PARAMOUNT GLOBAL Management's discussion and analysis of the results of operations and financial condition ofViacomCBS Inc. should be read in conjunction with the consolidated financial statements and related notes. References in this document to "ViacomCBS ," the "Company," "we," "us" and "our" refer toViacomCBS Inc. and its consolidated subsidiaries, unless the context otherwise requires. Significant components of management's discussion and analysis of results of operations and financial condition include: • Overview-The overview section provides a summary ofViacomCBS and our business and operational highlights.
• Consolidated Results of Operations-The consolidated results of operations
section provides an analysis of our results on a consolidated basis for
the three years ended December 31, 2019 .
• Segment Results of Operations-The segment results of operations section
provides an analysis of our results on a reportable segment basis for the
three years ended
• Liquidity and Capital Resources-The liquidity and capital resources
section provides a discussion of our cash flows for the three years ended
December 31, 2019 , and of our outstanding debt, commitments and
contingencies existing as of December 31, 2019 .
• Critical Accounting Policies-The critical accounting policies section
provides detail with respect to accounting policies that are considered by
management to require significant judgment and use of estimates and that
could have a significant impact on our financial statements.
• Legal Matters-The legal matters section discusses our legal matters and
other litigation to which we are a party.
• Market Risk-The market risk section discusses how we manage exposure to
market and interest rate risks.
Overview
ViacomCBS is a leading global media and entertainment company that creates content and experiences for audiences worldwide. Merger with Viacom Inc. OnDecember 4, 2019 , Viacom Inc. ("Viacom") merged with and intoCBS Corporation ("CBS"), with CBS continuing as the surviving company (the "Merger"). At the effective time of the Merger (the "Effective Time"), the combined company changed its name toViacomCBS Inc. ("ViacomCBS"). At the Effective Time, (1) each share of Viacom Class A Common Stock issued and outstanding immediately prior to the Effective Time, other than shares held directly by Viacom as treasury shares or held by CBS, was converted automatically into 0.59625 shares of ViacomCBS Class A Common Stock, and (2) each share of Viacom Class B Common Stock issued and outstanding immediately prior to the Effective Time, other than shares held directly by Viacom as treasury shares or held by CBS, was converted automatically into 0.59625 shares of ViacomCBS Class B Common Stock (together with ViacomCBS Class A Common Stock, the "ViacomCBS Common Stock"). At the Effective Time, each share of CBS Class A Common Stock and each share of CBS Class B Common Stock (together with CBS Class A Common Stock, the "CBS Common Stock") issued and outstanding immediately prior to the Effective Time, remained an issued and outstanding share ofViacomCBS Class A Common Stock and ViacomCBS Class B Common Stock, respectively, and was not affected by the Merger. Following the Merger, the CBS Common Stock was delisted from theNew York Stock Exchange and the Viacom Common Stock ceased trading on theNasdaq Stock Market LLC ("Nasdaq"). OnDecember 5, 2019 ,ViacomCBS II-4 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Class A Common Stock and ViacomCBS Class B Common Stock were listed on Nasdaq and began trading under the ticker symbols VIACA and VIAC, respectively.
The Merger is being accounted for as a transaction between entities under common control asNational Amusements, Inc. ("NAI") was the controlling stockholder of each of CBS and Viacom (and remains the controlling stockholder ofViacomCBS ). The net assets of Viacom have been combined with those of CBS at their historical carrying amounts and the companies have been presented on a combined basis for all periods presented. Operational Highlights 2019 vs. 2018 Consolidated results of operations Increase/(Decrease) Year Ended December 31, 2019 2018 $ % GAAP: Revenues$ 27,812 $ 27,250 $ 562 2 % Operating income$ 4,273 $ 5,204 $ (931 ) (18 )% Net earnings from continuing operations attributable to ViacomCBS$ 3,270 $ 3,423 $ (153 ) (4 )% Diluted EPS from continuing operations attributable to ViacomCBS$ 5.30 $ 5.51 $ (.21 ) (4 )% Net cash flow provided by operating activities$ 1,230 $ 3,464 $ (2,234 ) (64 )% Non-GAAP: (a) Adjusted OIBDA$ 5,531 $ 6,289 $ (758 ) (12 )% Adjusted net earnings from continuing operations attributable to ViacomCBS$ 3,090 $ 3,646 $ (556 ) (15 )% Adjusted diluted EPS from continuing operations attributable to ViacomCBS$ 5.01 $ 5.87 $ (.86 ) (15 )% Free cash flow$ 877 $ 3,111 $ (2,234 ) (72 )% (a) See pages II-6 - II-8 and II-33 for reconciliations of adjusted results to the most directly comparable financial measures in accordance with accounting principles generally accepted inthe United States ("GAAP"). For 2019, revenues increased 2% to$27.81 billion from$27.25 billion in 2018, driven byCBS' broadcast of Super Bowl LIII in 2019, growth from our streaming services, which include CBS All Access, Pluto TV and theShowtime streaming subscription offering ("Showtime OTT"), and higher content licensing revenues driven by the production of programming for third parties. These increases were partially offset by lower theatrical revenues, primarily due to the difficult comparison against Mission: Impossible - Fallout in 2018, and lower political advertising sales as a result of the midterm elections in 2018. Foreign exchange rate changes had a 1-percentage point unfavorable impact on the revenue comparison. Operating income decreased 18% to$4.27 billion from$5.20 billion in 2018. This comparison was impacted by items identified as affecting comparability, including restructuring charges, costs related to the Merger and other corporate matters, programming charges and gains on the sale of assets. Adjusted operating income before depreciation and amortization ("Adjusted OIBDA") decreased 12%, primarily reflecting an increased investment in content, including a higher number of series produced for exhibition on our properties as well as for third parties. Net earnings from continuing operations attributable toViacomCBS for 2019 were$3.27 billion , or$5.30 per diluted share, compared with$3.42 billion , or$5.51 per diluted share, for 2018. This comparison was impacted by the aforementioned items as well as other items identified as affecting comparability set forth in the section "Reconciliation of Non-GAAP Measures" below. Adjusted net earnings from continuing operations attributable toViacomCBS decreased 15% and adjusted diluted earnings per share ("EPS") from continuing operations decreased 15% to$5.01 for 2019, driven by the lower Adjusted OIBDA. Adjusted OIBDA, adjusted net earnings from continuing operations attributable toViacomCBS and adjusted diluted EPS from continuing operations are non-GAAP financial measures. See pages II-6 II-5 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
- II-8 for details of the items excluded from financial results, and reconciliations of adjusted results to the most directly comparable financial measures in accordance with GAAP.
We generated operating cash flow of$1.23 billion in 2019 compared with$3.46 billion in 2018. Free cash flow was$877 million for 2019 compared with$3.11 billion for 2018. These decreases primarily reflected the aforementioned increased investment in content, higher payments for income taxes and payments of$132 million in 2019 for costs related to the Merger. In addition, operating cash flow and free cash flow included payments for restructuring activities of$234 million in 2019 and$219 million in 2018. Free cash flow is a non-GAAP financial measure. See "Free Cash Flow" on pages II-33 for a reconciliation of net cash flow provided by (used for) operating activities, the most directly comparable financial measure in accordance with GAAP, to free cash flow. Reconciliation of Non-GAAP Measures Results for the years endedDecember 31, 2019 , 2018 and 2017 included certain items identified as affecting comparability. Adjusted OIBDA, adjusted earnings from continuing operations before income taxes, adjusted provision for income taxes, adjusted net earnings from continuing operations attributable toViacomCBS and adjusted diluted EPS from continuing operations (together, the "adjusted measures") exclude the impact of these items and are measures of performance not calculated in accordance with GAAP. We use these measures to, among other things, evaluate our operating performance. These measures are among the primary measures used by management for planning and forecasting of future periods, and they are important indicators of our operational strength and business performance. In addition, we use Adjusted OIBDA to, among other things, value prospective acquisitions. We believe these measures are relevant and useful for investors because they allow investors to view performance in a manner similar to the method used by our management; provide a clearer perspective on our underlying performance; and make it easier for investors, analysts and peers to compare our operating performance to other companies in our industry and to compare our year-over-year results. Because the adjusted measures are measures of performance not calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, operating income, earnings from continuing operations before income taxes, benefit (provision) for income taxes, net earnings from continuing operations attributable toViacomCBS or diluted EPS from continuing operations, as applicable, as indicators of operating performance. These measures, as we calculate them, may not be comparable to similarly titled measures employed by other companies.
The following tables reconcile the adjusted measures to their most directly
comparable financial measures in accordance with GAAP.
Year Ended
2019 2018 2017
Operating Income (GAAP) $ 4,273 $ 5,204 $ 5,341
Depreciation and amortization (a) 443 433
443
Restructuring and other corporate matters (b) 775 490 258 Programming charges (b) 589 162 144 Gain on sale of assets (b) (549 ) - (146 ) Adjusted OIBDA (Non-GAAP)$ 5,531 $ 6,289 $ 6,040 (a) 2019 includes an impairment charge of$20 million to reduce the carrying value of intangible assets. (b) See notes on the following tables for additional information on items affecting comparability. II-6 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Year Ended
Net Earnings from
Earnings from Continuing
Continuing Operations
Operations Before Benefit (Provision) for Income Attributable to Diluted EPS from Continuing
Income Taxes Taxes ViacomCBS Operations
Reported (GAAP) $ 3,345 $ 9 $ 3,270 $ 5.30
Items affecting comparability:
Restructuring and other
corporate matters (a) 775 (134 ) 641 1.04
Impairment charge (b) 20 (6 ) 14 .02
Programming charges (c) 589 (142 ) 447 .73
Gain on sale of assets (d) (549 ) 163 (386 ) (.63 )
Net gain from investments (e) (85 ) 16 (69 ) (.11 )
Discrete tax items (f) - (827 ) (827 ) (1.34 )
Adjusted (Non-GAAP) $ 4,095 $ (921 ) $ 3,090 $ 5.01
(a) Reflects severance and exit costs relating to restructuring activities and
costs incurred in connection with the Merger, legal proceedings involving the
Company and other corporate matters.
(b) Reflects a charge to reduce the carrying value of our international
broadcast licenses in Australia to their fair value.
(c) Programming charges principally reflect accelerated amortization associated
with changes in the expected monetization of certain programs, and decisions to
cease airing, alter future airing patterns or not renew certain programs, in
connection with management changes implemented as a result of the Merger.
(d) Reflects a gain on the sale of the CBS Television City property and sound
stage operation ("CBS Television City").
(e) Reflects a gain on marketable securities of $113 million ; gains of $22
million on the sale and acquisition of joint ventures; and an impairment charge
of $50 million to write-down an investment to its fair value.
(f) Primarily reflects a deferred tax benefit of $768 million resulting from the
transfer of intangible assets between our subsidiaries in connection with a
reorganization of our international operations; tax benefits of $44 million
realized in connection with the preparation of the 2018 federal tax return,
based on further clarity provided by the United States government on tax
positions relating to federal tax legislation enacted in December 2017 (the "Tax
Reform Act"); and a tax benefit of $39 million triggered by the bankruptcy of an
investee.
II-7
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Year Ended December 31, 2018
Net Earnings from
Earnings from Continuing
Continuing Operations
Operations Before Provision for Income Attributable to Diluted EPS from Continuing
Income Taxes Taxes ViacomCBS Operations
Reported (GAAP) $ 4,124 $ (617 ) $ 3,423 $ 5.51
Items affecting comparability:
Restructuring and other
corporate matters (a) 490 (116 ) 374 .60
Programming charges (b) 162 (39 ) 123 .20
Gain on early extinguishment of
debt (18 ) 4 (14 ) (.02 )
Net loss from investments (c) 53 (16 ) 37 .06
Discrete tax items (d) - (297 ) (297 ) (.48 )
Adjusted (Non-GAAP) $ 4,811 $ (1,081 ) $ 3,646 $ 5.87
(a) Primarily reflects severance and exit costs relating to restructuring
activities as well as professional fees related to legal proceedings, cost
transformation initiatives, investigations at our Company and the evaluation of
potential merger activity.
(b) Reflects programming charges resulting from changes to our programming
strategy, including at CBS Films and our Cable Networks segment, in connection
with management changes.
(c) Reflects a loss on marketable securities of $23 million ; an impairment
charge of $46 million to write-down an investment to its fair value; and a gain
of $16 million on the sale of a 1% equity interest in Viacom18 to our joint
venture partner.
(d) Primarily reflects a net discrete tax benefit of $80 million related to the
Tax Reform Act and other tax law changes; a net tax benefit of $71 million
relating to a tax accounting method change granted by the Internal Revenue
Service ("IRS"); and the reversal of a valuation allowance of $140 million
relating to capital loss carryforwards that were utilized in connection with the
sale of CBS Television City in 2019.
Year Ended December 31, 2017
Net Earnings from
Earnings from Continuing
Continuing Operations
Operations Before Provision for Income Attributable to Diluted EPS from Continuing
Income Taxes Taxes ViacomCBS Operations
Reported (GAAP) $ 4,120 $ (804 ) $ 3,268 $ 5.05
Items affecting comparability:
Restructuring charges 258 (95 ) 163 .25
Programming charges (a) 144 (50 ) 94 .14
Gain on sale of assets (b) (146 ) 16 (130 ) (.20 )
Loss on early extinguishment of debt 38 (17 ) 21 .03
Gain on sale of EPIX (285 ) 96 (189 ) (.29 )
Pension settlement charge 352 (115 ) 237 .37
Impairment of investments (c) 18 (7 ) 11 .02
Discrete tax items (d) - (321 ) (321 ) (.50 )
Adjusted (Non-GAAP) $ 4,499 $ (1,297 ) $ 3,154 $ 4.87
(a) Reflects programming charges associated with the execution of a strategy for
certain of our flagship brands, as well as strategic initiatives at Paramount .
(b) Reflects a gain of $127 million , with $11 million attributable to the
noncontrolling interest, on the sale of broadcast spectrum in connection with
the FCC 's broadcast spectrum auction and a net gain of $19 million relating to
the disposition of property and equipment.
(c) Reflects the write-down of certain investments to their fair value.
(d) Primarily reflects a tax benefit of $279 million reflecting the recognition
of foreign tax credits on the distribution of securities to the United States
("U.S").
