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-Summary ofViacomCBS and our business and operational highlights. •Consolidated Results of Operations-Analysis of our results on a consolidated basis for each of the three years endedDecember 31, 2020 . •Segment Results of Operations-Analysis of our results on a reportable segment basis for each of the three years endedDecember 31, 2020 . •Liquidity and Capital Resources-Discussion of our cash flows for each of the three years endedDecember 31, 2020 , and of our outstanding debt, commitments and contingencies as ofDecember 31, 2020 . •Critical Accounting Policies-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-Discussion of legal matters to which we are involved. •Market Risk-Discussion of how we manage exposure to market and interest rate risks. OverviewViacomCBS is a leading global media and entertainment company that creates premium 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 combined company changed its name toViacomCBS Inc. The Merger has been 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 ). Upon the closing of the Merger, the net assets of Viacom were combined with those of CBS at their historical carrying amounts and the companies have been presented on a combined basis for all periods presented. II-3 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Impact of COVID-19
The coronavirus disease ("COVID-19") pandemic negatively impacted the
macroeconomic environment in the United States and globally, as well as our
business, financial condition and results of operations in 2020. We experienced
a material negative impact on our advertising revenues, particularly at the end
of the first quarter and throughout the second quarter, as a result of weakness
in the advertising market as advertisers sought to reduce costs in response to
the pandemic's impact on their businesses, the cancellation of sporting events
for which we have broadcast rights, including the NCAA Division I Men's
Basketball Championship (the "NCAA Tournament") in the first quarter, and the
delay of the 2020-21 television broadcast season as a result of temporary
production shutdowns. The rate of decline was lower in the second half of the
year, with sequential improvement in the third and fourth quarters. While we are
not able to predict when or if advertising revenue will return to historical
levels, we expect that it will be impacted to a lesser extent in 2021.
COVID-19 also had a negative effect on our content licensing revenues in 2020.
Temporary television and film production shutdowns resulted in the abandonment
of content that was not completed, delays in the delivery of programming to
third parties, and fewer original programs and live events airing on our
broadcast and cable networks. We also experienced lower demand for the licensing
of our content from advertising-supported licensees. While production has
resumed, we are not able to predict whether we will encounter future production
delays or shutdowns, or if and to what extent content licensing revenues will
continue to be negatively impacted. Additionally, with the resumption of
production we began incurring incremental costs relating to health and safety
protocols, which are expected to continue throughout 2021.
In addition, our theatrical revenues have been negatively impacted by the
closure or reduction in capacity of movie theaters that show our films as a
result of COVID-19, which impacted our theatrical releases in 2020. Accordingly,
we have rescheduled certain theatrical releases and licensed others to our owned
or third-party streaming services. We are not able to predict when or whether
movie theaters will reopen at scale, whether consumers will return at the same
levels they previously did because of concerns related to COVID-19 or because of
changes to viewing habits, or whether revenues from theatrical releases will be
comparable to historical levels.
While COVID-19 has negatively impacted parts of our business, we have benefited
from increases in subscribers for our subscription streaming services and
monthly active users ("MAUs") for Pluto TV. Additionally, the impact from the
lower revenues has been partially mitigated by lower costs as a result of
decreases in production and distribution costs, mainly resulting from production
shutdowns and fewer theatrical releases; lower advertising and promotion costs;
and cost-savings initiatives. We have taken steps to strengthen our financial
position during this period of market uncertainty, such as the issuance of
long-term debt and redemption of near-term debt discussed under "Liquidity and
Capital Resources," and we will continue to actively monitor the potential
impact of COVID-19 and related events on the commercial paper and credit
markets.
The magnitude of the continuing impact of COVID-19 on our business, financial
condition and results of operations will depend on numerous evolving factors
that we may not be able to accurately predict or control, including the duration
and extent of the pandemic, the impact of federal, state, local and foreign
governmental actions, consumer behavior in response to the pandemic and such
governmental actions, and economic and operating conditions in the aftermath of
COVID-19. Even after COVID-19 has subsided, we may experience materially adverse
impacts to our business as a result of its global economic impact, including any
recession that has occurred or may occur in the future. Due to the evolving and
uncertain nature of the pandemic, we are not able to estimate the full extent of
the impact on our business, financial condition and results of operations.
