Corporation, their respective subsidiaries and affiliates, and companies that we account for under the equity method of accounting. For additional information, see Note 8 to the Consolidated Financial Statements.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q, including “Item 2. 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 actual results, performance or achievements to differ. These risks, uncertainties and other factors include, among others: the public acceptance of our programs, motion pictures and other entertainment content on the various platforms on which they are distributed; technological developments and their effect in our markets and on consumer behavior; competition for audiences and distribution; the impact of piracy; economic conditions generally, and in advertising and retail markets in particular; fluctuations in our results due to the timing, mix and availability of our motion pictures; changes in the Federal communications laws and regulations; other domestic and global economic, business, competitive and/or regulatory factors affecting our businesses generally; and

 

27


Table of Contents

other factors described in our news releases and filings with the Securities and Exchange Commission, including our 2011 Form 10-K and 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 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of investments. In the ordinary course of business, we may employ established and prudent policies and procedures to manage our exposure principally to changes in interest rates and foreign exchange risks. The objective of such policies and procedures is to manage exposure to market risks in order to minimize the impact on earnings and cash flows. We do not enter into financial instrument transactions for speculative purposes.

Item 4. Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) were effective, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

28


Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Since our 2011 Form 10-K, there have been no material developments in the material legal proceedings in which we are involved, except as set forth in Note 9 to the Consolidated Financial Statements included elsewhere in this report.

Item 1A. Risk Factors.

A wide range of risks may affect our business and financial results, now and in the future. We consider the risks described in our 2011 Form 10-K 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information about our purchases of Viacom Class B common stock during the quarter ended March 31, 2012 under our stock repurchase program. On November 9, 2011, we increased the aggregate amount of the program from $4.0 billion to $10.0 billion.

 

       
    

Total Number

of Shares

Purchased

   Average Price
Paid per Share
   Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Program
Open Market Purchases    (thousands)    (dollars)    (millions)

 

Month ended January 31, 2012

   4,058    $                47.31    $                    6,608

Month ended February 29, 2012

   4,716    $                48.34    $                    6,380

Month ended March 31, 2012

   5,884    $                47.58    $                    6,100

 

 

 

29


Table of Contents

Item 6. Exhibits.

 

Exhibit No.

  

Description of Exhibit

4.1    Tenth Supplemental Indenture, dated as of February 28, 2012, between Viacom Inc. and The Bank of New York Mellon, as Trustee (including forms of Senior Notes) (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Viacom Inc. filed February 28, 2012) (File No. 001-32686).
10.1*    Summary of Viacom Inc. Compensation for Outside Directors.
10.2    Viacom Inc. Senior Executive Short-Term Incentive Plan, as amended and restated effective January 18, 2012 (incorporated by reference to Exhibit A to the Definitive Proxy Statement of Viacom Inc. filed January 27, 2012) (File No. 001-32686).
31.1*    Certification of the Chief Executive Officer of Viacom Inc. pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification of the Chief Financial Officer of Viacom Inc. pursuant to Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Certification of the Chief Executive Officer of Viacom Inc. furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*    Certification of the Chief Financial Officer of Viacom Inc. furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase.
101.LAB*    XBRL Taxonomy Extension Label Linkbase.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase.

 

 

* Filed herewith

 

30


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  VIACOM INC.
Date: May 3, 2012   By:   /S/    JAMES W. BARGE        
   

 

    James W. Barge
    Executive Vice President, Chief Financial Officer
Date: May 3, 2012   By:   /S/    KATHERINE GILL-CHAREST        
   

 

    Katherine Gill-Charest
   

Senior Vice President, Controller

(Chief Accounting Officer)

 

31

XNAS:VIA Viacom Inc Class A Quarterly Report 10-Q Filling

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