II-8
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Consolidated Results of Operations-2019 vs. 2018
Revenues
Revenues by Type % of Total % of Total Increase/(Decrease)
Year Ended December 31, 2019 Revenues 2018 Revenues $ %
Advertising $ 11,074 40 % $ 10,841 40 % $ 233 2 %
Affiliate 8,602 31 8,376 31 226 3
Content licensing 6,483 23 6,163 22 320 5
Theatrical 547 2 744 3 (197 ) (26 )
Publishing 814 3 825 3 (11 ) (1 )
Other 292 1 301 1 (9 ) (3 )
Total Revenues $ 27,812 100 % $ 27,250 100 % $ 562 2 %
Advertising
Advertising revenues are generated primarily from the sale of advertising spots
on the CBS Television Network , our basic cable networks and our television
stations, as well as on our ad-supported streaming services, including CBS All
Access and Pluto TV, and on our websites. Our advertising revenues include
integrated marketing services, which provide unique branded content and custom
sponsorship opportunities to our advertisers, as well as advanced marketing
solutions ("AMS"), including addressable video and brand solutions. For 2019,
the 2% increase in advertising revenues was driven by 5% growth in domestic
advertising revenues, reflecting CBS' broadcast of tent-pole sporting events in
2019, mainly Super Bowl LIII and the national semifinals and championship game
of the NCAA Division I Men's Basketball Tournament ("NCAA Tournament"), as well
as higher revenues from AMS, which includes Pluto TV. These increases were
partially offset by lower political advertising sales at our owned television
stations, as a result of the benefit to last year from the 2018 midterm
elections. International advertising revenues decreased 14%, reflecting the
unfavorable impact of foreign exchange rate changes, as well as softness in the
Australian and UK markets, partially offset by increases in pricing and
political advertising in Argentina . Foreign exchange rate changes had an
unfavorable impact of 1-percentage point on the total advertising revenues
comparison and 9-percentage points on the international advertising revenues
comparison.
The Super Bowl is broadcast on the CBS Television Network on a rotating basis
with other networks through the 2022 season under the current contract with the
National Football League ("NFL"), and the national semifinals and championship
games of the NCAA Tournament are broadcast on the CBS Television Network every
other year through 2032 under the current agreement with the NCAA and Turner
Broadcasting System, Inc. ("Turner"). In 2020, the advertising revenue
comparison will be negatively affected by the benefit in 2019 from CBS'
broadcasts of the Super Bowl and the national semifinals and championship game
of the NCAA Tournament. These events will not be broadcast by CBS in 2020.
Advertising revenues in 2020 will benefit from higher political advertising
sales, mainly in the second half of the year, associated with the U.S.
Presidential election.
Affiliate
Affiliate revenues are principally comprised of fees received from multichannel
video programming distributors ("MVPDs") and virtual MVPDs for carriage of our
cable networks ("cable affiliate fees"), fees received from television stations
affiliated with the CBS Television Network ("station affiliation fees"); fees
for authorizing the MVPDs' and virtual MVPDs' carriage of our owned television
stations ("retransmission fees"); and subscription fees for our streaming
services. For 2019, the 3% increase in affiliate revenues reflects 20% growth in
station affiliation fees and retransmission fees, driven by annual contractual
increases and contract renewals with MVPDs and virtual MVPDs, as well as 45%
growth from our streaming services, including CBS All Access and Showtime OTT,
driven by subscriber growth. These increases were partially offset by 5% lower
cable affiliate fees, mainly resulting from subscriber declines. Domestic
affiliate revenues increased 4%, while international affiliate revenues
decreased 6% from the prior
II-9
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
year driven by the unfavorable impact of foreign exchange rate changes. Foreign
exchange rate changes had an unfavorable impact of 1-percentage point on the
total affiliate revenues comparison and 6-percentage points on the international
affiliate revenues comparison.
Content Licensing
Content licensing revenues are principally comprised of fees from the licensing
of exhibition rights for our internally-produced television and film programming
to television stations, cable networks, and subscription video-on-demand
("SVOD") and free video-on-demand services; home entertainment revenues, which
are derived from the sale and distribution of our content through DVDs and
Blu-ray discs to wholesale and retail partners, as well as from the viewing of
our content on a transactional basis through transactional video-on-demand
("TVOD") and electronic sell-through services; fees from the use of our
trademarks and brands for consumer products, recreation and live events; and
fees from the distribution of third-party programming. For 2019, content
licensing revenues increased 5%, primarily reflecting higher revenues from the
domestic licensing of our content, driven by the production of programming for
third parties and the licensing of programming to SVOD providers. These
increases were partially offset by a decline in international licensing
revenues.
Revenues from the licensing of exhibition rights are recognized at the beginning
of the license period in which programs are made available to the licensee for
exhibition, and therefore, content licensing revenue comparisons are impacted by
fluctuations resulting from the timing of the availability of our programming
for multiyear licensing agreements.
Theatrical
Theatrical revenues are principally comprised of the worldwide theatrical distribution of films through audience ticket sales. For 2019, theatrical revenues decreased 26%, principally reflecting a difficult comparison against the prior year, as a result of the 2018 releases of Mission: Impossible - Fallout and AQuiet Place . Theatrical revenues in 2019 benefited from the releases of Rocketman, Gemini Man and Dora and the Lost City of Gold, as well as the continued success of the 2018 release, Bumblebee. Domestic theatrical revenues decreased 31% and international theatrical revenues decreased 23%.
Theatrical revenues may be affected by many factors, including domestic and international audience response, the number, timing and mix of releases and competitive offerings in any given period, consumer tastes and consumption habits and overall economic conditions, including discretionary spending. Revenues from theatrical film releases tend to be cyclical with increases during the summer.
Publishing
Publishing revenues are principally comprised of the domestic and international publishing and distribution of consumer books in printed, digital and audio formats. For 2019, publishing revenues decreased 1%, driven by lower print book sales, which were partially offset by higher sales from digital audio books.
Other
Other revenues are principally comprised of revenues from the rental of production facilities and digital revenues from search and e-commerce partners. For 2019, other revenues decreased 3%, mainly reflecting lower revenues from the rental of our production facilities as a result of the sale of CBS Television City inJanuary 2019 . II-10
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Operating Expenses
% of % of
Operating Expenses by Type Operating Operating Increase/(Decrease)
Year Ended December 31, 2019 Expenses 2018 Expenses $ %
Production $ 6,797 39 % $ 6,483 41 % $ 314 5 %
Programming 4,287 25 3,965 25 322 8
Participation, distribution and
royalty 3,369 20 3,295 21 74 2
Programming charges 589 3 162 1 427 n/m
Other 2,181 13 2,012 12 169 8
Total Operating Expenses $ 17,223 100 % $ 15,917 100 % $ 1,306 8 %
n/m - not meaningful
Production
Production expenses reflect the amortization of direct costs of
internally-produced television and theatrical film content as well as other
television production costs, including on-air talent. For 2019, the 5% increase
in production expenses reflected an increased investment in content, including a
higher number of series produced for distribution on multiple platforms,
including our streaming services and cable networks, as well as higher
amortization of television production costs associated with the increase in
content licensing revenues. These increases were partially offset by lower
amortization of feature film costs, driven by costs in 2018 associated with
Mission: Impossible - Fallout.
Programming
Programming expenses reflect the amortization of acquired programs exhibited on our television broadcast networks, cable networks and television stations. For 2019, the 8% increase in programming expenses was driven by higher sports programming costs, mainly fromCBS' broadcasts of Super Bowl LIII and the national semifinals and championship game of theNCAA Tournament in 2019, which were not broadcast by CBS in 2018, and programming for Pluto TV, which we acquired inMarch 2019 . These increases were partially offset by lower amortization of acquired programming for our cable networks. Participation, Distribution and Royalty Participation, distribution and royalty costs primarily include participation and residual expenses for television and film programming, royalty costs for publishing content and other distribution expenses incurred with respect to film and television content, such as print and advertising. For 2019, the 2% increase in participation, distribution and royalty costs was driven by higher participation costs associated with the increase in content licensing revenues. Programming Charges During 2019, in connection with the Merger, we implemented management changes across the organization. In connection with these changes, we performed an evaluation of our programming portfolio across all of our businesses, including an assessment of the optimal use of our programming in the marketplace, which resulted in the identification of programs not aligned with management's strategy. As a result, we recorded programming charges of$589 million principally reflecting accelerated amortization associated with changes in the expected monetization of certain programs, and decisions to cease airing, alter future airing patterns or not renew certain programs. In addition, during 2018, in connection with management changes, we recorded programming charges of$162 million relating to changes to our programming strategy, including atCBS Films , which shifted its focus from theatrical films to developing content for our streaming services, as well as at our Cable Networks segment where we ceased the use of certain programming. II-11 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Other
Other operating expenses primarily include compensation and costs associated
with book sales, including printing and warehousing. For 2019, the 8% increase
in other operating expenses mainly reflected higher costs associated with growth
and expansion of our streaming services.
Selling, General and Administrative Expenses
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Selling, general and administrative expenses
441 8 %
Selling, general and administrative ("SG&A") expenses include expenses incurred
for selling and marketing costs, occupancy, professional service fees and back
office support, including employee compensation. The 8% increase in SG&A
expenses was driven by higher advertising and marketing costs, reflecting an
increase in the number of series premieres and costs associated with our
streaming services, as well as the inclusion of Pluto TV and Pop TV since their
acquisitions in the first quarter of 2019. These increases were partially offset
by cost savings associated with restructuring activities and compensation cost
savings resulting from changes in senior management at CBS in 2018.
Depreciation and Amortization
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Depreciation and amortization$ 443 $ 433 $ 10
2 %
Depreciation and amortization expense reflects depreciation of fixed assets, including amortization of transponders and equipment under finance leases, and amortization of finite-lived intangible assets. For 2019, depreciation and amortization expense also includes an impairment charge of$20 million to reduce the carrying value of broadcast licenses inAustralia to their fair value. Restructuring and Other Corporate Matters During 2019 and 2018, we recorded costs for restructuring and other corporate matters as follows: Year Ended December 31, 2019 2018 Severance$ 401 $ 235 Exit costs and other 23 75 Restructuring charges 424 310 Restructuring-related costs - 52 Merger-related costs 294 - Other corporate matters 57 128
Restructuring and other corporate matters
During the year endedDecember 31, 2019 , we recorded restructuring charges of$424 million , primarily for severance and the acceleration of stock-based compensation in connection with the Merger, as well as costs related to a restructuring plan initiated in the first quarter of 2019 under which severance payments are being provided to certain eligible employees who voluntarily elected to participate. In addition, in 2019 we incurred costs of$294 million in connection with the Merger, consisting of financial advisory, legal and other professional fees, transaction-related bonuses, and contractual executive compensation, including the accelerated vesting of stock-based compensation, that was triggered by the Merger. We also incurred costs of$40 million in connection with the settlement of a commercial dispute and$17 million associated with legal proceedings involving the Company (see Note 19) and other corporate matters. II-12 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
During the year ended December 31, 2018 , we recorded restructuring charges of
$310 million resulting from cost transformation initiatives to improve margins,
as well as restructuring-related costs of $52 million , comprised of third-party
professional services associated with such initiatives. In addition, in 2018 we
recorded expenses of $128 million primarily for professional fees related to
legal proceedings, investigations at our Company and the evaluation of potential
merger activity.
Gain on Sale of Assets
In 2019, we completed the sale of CBS Television City for $750 million . We have
guaranteed a specified level of cash flows to be generated by the business
during the first five years following the completion of the sale. Included on
the Consolidated Balance Sheet at December 31, 2019 is a liability of $124
million , reflecting the present value of the estimated amount payable under the
guarantee obligation. This transaction resulted in a gain of $549 million for
2019, which includes a reduction for the guarantee obligation. We also
recognized a tax benefit of $140 million in the fourth quarter of 2018 for the
reversal of a valuation allowance relating to capital loss carryforwards that
were utilized in connection with this sale.
Interest Expense and Interest Income
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Interest expense
The following table presents our outstanding debt balances, excluding finance leases, and the weighted average interest rate as ofDecember 31, 2019 and 2018: Weighted Average Weighted Average At December 31, 2019 Interest Rate 2018 Interest Rate Total long-term debt$ 17,976 4.70 %$ 18,370 4.64 % Commercial paper$ 699 2.07 %$ 674 3.02 % Gain (Loss) onMarketable Securities For 2019 and 2018, we recorded a gain of$113 million and a loss of$23 million , respectively, reflecting changes in the fair value of marketable securities. Gain (Loss) on Early Extinguishment of Debt For 2018, we recorded a gain on early extinguishment of debt of$18 million associated with the redemption of senior notes and debentures prior to maturity totaling$1.13 billion .
Other Items, Net
The following table presents the components of Other items, net.
Year Ended
2019 2018
Pension and postretirement benefit costs $ (105 ) $ (68 )
Foreign exchange losses (17 ) (18 )
Impairment of investments (50 ) (46 )
Gains from investments 22 16
Other 5 (8 )
Other items, net $ (145 ) $ (124 )
II-13--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Benefit (Provision) for Income Taxes
The benefit (provision) for income taxes represents federal, state and local,
and foreign taxes on earnings from continuing operations before income taxes and
equity in loss of investee companies. For 2019, we recorded a benefit for income
taxes of $9 million , reflecting an effective income tax rate of (0.3)%, which
included discrete items such as a deferred tax benefit of $768 million resulting
from the transfer of intangible assets between our subsidiaries in connection
with a reorganization of our international operations; tax benefits of $44
million realized in connection with the preparation of the 2018 federal tax
return, based on further clarity provided by the United States government on tax
positions relating to the Tax Reform Act; and a tax benefit of $39 million
triggered by the bankruptcy of an investee. For 2018, the provision for income
taxes was $617 million , reflecting an effective income tax rate of 15.0%. The
provision for income taxes for 2018 included discrete items such as the reversal
of a valuation allowance of $140 million relating to capital loss carryforwards
that were utilized in connection with the sale of CBS Television City in 2019; a
tax benefit of $80 million relating to the Tax Reform Act and other tax law
changes; and a net tax benefit of $71 million relating to a tax accounting
method change granted by the Internal Revenue Service.
Equity in Earnings (Loss) of Investee Companies, Net of Tax
The following table presents equity in loss of investee companies for our
equity-method investments.