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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)
Operational Highlights 2020 vs. 2019
Consolidated results of operations Increase/(Decrease)
Year Ended December 31, 2020 2019 $ %
GAAP:
Revenues $ 25,285 $ 26,998 $ (1,713) (6) %
Operating income $ 4,139 $ 4,146 $ (7) - %
Net earnings from continuing operations
attributable to ViacomCBS $ 2,305 $ 3,168 $ (863) (27) %
Diluted EPS from continuing operations
attributable to ViacomCBS $ 3.73 $ 5.13 $ (1.40) (27) %
Net cash flow provided by operating activities from
continuing operations $ 2,215 $ 1,171 $ 1,044 89 %
Non-GAAP: (a)
Adjusted OIBDA $ 5,132 $ 5,393 $ (261) (5) %
Adjusted net earnings from continuing operations
attributable to ViacomCBS $ 2,595 $ 2,983 $ (388) (13) %
Adjusted diluted EPS from continuing operations
attributable to ViacomCBS $ 4.20 $ 4.83 $ (.63) (13) %
Free cash flow $ 1,891 $ 826 $ 1,065 129 %
(a) See "Reconciliation of Non-GAAP Measures" and "Free Cash Flow" for
reconciliations of non-GAAP results to the most directly comparable financial
measures in accordance with accounting principles generally accepted in
For 2020, revenues decreased 6% to$25.29 billion from$27.00 billion in 2019, driven by the adverse effects of COVID-19 on our business, including lower demand in the advertising market, the closure or reduction in capacity of movie theaters, the cancellation of live events for which we have the broadcast rights, and production shutdowns. The revenue comparison was also impacted byCBS' broadcasts in 2019 of annual tentpole sporting events, theSuper Bowl and the semifinals and championship games of theNCAA Tournament, which we have the rights to broadcast on a rotational basis with other networks, including in 2019 and 2021. In addition, the games in the preceding rounds of theNCAA Tournament are shared equally each year betweenCBS andTurner Broadcasting System, Inc. ("Turner"). However, the 2020NCAA Tournament was cancelled as a result of COVID-19. These decreases were partially offset by a 49% increase in streaming revenues, reflecting growth across our streaming services, including Pluto TV, CBS All Access (to be rebranded as Paramount+ inMarch 2021 ),Showtime Networks' premium subscription streaming service ("Showtime OTT"), and BET+, as well as record political advertising sales. Operating income for 2020 remained flat at$4.14 billion . Each year was impacted by items identified as affecting comparability, including programming, restructuring and impairment charges and costs for other corporate matters, as well as a gain on the sale ofCNET Media Group ("CMG") in 2020 and a gain on the sale of the CBS Television City property and sound stage operation ("CBS Television City") in 2019. See "Reconciliation of Non-GAAP Measures." Adjusted OIBDA decreased 5%, primarily reflecting the decline in revenues, partially offset by lower expenses as a result of production shutdowns, the absence in 2020 of certain major sporting events, fewer theatrical releases, lower advertising and promotion costs reflecting the broadcast of fewer original programs, and the benefit from cost savings, including from restructuring activities. The lower expenses were partially offset by increased costs to support the growth and expansion of our streaming services.
For 2020, net earnings from continuing operations attributable to
II-5
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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)
in 2020, net gains from investments, and discrete tax items. Adjusted net
earnings from continuing operations attributable to ViacomCBS and adjusted
diluted EPS each decreased 13%, reflecting the lower Adjusted OIBDA and the
noncontrolling interest's share of profit from the licensing of South Park
during the second quarter of 2020. Adjusted OIBDA, adjusted net earnings from
continuing operations attributable to ViacomCBS and adjusted diluted EPS from
continuing operations are non-GAAP financial measures. See "Reconciliation of
Non-GAAP Measures" 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 flows from continuing operations of $2.22 billion in
2020 compared with $1.17 billion in 2019. Free cash flow was $1.89 billion for
2020 compared with $826 million for 2019. These increases primarily reflect
lower spending, including for programming, production, advertising and
distribution costs resulting from production shutdowns related to COVID-19 and
cost savings, as well as lower payments for income taxes in 2020. These items
were partially offset by the decline in revenues and higher payments for
restructuring, merger-related costs and costs to achieve synergies. Operating
cash flow and free cash flow included payments for restructuring, merger-related
costs and costs to achieve synergies which totaled $584 million and $362 million
for 2020 and 2019, respectively. Also included in free cash flow for 2020 are
capital expenditures of $40 million associated with costs to achieve synergies.
Free cash flow is a non-GAAP financial measure. See "Free Cash Flow" for a
reconciliation of net cash flow provided by operating activities, the most
directly comparable GAAP financial measure, to free cash flow.
Reconciliation of Non-GAAP Measures
Results for the years ended December 31, 2020 , 2019 and 2018 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 to
ViacomCBS , 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, provision for income taxes, net earnings from continuing
operations attributable to ViacomCBS 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.
II-6
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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)
The following tables reconcile the adjusted measures to their most directly comparable financial measures in accordance with GAAP.
Year Ended December 31, 2020 2019 2018
Operating Income (GAAP) $ 4,139 $ 4,146 $ 5,062
Depreciation and amortization (a) 430 438 427
Restructuring and other corporate matters (b) 618 769 489
Programming charges (b) 159 589 162
Gain on sales (b) (214) (549) -
Adjusted OIBDA (Non-GAAP) $ 5,132 $ 5,393 (a) Includes impairment charges of$25 million and$20 million to reduce the carrying value of intangible assets to fair value for 2020 and 2019, respectively. 2020 also includes accelerated depreciation of$12 million for technology that was abandoned in connection with synergy plans related to the Merger. (b) See notes on the following tables for additional information on items affecting comparability. Year Ended December 31, 2020 Earnings from Continuing Net Earnings from Operations Before Income Provision for Income Continuing Operations Diluted EPS from Taxes Taxes Attributable to ViacomCBS Continuing Operations Reported (GAAP)$ 3,147 $ (535) $ 2,305 $ 3.73 Items affecting comparability: Restructuring and other corporate matters (a) 618 (133) 485 .79 Impairment charge (b) 25 (6) 19 .03 Depreciation of abandoned technology (c) 12 (3) 9 .01 Programming charges (d) 159 (39) 120 .20 Gain on sales (e) (214) 31 (183) (.30) Net gains from investments (f) (206) 50 (156) (.25) Loss on extinguishment of debt 126 (29) 97 .16 Discrete tax items (g) - (110) (110) (.18) Impairment of equity-method investment - - 9 .01 Adjusted (Non-GAAP)$ 3,667 $ (774) $ 2,595 $ 4.20 (a) Reflects severance, exit costs and other costs related to the Merger and a charge to write down property and equipment classified as held for sale. (b) Reflects a charge to reduce the carrying values ofFCC licenses in two markets to their fair values. (c) Reflects accelerated depreciation for technology that was abandoned in connection with synergy plans related to the Merger. (d) Programming charges primarily related to the abandonment of certain incomplete programs resulting from production shutdowns related to COVID-19. (e) Reflects a gain on the sale of CMG. (f) Primarily reflects an increase in the value of our investment in fuboTV, Inc. ("fuboTV"), which was sold in the fourth quarter of 2020. (g) Primarily reflects a benefit from the remeasurement of ourU.K. net deferred income tax asset as a result of an increase in theU.K. corporate income tax rate from 17% to 19% enacted during the third quarter of 2020. II-7 -------------------------------------------------------------------------------- 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, 2019 Earnings from Continuing Net Earnings from Operations Before Income Benefit (Provision) for Continuing Operations Diluted EPS from Taxes Income Taxes Attributable to ViacomCBS Continuing Operations Reported (GAAP)$ 3,223 $ 29 $ 3,168 $ 5.13 Items affecting comparability: Restructuring and other corporate matters (a) 769 (133) 636 1.03 Impairment charge (b) 20 (6) 14 .02 Programming charges (c) 589 (142) 447 .73 Gain on sales (d) (549) 163 (386) (.63) Net gains from investments (e) (85) 16 (69) (.11) Discrete tax items (f) - (827) (827) (1.34) Adjusted (Non-GAAP)$ 3,967 $ (900) $ 2,983 $ 4.83 (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 inAustralia 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 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; a tax benefit of$44 million realized in connection with the preparation of the 2018 federal tax return, based on further clarity provided bythe United States government on tax positions relating to federal tax legislation enacted inDecember 2017 (the "Tax Reform Act"); and a tax benefit of$39 million triggered by the bankruptcy of an investee. II-8 -------------------------------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) (Tabular dollars in millions, except per