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Equity in loss of investee companies
19 15 4 27
Equity in loss of investee companies, net
of tax $ (53 ) $ (47 ) $ (6 ) (13 )%
Net Earnings from Continuing Operations Attributable to
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ % Net earnings from continuing operations attributable to ViacomCBS$ 3,270 $ 3,423 $ (153 ) (4 )% Diluted EPS from continuing operations attributable to ViacomCBS$ 5.30 $ 5.51 $ (.21 ) (4 )% For 2019, net earnings from continuing operations attributable toViacomCBS and diluted EPS from continuing operations each decreased 4%, primarily driven by the lower operating income, mainly reflecting our increased investment in content. The lower operating income was partially offset by the aforementioned discrete tax benefits. Net Earnings Attributable toViacomCBS and Diluted EPS Attributable toViacomCBS Increase/(Decrease) Year Ended December 31, 2019 2018 $ %
Net earnings attributable to
(4 )% Diluted EPS attributable to ViacomCBS$ 5.36 $ 5.56 $ (.20 )
(4 )%
Consolidated Results of Operations- 2018 vs. 2017 Revenues Revenues by Type % of Total % of Total Increase/(Decrease) Year Ended December 31, 2018 Revenues 2017 Revenues $ % Advertising$ 10,841 40 %$ 10,582 40 %$ 259 2 % Affiliate 8,376 31 8,153 31 223 3 Content licensing 6,163 22 5,947 22 216 4 Theatrical 744 3 716 3 28 4 Publishing 825 3 830 3 (5 ) (1 ) Other 301 1 307 1 (6 ) (2 ) Total Revenues$ 27,250 100 %$ 26,535 100 %$ 715 3 % Advertising For 2018, the 2% increase in advertising revenues was driven by our acquisition of Network 10 in the fourth quarter of 2017; record political advertising sales in 2018 associated with theU.S. midterm elections; higher pricing at our broadcast and cable networks; and growth in revenues from AMS. Advertising revenues for 2018 also benefited from the adoption of a new revenue recognition standard in the first quarter of 2018, under which revenues for certain distribution arrangements are recognized based on the gross amount of consideration received from the customer, with an offsetting increase to operating expenses. Under previous accounting guidance, such revenues were recognized at the net amount retained by us after the payment of fees to the third party. This guidance was applied prospectively from the date of adoption, and therefore, amounts for 2017 are reported under previous accounting guidance. These increases were partially offset by lower linear impressions at our cable networks and the absence of the broadcasts of five ThursdayNight Football games and the national semifinals and championship game of theNCAA Tournament, which were broadcast on theCBS Television Network in 2017. The national semifinals and championship game of theNCAA Tournament are broadcast by theCBS Television Network every other year through 2032 under the current agreements with theNCAA and Turner. Foreign exchange rate changes had an unfavorable impact of 1-percentage point on the advertising revenues comparison.
Affiliate
For 2018, the 3% increase in affiliate revenues reflects 22% growth in station affiliation and retransmission fees and 65% growth from subscription fees for our streaming services, CBS All Access and Showtime OTT. These increases were partially offset by the unfavorable comparison againstShowtime Networks' distribution in 2017 of the Floyd Mayweather/Conor McGregor pay-per-view boxing event. Cable affiliate fees were relatively flat for 2018 compared with 2017, as contractual rate increases under carriage agreements for our cable networks and the benefit of new channel launches and acquisitions were offset by subscriber declines.Content Licensing For 2018, the 4% increase in content licensing revenues reflects higher revenues from the distribution of third-party content, resulting from revenues under certain distribution arrangements now being recognized at the gross amount of consideration received from the customer, with an offsetting increase to participation expense, as a result of the adoption of a new revenue recognition standard in the first quarter of 2018. Under previous guidance, such II-14 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
distribution revenues were recognized at the net amount retained by us after the
payment of fees to the third party. The increase also reflected growth from
domestic and international license fees, including the 2018 availability of Tom
Clancy's Jack Ryan , The Haunting of Hill House, Maniac, The Alienist and The
Cloverfield Paradox, compared with 2017, which included the licensing of NCIS:
New Orleans , Madam Secretary and titles from the CSI franchise. These increases
were partially offset by lower home entertainment revenues, primarily reflecting
the number and mix of titles in release.
Theatrical
For 2018, theatrical revenues increased 4%, principally reflecting the strong performance of the theatrical release of Mission: Impossible - Fallout in 2018.
Publishing
Publishing revenues for 2018 decreased 1% driven by lower sales of print and
electronic books, which were partially offset by higher sales of digital audio
books.
Operating Expenses
% of Total % of Total
Operating Expenses by Type Operating Operating Increase/(Decrease)
Year Ended December 31, 2018 Expense 2017 Expense $ %
Production $ 6,483 41 % $ 5,994 39 % $ 489 8 %
Programming 3,965 25 4,268 28 (303 ) (7 )
Participation, distribution and
royalty 3,295 21 3,182 20 113 4
Programming charges 162 1 144 1 18 13
Other 2,012 12 1,895 12 117 6
Total Operating Expenses $ 15,917 100 % $ 15,483 100 % $ 434 3 %
ProductionFor 2018, the 8% increase in production expenses reflected an increased investment in content, including a higher number of series produced for distribution on multiple platforms, including our owned networks and streaming services, and the acquisition of Network 10 in the fourth quarter of 2017.
Programming
For 2018, the 7% decrease in programming expenses was driven by lower sports programming costs, resulting fromShowtime Networks' distribution of the Floyd Mayweather/Conor McGregor pay-per-view boxing event in 2017 and the absence of ThursdayNight Football and the national semifinals and championship game of theNCAA Tournament, which were broadcast on theCBS Television Network in 2017. These decreases were partially offset by costs for programming on Network 10, which we acquired in the fourth quarter of 2017, and an increased investment in programming for our cable networks. Participation, Distribution and Royalty For 2018, the 4% increase in participation, distribution and royalty costs was primarily driven by the adoption of new revenue recognition guidance in the first quarter of 2018, which resulted in revenues under certain distribution arrangements being recognized based on the gross amount of consideration received from the customer, with an offsetting participation expense recognized for the fees paid to the third party. Under previous accounting guidance, such revenues were recognized at the net amount retained by us after the payment of fees to the third party. This II-15 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
change resulted in an increase to both revenues and participation expenses of
$279 million for 2018, with no impact to our operating income. The increase also
reflects higher participation costs associated with the increase in content
licensing revenues. These increases were partially offset by lower film
distribution costs, driven by the number and mix of theatrical releases and a
charge in 2017 resulting from the termination of a slate financing agreement.
Programming Charges
During 2018, in connection with management changes, we recorded programming
charges of $162 million relating to changes to our programming strategy,
including at CBS Films , which shifted its focus from theatrical films to
developing content for our streaming services, as well as at our Cable Networks
segment where we ceased the use of certain programming.
In addition, during 2017, we recorded programming charges of $144 million
associated with management's decision to cease use of certain original and
acquired programming, in connection with the execution of a strategy for certain
of our flagship brands and strategic initiatives at Paramount .
Other
For 2018, the 6% increase in other operating expenses mainly reflected higher
costs associated with growth in our streaming services and expenses of Network
10, which we acquired in the fourth quarter of 2017.
Selling, General and Administrative Expenses
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ %
Selling, general and administrative expenses
50 1 %
For 2018, the 1% increase in SG&A expenses reflected higher advertising and
marketing costs, mainly for the launch of the Paramount Network and to support
our growth initiatives. These increases were partially offset by savings from
cost transformation initiatives.
Depreciation and Amortization
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ %
Depreciation and amortization
Restructuring and Other Corporate Matters During 2018 and 2017, we recorded costs for restructuring and other corporate matters as follows: Year Ended December 31, 2018 2017 Severance$ 235 $ 224 Exit costs and other 75 12 Asset impairment - 22 Restructuring charges 310 258 Restructuring-related costs 52 - Other corporate matters 128 -
Restructuring and other corporate matters
During the year endedDecember 31, 2018 , we recorded restructuring charges of$310 million resulting from cost transformation initiatives to improve margins, as well as restructuring-related costs of$52 million , comprised of third- II-16 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
party professional services associated with such initiatives. In addition, in
2018 we recorded expenses of $128 million primarily for professional fees
related to legal proceedings, investigations at our Company and the evaluation
of potential merger activity.
During the year ended December 31, 2017 , we recorded restructuring charges of
$258 million , resulting from the execution of a strategy for certain of our
flagship brands and strategic initiatives at Paramount , as well as costs
relating to other restructuring plans across several of our businesses in a
continued effort to reduce our cost structure. The restructuring charges for
2017 included a non-cash impairment charge resulting from the decision to
abandon an international trade name in connection with the strategic
initiatives.
Gain on Sale of Assets
In 2017, we completed the sale of broadcast spectrum in connection with the
FCC 's broadcast spectrum auction. The sale resulted in a pre-tax gain of $127
million on the Consolidated Statement of Operations, with $11 million
attributable to the noncontrolling interest. In addition, in 2017 we recorded a
net gain of $19 million relating to the disposition of property and equipment.
Interest Expense and Interest Income
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ %
Interest expense
The following table presents our outstanding debt balances, excluding finance leases, and the weighted average interest rate as ofDecember 31, 2018 and 2017: Weighted Average Weighted Average At December 31, 2018 Interest Rate 2017 Interest Rate Total long-term debt$ 18,370 4.64 %$ 19,466 4.67 % Commercial paper$ 674 3.02 %$ 779 1.91 % Gain (Loss) onMarketable Securities During 2018, we recorded a loss on marketable securities of$23 million . In connection with the adoption of FASB guidance on financial instruments, beginning in the first quarter of 2018, changes in the fair value of marketable securities are recognized in the Consolidated Statements of Operations. Gain (Loss) on Early Extinguishment of Debt For 2018, the gain on early extinguishment of debt of$18 million reflected the pre-tax gain associated with the redemption of senior notes and debentures prior to maturity totaling$1.13 billion . During 2017, we redeemed, prior to maturity, senior notes totaling$4.27 billion , resulting in the recognition of a pre-tax loss on the early extinguishment of debt of$38 million . Gain on Sale of EPIX During 2017, we completed the sale of our 49.76% interest in EPIX, resulting in a pre-tax gain of$285 million . II-17 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Pension Settlement Charge
During 2017, we purchased a group annuity contract under which an insurance
company permanently assumed our obligation to pay and administer pension
benefits to certain pension plan participants, or their designated
beneficiaries, who had been receiving pension benefits. The purchase of this
group annuity contract was funded with pension plan assets. As a result, our
outstanding pension benefit obligation was reduced by approximately $800
million . In connection with this transaction, we recorded a settlement charge of
$352 million in 2017, reflecting the accelerated recognition of a portion of
unamortized actuarial losses in the plan. Additionally, during 2017, we made
discretionary contributions totaling $600 million to prefund our qualified
pension plans.
Other Items, Net
The following table presents the components of Other items, net.
Year Ended
2018 2017
Pension and postretirement benefit costs $ (68 ) $ (96 )
Foreign exchange losses (18 ) (20 )
Impairment of investments (46 ) (18 )
Gain on sale of investment 16 -
Other (8 ) 19
Other items, net $ (124 ) $ (115 )
Benefit (Provision) for Income Taxes
For 2018, the provision for income taxes was $617 million , reflecting an
effective income tax rate of 15.0%. The provision for income taxes for 2018
included discrete items such as the reversal of a valuation allowance of $140
million relating to capital loss carryforwards that were utilized in connection
with the sale of CBS Television City in 2019; a tax benefit of $80 million
relating to the Tax Reform Act and other tax law changes; and a tax benefit of
$71 million relating to a tax accounting method change granted by the Internal
Revenue Service. For 2017, the provision for income taxes was $804 million ,
reflecting an effective income tax rate of 19.5%. The provision for income taxes
for 2017 included discrete items such as a tax benefit of $279 million
reflecting the recognition of foreign tax credits on the distribution of
securities to the U.S. Equity in Earnings (Loss) of Investee Companies, Net of Tax The following table presents equity in earnings (loss) of investee companies for our equity-method investments.
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ % Equity in earnings (loss) of investee companies$ (62 ) $ 14 $ (76 ) n/m Tax benefit (provision) 15 (10 ) 25 n/m Equity in earnings (loss) of investee companies, net of tax$ (47 ) $ 4 $ (51 ) n/m n/m - not meaningful II-18
--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Net Earnings from Continuing Operations Attributable to
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ % Net earnings from continuing operations attributable to ViacomCBS$ 3,423 $ 3,268 $ 155 5 % Diluted EPS from continuing operations attributable to ViacomCBS$ 5.51 $ 5.05 $ .46 9 % For 2018, the 5% increase in net earnings from continuing operations attributable toViacomCBS was driven by the lower effective income tax rate in 2018, partially offset by lower operating income. Diluted EPS from continuing operations attributable toViacomCBS grew 9%, reflecting the higher earnings and lower weighted average shares outstanding as a result of share repurchases and the shares retired as a result of the split-off ofCBS Radio Inc. ("CBS Radio ) during the fourth quarter of 2017. Net Loss from Discontinued Operations, Net of Tax OnNovember 16, 2017 , we completed the split-off ofCBS Radio through an exchange offer, in which we accepted 17.9 million shares of CBS ClassB Common Stock from our stockholders in exchange for the 101.4 million shares ofCBS Radio common stock that we owned. Immediately following the exchange offer, each share ofCBS Radio common stock was converted into one share of Entercom Communications Corp. ("Entercom") Class A common stock upon completion of the merger ofCBS Radio and Entercom.CBS Radio has been presented as a discontinued operation in the consolidated financial statements for all periods presented. II-19 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
The following table sets forth details of net earnings (loss) from discontinued
operations for the year ended December 31, 2017 . Net earnings from discontinued
operations for the year ended December 31, 2018 was not material to our
consolidated financial statements.
Year Ended December 31, 2017 CBS Radio Other Total
Revenues $ 1,018 $ - $ 1,018
Costs and expenses:
Operating 364 - 364
Selling, general and administrative 444 (8 ) 436
Market value adjustment 980 (a) - 980
Restructuring charges 7 - 7
Total costs and expenses 1,795 (8 ) 1,787
Operating income (loss) (777 ) 8 (769 )
Interest expense (70 ) - (70 )
Other items, net (2 ) - (2 )
Earnings (loss) from discontinued operations (849 ) 8 (841 )
Income tax benefit (provision) (55 ) 43 (b) (12 )
Earnings (loss) from discontinued operations,
net of tax (904 ) 51 (853 )
Net gain (loss) on disposal (109 ) 13 (96 )
Income tax benefit (provision) 4 (2 ) 2
Net gain (loss) on disposal, net of tax (105 ) 11 (c) (94 )
Net earnings (loss) from discontinued
operations, net of tax $ (1,009 ) $ 62 (a) During 2017, prior to the split-off,CBS Radio was measured each reporting period at the lower of its carrying amount or fair value less cost to sell. The value of the transaction with Entercom was determined based on Entercom's stock price at the closing of the transaction and therefore, we recorded a market value adjustment of$980 million in 2017 to adjust the carrying value ofCBS Radio to the value indicated by the stock valuation of Entercom. (b) Primarily reflects a tax benefit from the resolution of a tax matter in a foreign jurisdiction relating to a previously disposed business that was accounted for as a discontinued operation. (c) Reflects adjustments to the loss on disposal of our outdoor advertising businesses, primarily from a decrease to the guarantee liability associated with the 2013 disposal of our outdoor advertising business inEurope . Net Earnings Attributable toViacomCBS and Diluted EPS Attributable toViacomCBS Increase/(Decrease) Year Ended December 31, 2018 2017 $ %
Net earnings attributable to
49 %
Diluted EPS attributable to
55 %
II-20--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
SegmentsWe operate in the following four segments:
TV ENTERTAINMENT: OurTV Entertainment segment creates and acquires programming for distribution and viewing on multiple media platforms, including our broadcast network, through multichannel video programming distributors ("MVPDs") and virtual MVPDs, and our streaming services, as well as for licensing to third parties both domestically and internationally.TV Entertainment consists of theCBS Television Network ,CBS Television Studios ,CBS Television Distribution ,CBS Interactive ,CBS Sports Network ,CBS Television Stations and CBS-branded streaming services CBS All Access and CBSN, among others.TV Entertainment's revenues are generated primarily from advertising sales, the licensing and distribution of its content, and affiliate revenues. CABLE NETWORKS: Our Cable Networks segment creates and acquires programming for distribution and viewing on multiple media platforms, including our cable networks, through MVPDs and virtual MVPDs, and our streaming services, as well as for licensing to third parties both domestically and internationally. Cable Networks consists of our premium subscription cable networksShowtime , The Movie Channel and Flix, and a subscription streaming offering ofShowtime ; our basic cable networks Nickelodeon,MTV ,BET ,Comedy Central , Paramount Network,Nick Jr .,VH1 ,TV Land , CMT, Pop TV and Smithsonian Channel, among others, as well as the international extensions of these brands operated byViacomCBS Networks International ; international broadcast networks, Network 10,Channel 5 and Telefe; and Pluto TV, a leading free streaming TV platform inthe United States . Cable Networks' revenues are generated primarily from affiliate revenues, advertising sales and the licensing of its content and brands. FILMED ENTERTAINMENT: OurFilmed Entertainment segment develops, produces, finances, acquires and distributes films, television programming and other entertainment content in various markets and media worldwide primarily through Paramount Pictures, Paramount Players, Paramount Animation andParamount Television Studios .Filmed Entertainment's revenues are generated primarily from the release and/or distribution of films theatrically, the release and/or distribution of film and television product through home entertainment, the licensing of film and television product to television and digital platforms and other ancillary activities. PUBLISHING: Our Publishing segment publishes and distributes Simon & Schuster consumer books domestically and internationally and includes imprints such as Simon & Schuster, Scribner,Atria Books andGallery Books . Publishing generates revenues from the publishing and distribution of consumer books in print, digital and audio formats. We present operating income (loss) excluding depreciation and amortization, stock-based compensation, costs for restructuring and other corporate matters, programming charges and gain on sale of assets, each where applicable ("Adjusted OIBDA"), as the primary measure of profit and loss for our operating segments in accordance with FASB guidance for segment reporting. We began presenting Adjusted OIBDA as our segment profit measure in the fourth quarter of 2019 in order to align with the primary method used by our management beginning after the Merger to evaluate segment performance and to make decisions regarding the allocation of resources to our segments. We believe the presentation of Adjusted OIBDA is relevant and useful for investors because it allows investors to view segment performance in a manner similar to the primary method used by our management and enhances their ability to understand our operating performance. Stock-based compensation is excluded from our segment measure of profit and loss because it is set and approved by our Board of Directors in consultation with corporate executive management. Stock-based compensation is included as a component of our consolidated Adjusted OIBDA. The reconciliation of Adjusted OIBDA to our consolidated net earnings is presented in Note 17 to the consolidated financial statements. II-21 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Segment Results of Operations - 2019 vs. 2018
% of Total % of Total Increase/(Decrease)
Year Ended December 31, 2019 Revenues 2018 Revenues $ %
Revenues:
TV Entertainment $ 11,924 43 % $ 11,061 41 % $ 863 8 %
Cable Networks 12,449 45 12,683 46 (234 ) (2 )
Filmed Entertainment 2,990 10 2,956 11 34 1
Publishing 814 3 825 3 (11 ) (1 )
Corporate/Eliminations (365 ) (1 ) (275 ) (1 ) (90 ) (33 )
Total Revenues $ 27,812 100 % $ 27,250 100 % $ 562 2 %
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Adjusted OIBDA:
TV Entertainment $ 2,443 $ 2,466 $ (23 ) (1 )%
Cable Networks 3,515 4,341 (826 ) (19 )
Filmed Entertainment 80 (33 ) 113 n/m
Publishing 143 153 (10 ) (7 )
Corporate/Eliminations (449 ) (433 ) (16 ) (4 )
Stock-based compensation (201 ) (205 ) 4 2
Total Adjusted OIBDA 5,531 6,289 (758 ) (12 )
Depreciation and amortization (443 ) (433 ) (10 ) (2 )
Restructuring and other corporate matters (775 ) (490 ) (285 ) n/m
Programming charges (589 ) (162 ) (427 ) n/m
Gain on sale of assets 549 - 549 n/m
Total Operating Income $ 4,273 $ 5,204 $ (931 ) (18 )%
n/m - not meaningful
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Depreciation and Amortization:
TV Entertainment $ 150 $ 160 $ (10 ) (6 )%
Cable Networks 219 194 25 13
Filmed Entertainment 37 38 (1 ) (3 )
Publishing 5 6 (1 ) (17 )
Corporate 32 35 (3 ) (9 )
Total Depreciation and Amortization $ 443 $ 433 $ 10 2 %
TV Entertainment (CBS Television Network ,CBS Television Studios ,CBS Television Distribution ,CBS Interactive ,CBS Sports Network ,CBS Television Stations and CBS-branded streaming services CBS All Access and CBSN, among others) Increase/(Decrease) Year Ended December 31, 2019 2018 $ % Advertising$ 6,008 $ 5,751 $ 257 4 % Affiliate 2,550 2,082 468 22 Content licensing 3,157 3,006 151 5 Other 209 222 (13 ) (6 ) Revenues$ 11,924 $ 11,061 $ 863 8 % Adjusted OIBDA$ 2,443 $ 2,466 $ (23 ) (1 )% II-22
--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Revenues
For 2019, the 8% increase inTV Entertainment revenues reflects growth across each of the segment's main revenue streams. Advertising The 4% increase in advertising revenues was driven by 11% growth in CBS Network advertising, principally reflectingCBS' broadcasts of Super Bowl LIII and the national semifinals and championship game of theNCAA Tournament, partially offset by the timing of other sporting events. Taken together these items contributed 9-percentage points of the growth in network advertising. Advertising sales at our owned television stations decreased 11%, primarily reflecting record political advertising in 2018 from the midterm elections, partially offset by the benefit fromCBS' broadcast of Super Bowl LIII. TheSuper Bowl is broadcast on theCBS Television Network on a rotating basis with other networks through the 2022 season under the current contract with the NFL and the national semifinals and championship games of theNCAA Tournament are broadcast on theCBS Television Network every other year through 2032 under the current agreement with theNCAA and Turner.
Affiliate
Affiliate revenues grew 22%, primarily as a result of a 20% increase in station affiliation fees and retransmission revenues as well as subscriber growth at CBS All Access.Content Licensing Content licensing increased 5%, driven by higher revenues from the production of programming for third parties, including Unbelievable and Dead to Me, and higher revenues from the licensing of library programming to SVOD providers. Adjusted OIBDA Adjusted OIBDA decreased 1% as a result of an increased investment in content and higher costs associated with the growth and expansion of our streaming services, partially offset by higher revenues. Comparability in 2020 will be negatively affected by the benefit in 2019 fromCBS' broadcasts of Super Bowl LIII and the national semifinals and championship game of theNCAA Tournament. Results in 2020 will benefit from higher political advertising revenues, mainly in the second half of the year, associated with theU.S. Presidential election. II-23 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Cable Networks (
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Advertising $ 5,129 $ 5,130 $ (1 ) - %
Affiliate 6,052 6,294 (242 ) (4 )
Content licensing 1,268 1,259 9 1
Revenues $ 12,449 $ 12,683 $ (234 ) (2 )%
Adjusted OIBDA $ 3,515 $ 4,341 $ (826 ) (19 )%
Revenues
For 2019, Cable Networks revenues decreased 2% from the prior year, reflecting
an unfavorable impact from foreign exchange rate changes of 2-percentage points.
Domestic revenues remained substantially flat compared with the prior year as
higher advertising revenues were offset by a decline in affiliate revenues.
International revenues decreased 9% mainly as a result of a 7-percentage point
unfavorable impact of foreign exchange rate changes.
Advertising
Advertising revenues remained flat compared with the prior year and included an unfavorable impact of foreign exchange rate changes of 3-percentage points. Domestic advertising revenues increased 6%, reflecting higher revenues from AMS, which comprised approximately 19% of domestic advertising revenues in 2019, and includes Pluto TV, which was acquired inMarch 2019 . The domestic advertising growth also reflects higher pricing and the inclusion of the results of Pop TV. We began consolidating Pop TV inMarch 2019 when we acquired the 50% stake we did not own, which brought our ownership to 100%. These increases were partially offset by lower linear impressions. International advertising revenues decreased 13%, mainly reflecting the unfavorable impact of foreign exchange rate changes of 9-percentage points, as well as softness in the Australian andUK markets, partially offset by increases in pricing and political advertising inArgentina .
Affiliate
Affiliate revenues decreased 4%, which included a 1-percentage point unfavorable impact from foreign exchange rate changes. Domestic affiliate revenues decreased 4%, primarily driven by declines in traditional MVPD subscribers at our basic and premium cable networks. These declines were partially offset by growth from Showtime OTT, the inclusion of the results of Pop TV, and contractual rate increases under carriage agreements. International affiliate revenues decreased 6%, reflecting a 6-percentage point unfavorable impact of foreign exchange rate changes. As ofDecember 31, 2019 ,Showtime subscriptions, includingShowtime OTT, totaled approximately 27 million.Content Licensing The 1% increase in content licensing revenues, which includes the unfavorable impact of foreign exchange rate changes of 1-percentage point, was the result of increased revenues from the production of programming for third parties, includingThe Real World and Bellator mixed martial arts events. These increases were partially offset by lower secondary market revenue, driven by the renewal of a significant domestic licensing agreement for theShowtime original series, Dexter, in 2018. II-24
--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Adjusted OIBDA
Adjusted OIBDA decreased 19%, driven by lower revenues as well as increased
investment in content and higher advertising and promotion expenses.
Filmed Entertainment (Paramount Pictures, Paramount Players, Paramount Animation
and Paramount Television Studios )
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Theatrical $ 547 $ 744 $ (197 ) (26 )%
Home Entertainment 623 617 6 1
Licensing 1,709 1,493 216 14
Other 111 102 9 9
Revenues $ 2,990 $ 2,956 $ 34 1 %
Adjusted OIBDA $ 80 $ (33 ) $ 113 n/m
n/m - not meaningful
Revenues
For 2019, the 1% increase in Filmed Entertainment revenues reflects growth in
licensing revenues, partially offset by lower theatrical revenues. Foreign
exchange rate changes had a 1-percentage point unfavorable impact on the revenue
comparison.
Theatrical
The 26% decrease in theatrical revenues principally reflects a difficult comparison to the prior year, as a result of the 2018 releases of Mission: Impossible - Fallout and AQuiet Place . Theatrical revenues in 2019 benefited from the releases of Rocketman, Gemini Man and Dora and the Lost City of Gold, as well as the continued success of the 2018 release, Bumblebee. Foreign exchange rate changes had a 1-percentage point unfavorable impact on theatrical revenues.Home Entertainment The 1% increase in home entertainment revenues was driven by the number and mix of titles in release. Significant 2019 releases included Bumblebee, Rocketman, Instant Family, and Pet Sematary, while 2018 benefited from the releases of Mission: Impossible - Fallout, Daddy's Home 2 and AQuiet Place . Changes in foreign exchange rates resulted in a 1-percentage point unfavorable impact on the revenue comparison.
Licensing
The 14% growth in licensing revenues was driven by increases in licensing of film catalog titles to SVOD providers and recent releases to pay television services. Foreign exchange rate changes had a 1-percentage point unfavorable impact on licensing revenues.
Other
The 9% increase in other revenues was driven by higher studio rental revenues.
II-25
--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Adjusted OIBDA
Adjusted OIBDA for 2019 increased to $80 million from a loss of $33 million for
2018, principally driven by higher profits from licensing of film library
titles. This increase was partially offset by costs associated with future film
releases and higher incentive compensation costs. Fluctuations in results for
the Filmed Entertainment segment may occur as a result of the timing of the
recognition of print and advertising expenses, which are generally incurred
before and throughout the theatrical release of a film, while the revenues for
the respective film are recognized as earned through the film's theatrical
exhibition and subsequent distribution windows.
Publishing (Simon & Schuster)
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Revenues $ 814 $ 825 $ (11 ) (1 )%
Adjusted OIBDA $ 143 $ 153 $ (10 ) (7 )%
Revenues
For 2019, the 1% decrease in revenues primarily reflects lower print book sales,
partially offset by 15% growth in digital audio sales. Bestselling titles for
2019 included Howard Stern Comes Again by Howard Stern , The Institute by Stephen
King and The Pioneers by David McCullough .
Adjusted OIBDA
The 7% decrease in Adjusted OIBDA primarily reflects lower revenues and higher
costs from the mix of titles.
Segment Results of Operations - 2018 vs. 2017
% of Total % of Total Increase/(Decrease)
Year Ended December 31, 2018 Revenues 2017 Revenues $ %
Revenues:
TV Entertainment $ 11,061 41 % $ 10,476 39 % $ 585 6 %
Cable Networks 12,683 46 12,479 47 204 2
Filmed Entertainment 2,956 11 3,075 12 (119 ) (4 )
Publishing 825 3 830 3 (5 ) (1 )
Corporate/Eliminations (275 ) (1 ) (325 ) (1 ) 50 15
Total Revenues $ 27,250 100 % $ 26,535 100 % $ 715 3 %
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ %
Adjusted OIBDA:
TV Entertainment $ 2,466 $ 2,301 $ 165 7 %
Cable Networks 4,341 4,442 (101 ) (2 )
Filmed Entertainment (33 ) (187 ) 154 82
Publishing 153 146 7 5
Corporate/Eliminations (433 ) (442 ) 9 2
Stock-based compensation (205 ) (220 ) 15 7
Total Adjusted OIBDA 6,289 6,040 249 4
Depreciation and amortization (433 ) (443 ) 10 2
Restructuring and other corporate matters (490 ) (258 ) (232 ) n/m
Programming charges (162 ) (144 ) (18 ) n/m
Gain on sale of assets - 146 (146 ) n/m
Total Operating Income $ 5,204 $ 5,341 $ (137 ) (3 )%
n/m - not meaningful
II-26--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ % Depreciation and Amortization: TV Entertainment$ 160 $ 163 $ (3 ) (2 )% Cable Networks 194 193 1 1 Filmed Entertainment 38 42 (4 ) (10 ) Publishing 6 6 - - Corporate 35 39 (4 )
(10 )
Total Depreciation and Amortization
TV Entertainment (CBS Television Network ,CBS Television Studios ,CBS Television Distribution ,CBS Interactive ,CBS Sports Network ,CBS Television Stations and CBS-branded streaming services CBS All Access and CBSN, among others) Increase/(Decrease) Year Ended December 31, 2018 2017 $ % Advertising$ 5,751 $ 5,696 $ 55 1 % Affiliate 2,082 1,674 408 24 Content licensing 3,006 2,880 126 4 Other 222 226 (4 ) (2 ) Revenues$ 11,061 $ 10,476 $ 585 6 % Adjusted OIBDA$ 2,466 $ 2,301 $ 165 7 % Revenues For 2018, the 6% increase inTV Entertainment revenues reflects growth across each of the segment's main revenue streams. Advertising The 1% increase in advertising revenues was driven by record political advertising sales associated with the 2018 midterm elections, partially offset by the absence of ThursdayNight Football and the national semifinals and championship game of theNCAA Tournament, which were broadcast by CBS in 2017.TV Entertainment advertising revenues also benefited from the adoption of a new revenue recognition standard in the first quarter of 2018, under which revenues for certain distribution arrangements are recognized based on the gross amount of consideration II-27 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
received from the customer, with an offsetting increase to participation
expense. Under previous accounting guidance, such revenues were recognized at
the net amount retained by us after the payment of fees to the third party. This
guidance was applied prospectively from the date of adoption and therefore,
amounts for 2017 are reported under previous accounting guidance.
Affiliate
Affiliate revenues grew 24% as a result of a 22% increase in station affiliation fees and retransmission revenues as well as subscriber growth at CBS All Access.
Content Licensing Content licensing increased 4%, primarily reflecting higher international licensing and the impact of the aforementioned adoption of a new revenue recognition standard in 2018, which resulted in higher revenues under certain distribution arrangements, with an offsetting increase to operating expenses. These increases were partially offset by lower domestic licensing, as 2017 included the licensing of NCIS:New Orleans , Madam Secretary and titles from the CSI franchise. Adjusted OIBDA Adjusted OIBDA increased 7% as a result of higher revenues and lower programming costs associated with the absence ofCBS's broadcast of ThursdayNight Football , partially offset by an increased investment in content and digital initiatives. Cable Networks (Showtime Networks , Nickelodeon,MTV ,BET ,Comedy Central , Paramount Network,Nick Jr .,VH1 ,TV Land , CMT, Smithsonian Networks,ViacomCBS Networks International , Network 10,Channel 5 and Telefe) Increase/(Decrease) Year Ended December 31, 2018 2017 $ % Advertising$ 5,130 $ 4,947 $ 183 4 % Affiliate 6,294 6,479 (185 ) (3 ) Content licensing 1,259 1,053 206 20 Revenues$ 12,683 $ 12,479 $ 204 2 % Adjusted OIBDA$ 4,341 $ 4,442 $ (101 ) (2 )% Revenues For 2018, the 2% increase in Cable Networks revenues was driven by 15% growth in international revenues, reflecting growth across each of the segment's revenue streams. Domestic revenues decreased 2%, driven by lower affiliate revenues and advertising revenues, partially offset by increased content licensing revenues. International revenues included a 3-percentage point unfavorable impact from foreign exchange rate changes.
Advertising
Advertising revenues increased 4%, driven by 26% higher international revenues
as a result of the acquisition of Network 10 in the fourth quarter of 2017,
partially offset by an unfavorable impact from foreign exchange rate changes of
5-percentage points. Domestic advertising revenues decreased 4%, principally
reflecting lower linear impressions, partially offset by higher pricing and
growth in revenues from AMS.
II-28
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Affiliate
The 3% decrease in affiliate revenues was the result of a 4% decrease in
domestic revenues, reflecting the benefit to 2017 from Showtime Networks'
distribution of the Floyd Mayweather/Conor McGregor pay-per-view boxing event
and declines in traditional MVPD subscribers at our basic cable networks. Growth
from Showtime OTT and contractual rate increases partially offset the decline.
As of December 31, 2018 , Showtime subscriptions, including Showtime OTT, totaled
approximately 27 million. International affiliate revenues increased 6%, driven
by the acquisition of Network 10, as well as subscriber growth and new channel
launches. International affiliate revenues included a 1-percentage point
unfavorable impact of foreign exchange rate changes.
Content Licensing
Content licensing revenues increased 20% reflecting higher revenues from the
licensing of original programming from our basic cable networks and Showtime ,
including the renewal of Dexter, as well as the benefit to 2018 from SpongeBob
SquarePants: The Broadway Musical.
Adjusted OIBDA
Adjusted OIBDA decreased 2%, driven by an increased investment in content and
growth initiatives, partially offset by the revenue growth and lower expenses
resulting from cost transformation initiatives.
Filmed Entertainment (Paramount Pictures, Paramount Players, Paramount Animation
and Paramount Television Studios )
Increase/(Decrease)
Year Ended December 31, 2018 2017 $ %
Theatrical $ 744 $ 716 $ 28 4 %
Home Entertainment 617 789 (172 ) (22 )
Licensing 1,493 1,468 25 2
Other 102 102 - -
Revenues $ 2,956 $ 3,075 $ (119 ) (4 )%
Adjusted OIBDA $ (33 ) $ (187 ) $ 154 82 %
Revenues
For 2018,
Theatrical
Theatrical revenues increased 4%, principally reflecting the 2018 release of Mission: Impossible - Fallout. Other significant 2018 releases included AQuiet Place and Bumblebee. Significant releases in 2017 included Transformers: The Last Knight, xXx: Return ofXander Cage , Daddy's Home 2 and Baywatch. Foreign exchange rate changes had a 1-percentage point unfavorable impact on theatrical revenues.Home Entertainment Home entertainment revenues decreased 22% in 2018, primarily reflecting the number and mix of titles in release. Significant 2018 releases included Mission: Impossible - Fallout, Daddy's Home 2 and AQuiet Place compared to Transformers: The Last Knight, Jack Reacher: Never Go Back and Arrival in 2017. II-29 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Licensing
Licensing revenues increased 2% in 2018, driven by higher revenues from the
production of programming for third parties, including
Adjusted OIBDA Adjusted OIBDA forFilmed Entertainment was a loss of$33 million in 2018 compared with a loss of$187 million in 2017, an improvement of 82%, reflecting lower print and advertising expenses, primarily driven by the number and mix of theatrical releases and a charge resulting from the termination of a slate financing agreement in 2017. Fluctuations in results for theFilmed Entertainment segment may occur as a result of the timing of the recognition of print and advertising expenses, which are generally incurred before and throughout the theatrical release of a film, while the revenues for the respective film are recognized as earned through the film's theatrical exhibition and subsequent distribution windows. Publishing (Simon & Schuster) Increase/(Decrease) Year Ended December 31, 2018 2017 $ % Revenues$ 825 $ 830 $ (5 ) (1 )% Adjusted OIBDA$ 153 $ 146 $ 7 5 % Revenues For 2018, the 1% decrease in revenues primarily reflects lower sales of print and electronic books, partially offset by 20% growth in digital audio sales. Bestselling titles for 2018 included Fear: Trump in theWhite House byBob Woodward , The Outsider byStephen King and Whiskey in a Teacup byReese Witherspoon . Adjusted OIBDA The 5% increase in Adjusted OIBDA mainly reflects lower production costs. Cash Flows The changes in cash, cash equivalents and restricted cash were as follows: Increase/ Increase/ (Decrease) (Decrease) Year Ended December 31, 2019 2018 2019 vs. 2018 2017 2018 vs. 2017 Cash provided by operating activities from: Continuing operations$ 1,230 $ 3,463 $ (2,233 ) $ 2,345 $ 1,118 Discontinued operations - 1 (1 ) 94 (93 ) Cash provided by operating activities 1,230 3,464 (2,234 ) 2,439 1,025 Cash (used for) provided by investing activities from: Continuing operations (153 ) (588 ) 435 150 (738 ) Discontinued operations (2 ) (23 ) 21 (24 ) 1 Cash (used for) provided by investing activities (155 ) (611 ) 456 126 (737 )
Cash used for financing activities (1,216 ) (2,531 ) 1,315
(3,009 ) 478
Effect of exchange rate changes on
cash, cash
equivalents and restricted cash (1 ) (25 ) 24 58 (83 )
Net (decrease) increase in cash,
cash equivalents and
restricted cash $ (142 ) $ 297 $ (439 ) $ (386 ) $ 683
II-30--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Operating Activities. The decrease in cash provided by operating activities
from continuing operations for 2019 compared with 2018 was primarily driven by
an increased investment in television and film programming, higher payments for
income taxes and payments of $132 million associated with costs related to the
Merger. Operating cash flow for 2019 and 2018 also included payments for
restructuring activities of $234 million and $219 million , respectively.
The increase in cash provided by operating activities from continuing operations
for 2018 compared with 2017 was primarily driven by lower cash payments for
income taxes and growth in affiliate revenues, which were partially offset by an
increased investment in television and film programming. Operating cash flow for
2017 also included discretionary pension contributions of $600 million to
prefund our qualified pension plans.
Cash provided by operating activities from discontinued operations primarily
reflected the operating activities of CBS Radio . Operating activities from
discontinued operations also included payments and refunds for tax matters in
foreign jurisdictions related to previously disposed businesses that are
accounted for as discontinued operations.
The increase in cash payments for income taxes for 2019 compared to 2018 was
primarily due to a payment in 2019 as a result of guidance issued by the United
States government in January 2019 relating to the transition tax on cumulative
foreign earnings and profits that resulted from the enactment of federal tax
legislation in December 2017 . In addition, cash taxes for 2018 benefited from
the application of a federal income tax overpayment carryforward from 2017.
The decrease in cash payments for income taxes for 2018 compared to 2017
reflects the benefit from a federal income tax overpayment, which included the
impact from the retroactive renewal of a federal tax law.
Investing Activities
Year Ended December 31, 2019 2018 2017
Investments (a) $ (171 ) $ (161 ) $ (128 )
Capital expenditures (353 ) (352 ) (356 )
Acquisitions, net of cash acquired (b) (399 ) (118 ) (289 )
Proceeds from dispositions (c) 756 39 892
Other investing activities from continuing operations 14 4
31
Cash flow (used for) provided by investing activities from continuing operations (153 ) (588 ) 150 Cash flow used for investing activities from discontinued operations (2 ) (23 ) (24 ) Cash flow (used for) provided by investing activities$ (155 ) $ (611
)
(a) Primarily includes our investment in The CW. (b) 2019 primarily reflects the acquisition ofPluto Inc. and the remaining 50% interest in Pop TV, a general entertainment cable network. 2018 primarily reflects the acquisitions ofWhoSay Inc. , a leading influence marketing firm, Pop Culture Media, a digital entertainment media company, andVidCon LLC , a host of conferences dedicated to online video. 2017 primarily reflects the acquisition of Network 10, one of three major commercial broadcast networks inAustralia , and the acquisition of a television library. (c) 2019 primarily reflects the sale of CBS Television City. 2017 primarily reflects the sale of our 49.76% interest in EPIX and the sale of broadcast spectrum in connection with theFCC 's broadcast spectrum auction. II-31 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Financing Activities
Year Ended December 31, 2019 2018 2017
Proceeds from (repayments of) short-term debt borrowings, net$ 25 $ (5 ) $ 229 Proceeds from issuance of senior notes 492 -
3,157
Repayment of notes and debentures (910 ) (1,102 ) (4,729 ) Dividends (595 ) (599 ) (616 ) Repurchase of the Company's Class B Common Stock (57 ) (586 ) (1,111 ) Payment of payroll taxes in lieu of issuing shares for stock-based compensation (56 ) (67 ) (103 ) Proceeds from exercise of stock options 15 29
263
Other financing activities (130 ) (201 ) (99 ) Cash flow used for financing activities$ (1,216 ) $ (2,531 ) $ (3,009 ) Free Cash Flow Free cash flow is a non-GAAP financial measure. Free cash flow reflects our net cash flow provided by (used for) operating activities before operating cash flow from discontinued operations, and less capital expenditures. Our calculation of free cash flow includes capital expenditures because investment in capital expenditures is a use of cash that is directly related to our operations. Our net cash flow provided by (used for) operating activities is the most directly comparable GAAP financial measure. Management believes free cash flow provides investors with an important perspective on the cash available to us to service debt, make strategic acquisitions and investments, maintain our capital assets, satisfy our tax obligations, and fund ongoing operations and working capital needs. As a result, free cash flow is a significant measure of our ability to generate long-term value. It is useful for investors to know whether this ability is being enhanced or degraded as a result of our operating performance. We believe the presentation of free cash flow is relevant and useful for investors because it allows investors to evaluate the cash generated from our underlying operations in a manner similar to the method used by management. Free cash flow is among several components of incentive compensation targets for certain management personnel. In addition, free cash flow is a primary measure used externally by our investors, analysts and industry peers for purposes of valuation and comparison of our operating performance to other companies in our industry. As free cash flow is not a measure calculated in accordance with GAAP, free cash flow should not be considered in isolation of, or as a substitute for, either net cash flow provided by operating activities as a measure of liquidity or net earnings (loss) as a measure of operating performance. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, free cash flow as a measure of liquidity has certain limitations, does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. The following table presents a reconciliation of our net cash flow provided by operating activities to free cash flow. Year Ended December 31, 2019 2018
2017
Net cash flow provided by operating activities (GAAP)
$ 2,439 Capital expenditures (353 ) (352 ) (356 ) Less: Operating cash flow from discontinued operations - 1 94 Free cash flow (Non-GAAP)$ 877 $ 3,111 $ 1,989 II-32
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Dividends
On December 19, 2019 , ViacomCBS declared a quarterly cash dividend of $.24 per
share on its Class A and Class B Common Stock, resulting in total dividends of
$150 million , which were paid on January 10, 2020 . Prior to the Merger, Viacom
and CBS each declared a quarterly cash dividend during each of the first three
quarters of 2019 and during each of the four quarters of 2018 and 2017. During
2019, CBS declared total per share dividends of $.54 , resulting in total
dividends of $205 million . For each of the years ended December 31, 2018 and
2017, CBS declared total per share dividends of $.72 , resulting in total annual
dividends of $274 million and $289 million , respectively. During 2019, Viacom
declared total per share dividends of $.60 , resulting in total dividends of $245
million . For each of the years ended December 31, 2018 and 2017, Viacom declared
total per share dividends of $.80 , resulting in total annual dividends of $325
million and $323 million , respectively.
On February 12, 2020 , ViacomCBS declared a quarterly cash dividend of $.24 per
share on its Class A and Class B Common Stock, payable on April 1, 2020 .
Share Repurchase Program
During December 2019 , we repurchased 1.2 million shares of ViacomCBS Class B
Common Stock under our share repurchase program for $50 million , at an average
cost of $40.78 per share. At December 31, 2019 , $2.41 billion of authorization
remained under the share repurchase program.
Capital Structure
The following table sets forth our debt.
At December 31, 2019 2018
Commercial paper $ 699 $ 674 Senior debt (2.30%-7.875% due 2019-2045) 16,690 17,086 Junior debt (5.875%-6.250% due 2057)
1,286 1,284
Obligations under finance leases 44 69
Total debt (a) 18,719 19,113
Less commercial paper 699 674
Less current portion of long-term debt 18 339
Total long-term debt, net of current portion
(a) At
balances included (i) a net unamortized discount of
million, respectively, (ii) unamortized deferred financing costs of
million and
value of the debt relating to previously settled fair value hedges of
million and
2018.
During the year ended December 31, 2019 , we issued $500 million of 4.20% senior
notes due 2029. We used the net proceeds from this issuance in the redemption of
our $600 million outstanding 2.30% senior notes due August 2019 . During 2019, we
also repaid the $220 million aggregate principal amount of our 5.625% senior
notes due September 2019 and the $90 million aggregate principal amount of our
2.75% senior notes due December 2019 .
During the year ended December 31, 2018 , we redeemed $1.13 billion of senior
notes and debentures for a redemption price of $1.10 billion , resulting in a
pre-tax gain on early extinguishment of debt of $18 million ($14 million , net of
tax).
During the year ended December 31, 2017 , we issued $3.10 billion of senior notes
and junior subordinated debentures. Also during 2017, we redeemed and repaid
$4.67 billion of senior notes, of which $4.27 billion was
II-33
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
redeemed prior to maturity, resulting in a pre-tax loss on early extinguishment
of debt of
Our 5.875% junior subordinated debentures dueFebruary 2057 and 6.25% junior subordinated debentures dueFebruary 2057 accrue interest at the stated fixed rates untilFebruary 28, 2022 andFebruary 28, 2027 , respectively, on which dates the rates will switch to floating rates based on three-month LIBOR plus 3.895% and 3.899%, respectively, reset quarterly. These debentures can be called by us at any time after the expiration of the fixed-rate period. The subordination, interest deferral option and extended term of the junior subordinated debentures provide significant credit protection measures for senior creditors and, as a result of these features, the debentures received a 50% equity credit byStandard & Poor's Rating Services andFitch Ratings Inc. , and a 25% equity credit byMoody's Investors Service, Inc. The interest rate payable on our 2.25% senior notes dueFebruary 2022 and 3.45% senior notes dueOctober 2026 , collectively the "Senior Notes", will be subject to adjustment from time to time ifMoody's Investors Services, Inc. or S&P Global Ratings downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Senior Notes. The interest rate on these Senior Notes would increase by 0.25% upon each credit agency downgrade up to a maximum of 2.00%, and would similarly be decreased for subsequent upgrades. AtDecember 31, 2019 , the outstanding principal amount of our 2.25% senior notes dueFebruary 2022 and 3.45% senior notes dueOctober 2026 was$50 million and$124 million , respectively. Some of our outstanding notes and debentures provide for certain covenant packages typical for an investment grade company. There is an acceleration trigger for the majority of the notes and debentures in the event of a change in control under specified circumstances coupled with ratings downgrades due to the change in control, as well as certain optional redemption provisions for our junior debentures. We had outstanding commercial paper borrowings under our$2.50 billion commercial paper program of$699 million and$674 million atDecember 31, 2019 and 2018, respectively, each with maturities of less than 90 days. The weighted average interest rate for these borrowings was 2.07% and 3.02% atDecember 31, 2019 and 2018, respectively.
In
Credit Facility AtDecember 31, 2019 , we had a$2.50 billion revolving credit facility held by CBS prior to the Merger (the "CBS Credit Facility") with a maturity inJune 2021 and a$2.50 billion revolving credit facility held by Viacom prior to the Merger (the "Viacom Credit Facility"), with a maturity inFebruary 2024 . AtDecember 31, 2019 , we had no borrowings outstanding under the CBS Credit Facility or the Viacom Credit Facility and the remaining availability, net of outstanding letters of credit, was$2.50 billion for each facility. InJanuary 2020 , the CBS Credit Facility was terminated and the Viacom Credit Facility was amended and restated to a$3.50 billion revolving credit facility with a maturity inJanuary 2025 (the "Credit Facility"). The Credit Facility is used for general corporate purposes and to support commercial paper outstanding, if any. We may, at our option, also borrow in certain foreign currencies up to specified limits under the Credit Facility. Borrowing rates under the Credit Facility are determined at our option at the time of each borrowing and are based generally on the prime rate in theU.S. or LIBOR plus a margin based on our senior unsecured debt rating. The Credit Facility requires our Consolidated Total Leverage Ratio to be less than 4.5x (which we may elect to increase to 5.0x for up to four consecutive II-34 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
quarters following a qualified acquisition) at the end of each quarter, to be
applied retrospectively from December 31, 2019 . The Consolidated Total Leverage
Ratio reflects the ratio of our Consolidated Indebtedness at the end of a
quarter, to our Consolidated EBITDA (each as defined in the amended credit
agreement) for the trailing twelve-month period. We met this covenant as of
December 31, 2019 .
Liquidity and Capital Resources
We project anticipated cash requirements for our operating, investing and
financing needs as well as cash flows generated from operating activities
available to meet these needs. Our operating needs include, among other items,
commitments for sports programming rights, television and film programming,
talent contracts, leases, interest payments, income taxes payments and pension
funding obligations. Our investing and financing spending includes capital
expenditures, investments and acquisitions, share repurchases, dividends and
principal payments on our outstanding indebtedness.
We believe that our operating cash flows, cash and cash equivalents, borrowing
capacity under the $3.50 billion Credit Facility, and access to capital markets
are sufficient to fund our operating, investing and financing requirements for
the next twelve months.
Our funding for short-term and long-term obligations will come primarily from
cash flows from operating activities. Any additional cash funding requirements
are financed with short-term borrowings, including commercial paper, and
long-term debt. To the extent that commercial paper is not available to us, the
Credit Facility provides sufficient capacity to satisfy short-term borrowing
needs. We routinely assess our capital structure and opportunistically enter
into transactions to lower our interest expense, which could result in a charge
from the early extinguishment of debt.
Funding for our long-term debt obligations due over the next five years of
Our access to capital markets can be impacted by factors outside our control, including economic conditions; however, we believe that our strong cash flows and balance sheet, our credit facility and our credit rating will provide us with adequate access to funding for our expected cash needs. The cost of any new borrowings are affected by market conditions and short and long-term debt ratings assigned by independent rating agencies, and there can be no assurance that we will be able to access capital markets on terms and conditions that will be favorable to us. AtDecember 31, 2019 , we had$2.41 billion of remaining availability under our share repurchase program. Share repurchases under the program are expected to be funded by cash flows from operations and, as appropriate, with short-term borrowings, including commercial paper, and/or the issuance of long-term debt. II-35 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Contractual Obligations
As of December 31, 2019 , payments due by period under our significant
contractual obligations with remaining terms in excess of one year were as
follows:
Payments Due by Period
and 2025 and
Total 2020 2021-2022 2023-2024 Thereafter
Off-Balance Sheet Arrangements
Programming and talent
commitments (a) $ 10,355 $ 3,003 $ 5,350 $ 1,159 $ 843
Purchase obligations (b) 1,517 609 744 82 82
On-Balance Sheet Arrangements
Operating leases (c) 2,709 371 648 456 1,234
Long-term debt obligations (d) 18,486 - 2,345 3,557 12,584
Interest commitments on
long-term debt (e) 13,046 868 1,627 1,418 9,133
Finance leases (including
interest) (f) 47 21 23 2 1
Other long-term contractual
obligations (g) 2,076 - 1,479
412 185
Total $ 48,236 $ 4,872 $ 12,216 $ 7,086 $ 24,062
(a) Our programming and talent commitments include $5.39 billion for sports
programming rights, $3.80 billion relating to the production and licensing of
television and film programming, and $1.17 billion for talent contracts.
(b) Purchase obligations include agreements to purchase goods or services that
are enforceable and legally binding and that specify all significant terms,
including open purchase orders.
(c) Consists of operating lease commitments for office space, equipment,
satellite transponders and studio facilities.
(d) Long-term debt obligations are presented at face value, excluding finance
leases.
(e) Future interest based on scheduled debt maturities. Interest payments on
junior subordinated debentures subsequent to the expiration of their fixed-rate
periods have been included based on their current fixed rates.
(f) Includes finance lease obligations for satellite transponders and equipment.
(g) Reflects long-term contractual obligations recorded on the Consolidated
Balance Sheet, including program liabilities; participations due to producers;
residuals; and a tax liability resulting from the enactment of the Tax Reform
Act in December 2017 . This tax liability reflects the remaining tax on our
historical accumulated foreign earnings and profits, which is payable to the IRS
in 2024 and 2025.
The table above does not include payments relating to reserves for uncertain tax
positions of $384 million , and related interest and penalties, interest under
our credit facility and for commercial paper borrowings, redeemable
noncontrolling interest of $254 million , our guarantee liability of $124 million
relating to the sale of CBS Television City; lease indemnification obligations
of $86 million or potential future contributions to our qualified defined
benefit pension plans. The amount and timing of payments with respect to these
items are subject to a number of uncertainties such that we are unable to make
sufficiently reliable estimations of future payments.
In 2020, we expect to make contributions of approximately $70 million to our
non-qualified pension plans to satisfy the benefit payments due under these
plans. Also in 2020, we expect to contribute approximately $43 million to our
other postretirement benefit plans to satisfy our portion of benefit payments
due under these plans.
Guarantees
Letters of Credit and Surety Bonds. We have indemnification obligations with respect to letters of credit and surety bonds primarily used as security against non-performance in the normal course of business. AtDecember 31, 2019 , the outstanding letters of credit and surety bonds approximated$136 million and were not recorded on the Consolidated Balance Sheet. II-36 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
CBS Television City. During 2019, we completed the sale of CBS Television City.
We have guaranteed a specified level of cash flows to be generated by the
business during the first five years following the completion of the sale.
Included on the Consolidated Balance Sheet at December 31, 2019 is a liability
of $124 million , reflecting the present value of the estimated amount payable
under the guarantee obligation.
Lease Guarantees. As noted above, we have indemnification obligations of $86
million with respect to leases primarily associated with the previously
discontinued operations of Famous Players Inc.
Film Financing Arrangements. From time to time we enter into film or television
programming (collectively referred to as "film") financing arrangements that
involve the sale of a partial copyright interest in a film to third-party
investors. Since the investors typically have the risks and rewards of ownership
proportionate to their ownership in the film, we generally record the amounts
received for the sale of copyright interest as a reduction of the cost of the
film and related cash flows are reflected in net cash flow from operating
activities. We also enter into collaborative arrangements with other studios to
jointly finance and distribute films ("co-financing arrangements"), under which
each partner is responsible for distribution of the film in specific territories
or distribution windows. The partners' share in the profits and losses of the
films under these arrangements are included within participations expense.
In the course of our business, we both provide and receive indemnities which are
intended to allocate certain risks associated with business transactions.
Similarly, we may remain contingently liable for various obligations of a
business that has been divested in the event that a third party does not live up
to its obligations under an indemnification obligation. We record a liability
for its indemnification obligations and other contingent liabilities when
probable and reasonably estimable.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. On an ongoing basis, we evaluate these estimates, which are based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The result of these evaluations forms the
basis for making judgments about the carrying values of assets and liabilities
and the reported amount of revenues and expenses that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions.
We consider the following accounting policies to be the most critical as they
are important to our financial condition and results of operations, and require
significant judgment and estimates on the part of management in their
application. The risks and uncertainties involved in applying our critical
accounting policies are provided below. Unless otherwise noted, we applied our
critical accounting policies and estimation methods consistently in all material
respects and for all periods presented, and have discussed such policies with
our Audit Committee. For a summary of our significant accounting policies, see
the accompanying notes to the consolidated financial statements.
Revenue Recognition
Revenue is recognized when control of a good or service is transferred to a
customer in an amount that reflects the consideration we expect to be entitled
to in exchange for those goods or services. Significant judgments used in the
determination of the amount and timing of revenue recognition include the
identification of distinct performance obligations in contracts containing
bundled advertising sales and content licenses, and the allocation of
consideration among individual performance obligations within these arrangements
based on their relative standalone selling prices.
II-37
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Advertising Revenues-Advertising revenues are recognized when the advertising
spots are aired on television or displayed on digital platforms. If a contract
includes a guarantee to deliver a targeted audience rating or number of
impressions, the delivery of the advertising spots that achieve the guarantee
represents the performance obligation to be satisfied over time and revenues are
recognized based on the proportion of the audience rating or impressions
delivered to the total guaranteed in the contract. To the extent the amounts
billed exceed the amount of revenue recognized, such excess is deferred until
the guaranteed audience ratings or impressions are delivered. For contracts that
do not include impressions guarantees, the individual advertising spots are the
performance obligation and consideration is allocated among the individual
advertising spots based on relative standalone selling price.
Content Licensing Revenues-For licenses of exhibition rights for
internally-produced programming, each individual episode or film delivered
represents a separate performance obligation and revenues are recognized when
the episode or film is made available to the licensee for exhibition and the
license period has begun. For license agreements that include delivery of
content on one or more dates for a fixed fee, consideration is allocated based
on the relative standalone selling price of each episode or film, which is based
on licenses for comparable content within the marketplace. Estimation of
standalone selling prices requires judgment, which can impact the timing of
recognizing revenues.
Affiliate Revenues-The performance obligation for our affiliate agreements is a
license to our programming provided through the continuous delivery of live
linear feeds and, for agreements with MVPDs and subscribers to our digital
streaming services, also includes a license to programming for video on demand
viewing. Affiliate revenues are recognized over the term of the agreement as we
satisfy our performance obligation by continuously providing our customer with
the right to use our programming. For agreements that provide for a variable
fee, revenues are determined each month based on an agreed upon contractual rate
applied to the number of subscribers to our customer's service. For agreements
that provide for a fixed fee, revenues are recognized based on the relative fair
value of the content provided over the term of the agreement. These agreements
primarily include agreements with television stations affiliated with the CBS
Television Network ("network affiliates") for which fair value is determined
based on the fair value of the network affiliate's service and the value of our
programming.
Film and Television Production Costs
Costs incurred to produce television programs and feature films are capitalized
and amortized over the projected life of each television program or feature film
based on the ratio of current period revenues to estimated remaining total
revenues to be earned ("Ultimate Revenues"). Management's judgment is required
in estimating Ultimate Revenues and the costs to be incurred throughout the life
of each television program or feature film. These estimates are used to
determine the amortization of capitalized production costs, expensing of
participation costs, and any necessary impairments to capitalized production
costs.
For television programming, our estimates of Ultimate Revenue are initially
limited to the amount of revenue contracted for each episode in the initial
market and estimates of revenue from a secondary market where we can demonstrate
a history of earning such revenue in that market. Estimates for additional
secondary market revenues such as domestic and foreign syndication and home
entertainment are included in the estimates of Ultimate Revenues once it can be
demonstrated that a program can be successfully licensed in such secondary
market. For each television program, management bases these estimates on the
performance in the initial markets, the existence of future firm commitments to
sell and the past performance of similar television programs.
For feature films, our estimate of Ultimate Revenues includes revenues from all
sources that are estimated to be earned within 10 years from the date of a
film's initial theatrical release. For acquired film libraries, our estimate of
Ultimate Revenues is for a period within 20 years from the date of acquisition.
Prior to the release of feature films, we estimate Ultimate Revenues based on
the historical performance of similar content and pre-release market research
II-38
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
(including test market screenings), as well as factors relating to the specific
film, including the expected number of theaters and markets in which the
original content will be released, the genre of the original content and the
past box office performance of the lead actors and actresses. For films intended
for theatrical release, we believe the performance during the theatrical
exhibition is the most sensitive factor affecting our estimate of Ultimate
Revenues as subsequent markets have historically exhibited a high correlation to
theatrical performance. Upon a film's initial release, we update our estimate of
Ultimate Revenues based on actual and expected future performance. Our estimates
of revenues from succeeding windows and markets are revised based on historical
relationships to theatrical performance and an analysis of current market
trends. We also review and revise estimates of Ultimate Revenue and
participation costs as of each reporting date to reflect the most current
available information. After their theatrical release the most sensitive factor
affecting our estimates for feature films is the extent of home entertainment
sales. In addition to theatrical performance, home entertainment sales vary
based on a variety of factors including demand for our titles, the volume and
quality of competing products, marketing and promotional strategies, as well as
economic conditions.
Estimates of Ultimate Revenues for internally-produced television programming
are updated regularly based on information available as the television program
progresses through its life cycle. If Ultimate Revenue estimates are revised,
the difference between amortization expense determined using the new estimate
and any amounts previously expensed during that year are reflected in our
Consolidated Statement of Operations in the quarter in which the estimates are
revised. Overestimating Ultimate Revenues for internally-produced programming
could result in the understatement of the amortization of capitalized production
costs and future net realizable value adjustments, as well as the misstatement
of accruals for participation expense.
Acquired Program Rights
The costs incurred in acquiring television series and feature film programming
rights, including advances, are capitalized when the program is accepted and
available for airing at the commencement of the license period. The costs of
programming rights licensed under multi-year sports programming agreements are
capitalized if the rights payments are made before the related economic benefit
has been received. These costs are expensed over the shorter of the license
period or the period in which an economic benefit is expected to be derived. The
economic benefit is determined based on management's estimates of revenues to be
derived from the programming, the expected number of future airings, which may
differ from the contracted number of airings, and the length of the license
period. If initial airings are expected to generate higher revenues an
accelerated method of amortization is used. Management's judgment is required in
determining the value of the future economic benefit and the timing of the
expensing of these costs.
The estimated economic benefit for acquired programming, including revenue
projections for multi-year sports programming, are periodically reviewed and
updated based on information available throughout the contractual term. A
failure to adjust for a downward revision in the estimated economic benefit to
be generated from acquired programming could result in the understatement of
programming costs or future net realizable value adjustments.
The net realizable value of acquired programming is regularly evaluated either
by title or on a daypart basis, which is defined as an aggregation of programs
broadcast during a particular time of day or an aggregation of programs of a
similar type based on the specific demographic targeted by each respective
program or program service. Net realizable value is determined by estimating
advertising revenues to be derived from the future airing of the programming
within the daypart and allocating affiliate revenues to the programming, each as
applicable. An impairment charge may be necessary if our estimates of future
cash flows are below the carrying value of the programming or if programming is
abandoned.
II-39--------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Goodwill and Intangible Assets Impairment Test
We perform fair value-based impairment tests of goodwill and intangible assets
with indefinite lives, comprised primarily of television FCC licenses in the
U.S. and broadcast licenses in Australia , on an annual basis and also between
annual tests if an event occurs or if circumstances change that would more
likely than not reduce the fair value of a reporting unit or an indefinite-lived
intangible asset below its carrying value.
Television FCC Licenses and International Broadcast Licenses-FCC licenses are
tested for impairment at the geographic market level. We consider each
geographic market, which is comprised of all of our television stations within
that geographic market, to be a single unit of accounting because the FCC
licenses at this level represent their highest and best use. At December 31,
2019 , we had 14 television markets with FCC license book values. For broadcast
licenses in Australia , we consider all of our broadcast licenses within the
country to be a single unit of accounting because this represents their highest
and best use.
For our annual impairment test, we perform qualitative assessments for each U.S.
television market that we estimate has an aggregate fair value of FCC licenses
that significantly exceed their respective carrying values, and for our
Australian broadcast licenses when we estimate that the aggregate fair value
significantly exceeds the carrying value. Additionally, we consider the duration
of time since a quantitative test was performed. For the 2019 annual impairment
test, we performed qualitative assessments for all of our U.S. television
markets. For each market, we weighed the relative impact of market-specific and
macroeconomic factors. The market-specific factors considered include recent
projections by geographic market from both independent and internal sources for
revenue and operating costs, as well as market share and capital expenditures.
We also considered the macroeconomic impact on discount rates and growth rates,
as well as the impact from tax law changes that were enacted since the most
recent quantitative tests were performed on these markets. Based on the
qualitative assessments, considering the aggregation of the relevant factors, we
concluded that it is not more likely than not that the fair values of the FCC
licenses in each of these television markets are less than their respective
carrying values. Therefore, performing the quantitative impairment test was
unnecessary.
A quantitative impairment test of broadcast licenses calculates an estimated
fair value using the Greenfield Discounted Cash Flow Method, which values a
hypothetical start-up station in the relevant market by adding discounted cash
flows over a five-year build-up period to a residual value. The assumptions for
the build-up period include industry projections of overall market revenues; the
start-up station's operating costs and capital expenditures, which are based on
both industry and internal data; and average market share. The discount rate is
determined based on the industry and market-based risk of achieving the
projected cash flows, and the residual value is calculated using a perpetual
nominal growth rate, which is based on projected long-range inflation and
industry projections.
For 2019, we performed a quantitative impairment test for our Australian
broadcast licenses. The discount rate and perpetual nominal growth rate were 11%
and 0.5%, respectively. The impairment test indicated that the estimated fair
value of the broadcast licenses was lower than the carrying value, which was the
result of a sustained decline in the advertising marketplace in Australia .
Accordingly, we recorded an impairment charge during the fourth quarter of 2019
of $20 million , which is included within "Depreciation and amortization" on the
Consolidated Statements of Operations.
The estimated fair values of the FCC licenses and Australian broadcast licenses
are highly dependent on the assumptions of future economic conditions in the
individual geographic markets in which we own and operate television stations.
Certain future events and circumstances, including deterioration of market
conditions, higher cost of capital, or a decline in the local television
advertising marketplace in the U.S. or further decline in the advertising
marketplace in Australia could result in a downward revision to our current
assumptions and judgments. Various factors may contribute to a future decline in
an advertising marketplace including declines in economic conditions;
II-40
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
an other-than-temporary decrease in spending by advertisers in certain
industries that have historically represented a significant portion of
television advertising revenues in that market; a shift by advertisers to
competing advertising platforms; changes in consumer behavior; and/or a change
in population size. A downward revision to the present value of future cash
flows could result in impairment and a noncash charge would be required. Such a
charge could have a material effect on the Consolidated Statement of Operations
and Consolidated Balance Sheet.
Goodwill-Goodwill is tested for impairment at the reporting unit level, which is
an operating segment, or one level below. At December 31, 2019 , we had six
reporting units with goodwill balances, which were determined based on the
post-Merger reporting structure. For the 2019 annual impairment test, the
reporting units tested were those in place prior to the Merger, which closed
after the testing dates. We tested two reporting units for impairment as of
August 31 and eight reporting units as of October 31 .
For our annual impairment test, we perform a qualitative assessment for each
reporting unit that management estimates has a fair value that significantly
exceeds its respective carrying value. For the 2019 annual impairment test, we
performed qualitative assessments for all of our reporting units. For each
reporting unit, we weighed the relative impact of factors that are specific to
the reporting unit as well as industry and macroeconomic factors. The reporting
unit specific factors that were considered included financial performance and
changes to the reporting units' carrying amounts since the most recent
impairment tests. For each industry in which the reporting units operate, we
considered growth projections from independent sources and significant
developments or transactions within the industry. We also determined that the
impact of macroeconomic factors on the discount rates and growth rates used for
the most recent impairment tests would not significantly affect the fair value
of the reporting units, and that the lower tax rate from tax law changes enacted
since the most recent quantitative tests would positively impact the fair value
of the reporting units. Based on the qualitative assessments, considering the
aggregation of the relevant factors, we concluded that it is not more likely
than not that the fair value of each reporting unit is less than its respective
carrying amount and therefore performing quantitative impairment tests was
unnecessary.
As of the closing date of the Merger on December 4, 2019 , we performed
qualitative assessments on the pre-Merger reporting units that were to be
combined as a result of the new reporting structure, as well as the post-Merger
reporting units that resulted from this combination. Based on these assessments,
we concluded that there were no changes to the conclusions reached in our annual
impairment test.
A quantitative goodwill impairment test, when performed, requires estimating
fair value of a reporting unit based on a discounted cash flow analysis. A
discounted cash flow analysis requires us to make various judgmental
assumptions, including assumptions about the timing and amount of future cash
flows, growth rates and discount rates.
Certain future events and circumstances, including deterioration of market
conditions, higher cost of capital, a decline in the advertising market, a
decrease in audience acceptance of programming, a shift by advertisers to
competing advertising platforms; and/or changes in consumer behavior could
result in changes to our assumptions and judgments used in the goodwill
impairment tests. A downward revision of these assumptions could cause the fair
values of the reporting units to fall below their respective carrying values and
a noncash impairment charge would be required. Such a charge could have a
material effect on the Consolidated Statement of Operations and Consolidated
Balance Sheet.
Legal Matters
Estimates of liabilities related to legal issues and discontinued businesses,
including asbestos and environmental matters, require significant judgments by
management. We continually evaluate these estimates based on changes in the
relevant facts and circumstances and events that may impact estimates. It is
difficult to predict future asbestos
II-41
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
liabilities as events and circumstances may impact the estimate of our
liabilities. While we believe that our liabilities for matters related to our
predecessor operations, including environmental and asbestos, are adequate to
cover our liabilities, there can be no assurance that circumstances will not
change in future periods. Our liability estimate is based upon many factors,
including the number of outstanding claims, estimated average cost per claim,
the breakdown of claims by disease type, historic claim filings, costs per claim
of resolution and the filing of new claims, as well as consultation with a third
party firm on trends that may impact our future asbestos liability.
Pensions
Pension benefit obligations and net periodic pension costs are calculated using many actuarial assumptions. Two key assumptions used in accounting for pension liabilities and expenses are the discount rate and expected rate of return on plan assets. The discount rate is determined based on the yield on a portfolio of high quality bonds, constructed to provide cash flows necessary to meet our pension plans' expected future benefit payments, as determined for the projected benefit obligation. The expected return on plan assets assumption is derived using the current and expected asset allocation of the pension plan assets and considering historical as well as expected returns on various classes of plan assets. As ofDecember 31, 2019 , the unrecognized actuarial losses included in accumulated other comprehensive income increased from the prior year-end due primarily to a decrease in the discount rate, partially offset by the favorable performance of pension plan assets. A 25 basis point change in the discount rate would result in an estimated change to the projected benefit obligation of approximately$137 million and would not have a material impact on 2020 pension expense. A decrease in the expected rate of return on plan assets would increase pension expense. The estimated impact of a 25 basis point change in the expected rate of return on plan assets is a change of approximately$8 million to 2020 pension expense. Income Taxes We are subject to income taxes in both theU.S. and numerous foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and evaluating our income tax positions. When recording an interim worldwide provision for income taxes, an estimated effective tax rate for the year is applied to interim operating results. In the event there is a significant or unusual item recognized in the quarterly operating results, the tax attributable to that item is separately calculated and recorded in the same quarter. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the financial statement carrying amounts and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be reversed. We evaluate the realizability of deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. A number of years may elapse before a tax return containing tax matters for which a reserve has been established is audited and finally resolved. For positions taken in a previously filed tax return or expected to be taken in a future tax return, we evaluate each position to determine whether it is more likely than not that the tax position will be sustained upon examination, based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is subject to a measurement assessment to determine the amount of benefit to recognize in the Consolidated Statement of Operations and the appropriate reserve to establish, if any. If a tax position does not meet the more-likely-than-not recognition threshold a tax reserve is established and no benefit is recognized. We evaluate our uncertain tax positions quarterly based on many factors, including, changes in tax laws and interpretations, information received from tax authorities, and other changes in facts and circumstances. Our income tax returns are routinely audited byU.S. federal and state as well as foreign tax authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that the reserve for uncertain tax positions of$384 million atDecember 31, 2019 is properly recorded pursuant to the recognition and measurement provisions of FASB guidance for uncertainty in income taxes. II-42 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Legal Matters
General. On an ongoing basis, we vigorously defend ourselves in numerous
lawsuits and proceedings and respond to various investigations and inquiries
from federal, state, local and international authorities (collectively,
"litigation''). Litigation may be brought against us without merit, is
inherently uncertain and always difficult to predict. However, based on our
understanding and evaluation of the relevant facts and circumstances, we believe
that the below-described legal matters and other litigation to which we are a
party are not likely, in the aggregate, to have a material adverse effect on our
results of operations, financial position or cash flows.
Litigation Relating to the Merger. On September 27, 2019 , Bucks County Employees
Retirement Fund (the "Bucks County Fund "), a purported holder of CBS Class B
Common Stock, served us with a demand for inspection of books and records
pursuant to 8 Del. C. § 220 in connection with the Merger (the "Demand"). On
October 10, 2019 , we offered to produce certain categories of documents properly
within the scope of a books and records demand under § 220. The Bucks County
Fund rejected our offer and filed litigation in the Court of Chancery of the
State of Delaware on October 15, 2019 , seeking to compel production of all
documents requested in the Demand (the "Section 220 Complaint"). A trial on the
Section 220 Complaint took place on November 22, 2019 , and the Court ordered
limited additional production on November 25, 2019 . On December 2, 2019 , we
certified that we had completed production of all relevant documents. On
February 20, 2020 , the Bucks County Fund filed a putative derivative and class
action complaint in the Court of Chancery of the State of Delaware against Shari
Redstone , NAI, Sumner M. Redstone National Amusements Trust ("SMR Trust "), the
CBS board of directors (comprised of Candace K. Beinecke , Barbara M. Byrne , Gary
L. Countryman , Brian Goldner , Linda M. Griego , Robert N. Klieger , Martha L.
Minow , Susan Schuman , Frederick O. Terrell and Strauss Zelnick ), former CBS
President and Acting Chief Executive Officer Joseph Ianniello and ViacomCBS Inc.
The complaint alleges breaches of fiduciary duties to CBS stockholders and waste
in connection with the negotiation and approval of the Merger Agreement. The
complaint seeks unspecified damages, costs and expenses as well as other relief.
We believe that the claims are without merit and we intend to defend against
them vigorously. We are currently unable to determine a range of potential
liability, if any. Accordingly, no accrual for this matter has been made in our
consolidated financial statements.
On January 23, 2020 , the Court of Chancery of the State of Delaware consolidated
four putative class action suits filed by purported Viacom stockholders against
NAI, NAI Entertainment Holdings LLC , Shari E. Redstone , the members of the
Viacom special transaction committee of the Viacom board of directors (comprised
of Thomas J. May , Judith A. McHale , Ronald L. Nelson and Nicole Seligman ) and
our President and Chief Executive Officer and director, Robert M. Bakish , in In
re Viacom Inc. Stockholders Litigation. The four actions allege breaches of
fiduciary duties to Viacom stockholders in connection with the negotiation and
approval of the Merger Agreement, and seek unspecified damages, costs and
expenses. On February 6, 2020 , the Court appointed the California Public
Employees' Retirement System as the lead plaintiff in the consolidated action.
We believe that the claims are without merit and we intend to defend against
them vigorously. We are currently unable to determine a range of potential
liability, if any. Accordingly, no accrual for this matter has been made in our
consolidated financial statements.
Investigation-Related Matters. As announced on August 1, 2018 , the CBS Board of
Directors (the "CBS Board") retained two law firms to conduct a full
investigation of the allegations in press reports about CBS' former Chairman of
the Board, President and Chief Executive Officer, Leslie Moonves , CBS News and
cultural issues at CBS. On December 17, 2018 , the CBS Board announced the
completion of its investigation, certain findings of the investigation and the
CBS Board's determination, discussed below, with respect to the termination of
Mr. Moonves' employment. We have received subpoenas from the New York County
District Attorney's Office and the New York City Commission on Human Rights
regarding the subject matter of this investigation and related matters. The New
York State Attorney General's Office and the United States Securities and
Exchange Commission have also requested information about these matters,
including with respect to CBS' related public disclosures. We may continue to
receive additional related regulatory and investigative inquiries from these and
other entities in the future. We are cooperating with these inquiries.
II-43
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
On August 27, 2018 and on October 1, 2018 , each of Gene Samit and John Lantz ,
respectively, filed putative class action suits in the United States District
Court for the Southern District of New York , individually and on behalf of
others similarly situated, for claims that are similar to those alleged in the
amended complaint described below. On November 6, 2018 , the Court entered an
order consolidating the two actions. On November 30, 2018 , the Court appointed
Construction Laborers Pension Trust for Southern California as the lead
plaintiff of the consolidated action. On February 11, 2019 , the lead plaintiff
filed a consolidated amended putative class action complaint against CBS,
certain current and former senior executives and members of the CBS Board. The
consolidated action is stated to be on behalf of purchasers of CBS Class A
Common Stock and Class B Common Stock between September 26, 2016 and December 4,
2018 . This action seeks to recover damages arising during this time period
allegedly caused by the defendants' purported violations of the federal
securities laws, including by allegedly making materially false and misleading
statements or failing to disclose material information, and seeks costs and
expenses as well as remedies under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On April 12, 2019 ,
the defendants filed motions to dismiss this action, which the Court granted in
part and denied in part on January 15, 2020 . With the exception of one statement
made by Mr. Moonves at an industry event in November 2017 , in which he allegedly
was acting as the agent of CBS, all claims as to all other allegedly false and
misleading statements were dismissed. We believe that the remaining claims are
without merit and we intend to defend against them vigorously. We are currently
unable to determine a range of potential liability, if any. Accordingly, no
accrual for this matter has been made in our consolidated financial statements.
Separation Agreement. On September 9, 2018 , CBS entered into a separation and
settlement agreement and releases (the "Separation Agreement") with Mr. Moonves ,
pursuant to which Mr. Moonves resigned as a director and as Chairman of the
Board, President and Chief Executive Officer of CBS. In October 2018 , we
contributed $120 million to a grantor trust pursuant to the Separation
Agreement. On December 17, 2018 , the CBS Board announced that, following its
consideration of the findings of the investigation referred to above, it had
determined that there were grounds to terminate Mr. Moonves' employment for
cause under his employment agreement with CBS. Any dispute related to the CBS
Board's determination is subject to binding arbitration as set forth in the
Separation Agreement. On January 16, 2019 , Mr. Moonves commenced a binding
arbitration proceeding with respect to this matter and the related CBS Board
investigation, which proceeding is ongoing. The assets of the grantor trust will
remain in the trust until a final determination in the arbitration. We are
currently unable to determine the outcome of the arbitration and the amount, if
any, that may be awarded thereunder and, accordingly, no accrual for this matter
has been made in our consolidated financial statements.
Claims Related to Former Businesses: Asbestos. We are a defendant in lawsuits
claiming various personal injuries related to asbestos and other materials,
which allegedly occurred as a result of exposure caused by various products
manufactured by Westinghouse, a predecessor, generally prior to the early 1970s.
Westinghouse was neither a producer nor a manufacturer of asbestos. We are
typically named as one of a large number of defendants in both state and federal
cases. In the majority of asbestos lawsuits, the plaintiffs have not identified
which of our products is the basis of a claim. Claims against us in which a
product has been identified most commonly relate to allegations of exposure to
asbestos-containing insulating material used in conjunction with turbines and
electrical equipment.
Claims are frequently filed and/or settled in groups, which may make the amount
and timing of settlements, and the number of pending claims, subject to
significant fluctuation from period to period. We do not report as pending those
claims on inactive, stayed, deferred or similar dockets that some jurisdictions
have established for claimants who allege minimal or no impairment. As of
December 31, 2019 , we had pending approximately 30,950 asbestos claims, as
compared with approximately 31,570 as of December 31, 2018 and 31,660 as of
December 31, 2017 . During 2019, we received approximately 3,460 new claims and
closed or moved to an inactive docket approximately 4,080 claims. We report
claims as closed when we become aware that a dismissal order has been entered by
a court or when we have reached agreement with the claimants on the material
terms of a settlement. Settlement costs depend on the seriousness of the
injuries that form the basis of the claims, the quality of evidence supporting
the claims and other
II-44
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
factors. Our total costs for the years 2019 and 2018 for settlement and defense
of asbestos claims after insurance recoveries and net of tax were approximately
$58 million and $45 million , respectively. Our costs for settlement and defense
of asbestos claims may vary year to year and insurance proceeds are not always
recovered in the same period as the insured portion of the expenses.
Filings include claims for individuals suffering from mesothelioma, a rare
cancer, the risk of which is allegedly increased by exposure to asbestos; lung
cancer, a cancer which may be caused by various factors, one of which is alleged
to be asbestos exposure; other cancers, and conditions that are substantially
less serious, including claims brought on behalf of individuals who are
asymptomatic as to an allegedly asbestos-related disease. The predominant number
of pending claims against us are non-cancer claims. It is difficult to predict
future asbestos liabilities, as events and circumstances may impact the estimate
of our asbestos liabilities, including, among others, the number and types of
claims and average cost to resolve such claims. We record an accrual for a loss
contingency when it is both probable that a liability has been incurred and when
the amount of the loss can be reasonably estimated. We believe that our accrual
and insurance are adequate to cover our asbestos liabilities. Our liability
estimate is based upon many factors, including the number of outstanding claims,
estimated average cost per claim, the breakdown of claims by disease type,
historic claim filings, costs per claim of resolution and the filing of new
claims, as well as consultation with a third party firm on trends that may
impact our future asbestos liability.
Other. From time to time we receive claims from federal and state environmental
regulatory agencies and other entities asserting that we are or may be liable
for environmental cleanup costs and related damages principally relating to our
historical and predecessor operations. In addition, from time to time we receive
personal injury claims including toxic tort and product liability claims (other
than asbestos) arising from our historical operations and predecessors.
Market Risk
We are exposed to fluctuations in foreign currency exchange rates and interest
rates and use derivative financial instruments to manage this exposure. In
accordance with our policy, we do not use derivative instruments unless there is
an underlying exposure and, therefore, we do not hold or enter into derivative
financial instruments for speculative trading purposes.
Foreign Exchange Risk
We conduct business in various countries outside the U.S. , resulting in exposure
to movements in foreign exchange rates when translating from the foreign local
currency to the U.S. dollar. In order to hedge anticipated cash flows in
currencies such as the British Pound, the Euro, the Canadian Dollar and the
Australian Dollar, foreign currency forward contracts, for periods generally up
to 24 months, are used. Additionally, we designate forward contracts used to
hedge committed and forecasted foreign currency transactions, including future
production costs and programming obligations, as cash flow hedges. Gains or
losses on the effective portion of designated cash flow hedges are initially
recorded in other comprehensive income (loss) and reclassified to the statement
of operations when the hedged item is recognized. Additionally, we enter into
non-designated forward contracts to hedge non-U.S. dollar denominated cash
flows. The change in fair value of the non-designated contracts is included in
"Other items, net" in the Consolidated Statements of Operations. We manage the
use of foreign exchange derivatives centrally.
At December 31, 2019 and 2018, the notional amount of all foreign currency
contracts was $1.44 billion and $995 million , respectively. For 2019, $833
million related to future production costs and $606 million related to our
foreign currency balances and other expected foreign currency cash flows. For
2018, $481 million related to future production costs and $514 million related
to our foreign currency balances and other expected foreign currency cash flows.
II-45
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Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Interest Risk
Interest on commercial paper borrowings is exposed to risk related to movements
in short-term interest rates. A 100 basis point change to the weighted average
interest rate on commercial paper borrowings in 2019 would increase or decrease
interest expense by approximately $7 million . In addition, interest rates on
future long-term debt issuances are exposed to risk related to movements in
long-term interest rates. Interest rate hedges may be used to modify both of
these exposures at our discretion. There were no interest rate hedges
outstanding at December 31, 2019 or 2018 but in the future we may use
derivatives to manage our exposure to interest rates.
At December 31, 2019 , the carrying value of our outstanding notes and debentures
was $17.98 billion and the estimated fair value was $20.6 billion . A 1% increase
or decrease in interest rates would decrease or increase the fair value of our
notes and debentures by approximately $1.22 billion and $2.68 billion ,
respectively.
Credit Risk
We continually monitor our positions with, and credit quality of, the financial
institutions that are counterparties to our financial instruments. We are
exposed to credit loss in the event of nonperformance by the counterparties to
the agreements. However, we do not anticipate nonperformance by the
counterparties.
Our receivables do not represent significant concentrations of credit risk at
December 31, 2019 or 2018, due to the wide variety of customers, markets and
geographic areas to which our products and services are sold.
Related Parties
For a discussion of related parties, see Note 6 to the consolidated financial
statements.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet
Adopted
See Note 1 to the consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information required by this item is presented in "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition-Market Risk."
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