share amounts) Year Ended December 31, 2018 Earnings from Continuing Net Earnings from Operations Before Income Provision for Income Continuing Operations Diluted EPS from Taxes Taxes Attributable to ViacomCBS Continuing Operations Reported (GAAP)$ 3,984 $ (580) $ 3,320 $ 5.35 Items affecting comparability: Restructuring and other corporate matters (a) 489 (116) 373 .59 Programming charges (b) 162 (39) 123 .20 Gain on 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)$ 4,670 $ (1,044) $ 3,542 $ 5.70 (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 atCBS 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. Consolidated Results of Operations-2020 vs. 2019 Revenues Revenues by Type % of Total % of Total Increase/(Decrease) Year Ended December 31, 2020 Revenues 2019 Revenues $ % Advertising$ 9,751 38 %$ 11,074 41 % $ (1,323) (12) % Affiliate 9,166 36 8,602 32 564 7 Content licensing 5,963 24 6,483 24 (520) (8) Theatrical 180 1 547 2 (367) (67) Other 225 1 292 1 (67) (23) Total Revenues$ 25,285 100 %$ 26,998 100 % $ (1,713) (6) % 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)
Streaming Revenues
The following tables present our global streaming revenues by type and by
segment. Streaming revenues are earned from advertising on our pay and free
streaming services, including Pluto TV, CBS All Access (to be rebranded as
Paramount+ in March 2021 ), and CBSN; subscription fees for our pay streaming
services, including CBS All Access, Showtime OTT, BET+ and Noggin; and
advertising and subscriptions for our other digital video products.
Streaming Revenues by Type Increase/(Decrease)
Year Ended December 31, 2020 2019 $ %
Advertising $ 1,418 $ 1,005 $ 413 41 %
Subscription (a) 1,143 709 434 61
Total Streaming Revenues $ 2,561 $ 1,714 $ 847 49 %
Streaming Revenues by Segment Increase/(Decrease)
Year Ended December 31, 2020 2019 $ % TV Entertainment (b)$ 911 $ 701 $ 210 30 % Cable Networks (c) 1,650 1,013 637 63 Total Streaming Revenues$ 2,561 $ 1,714 $ 847 49 % (a) Subscription streaming revenues are included within affiliate revenues. (b) Primarily includes CBS All Access, CBSN and other CBS branded digital video products. (c) Primarily includes Pluto TV, Showtime OTT, BET+, Noggin, our international streaming services, and other digital video products. Included in total streaming revenues are$2.46 billion and$1.63 billion of domestic revenues for the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , our global streaming subscribers totaled 29.9 million, which included domestic subscribers of 19.2 million, and global MAUs for Pluto TV were 43.1 million, which included 30.1 million domestic MAUs. Global subscribers include customers who access our domestic or international streaming services, either directly through our owned and operated apps and websites, or through third-party distributors. Advertising Advertising revenues are generated primarily from the sale of advertising spots on theCBS Television Network , our basic cable networks and our television stations, as well as on our advertising-supported streaming services, and on our websites. Our advertising revenues include integrated marketing services, which provide unique branded content and custom sponsorship opportunities to our advertisers. For 2020, the 12% decrease in advertising revenues was driven by the adverse effects of COVID-19, including lower demand in the advertising market and the cancellation of theNCAA Tournament, as well as the comparison againstCBS' broadcasts in 2019 of annual tentpole sporting events that we have the rights to broadcast on a rotational basis with other networks, theSuper Bowl and the national semifinals and championship games of theNCAA Tournament. These decreases were partially offset by 41% growth in advertising from our streaming businesses, led by Pluto TV, as well as record political advertising revenues associated with theU.S. presidential election in 2020. In 2021, the advertising revenue comparison will benefit from the broadcasts of Super Bowl LV and theNCAA Tournament. Under the current contract with the NFL, theSuper Bowl is broadcast on theCBS Television Network on a rotating basis with other networks through the 2022 season, with CBS broadcasting these games in 2019 and 2021. Under agreements with theNCAA and Turner, the national semifinals and championship games of theNCAA Tournament are broadcast on CBS every other year through 2032, including in 2019 and 2021, and in each year the games in the preceding rounds of the tournament are shared equally between CBS and Turner. II-10 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
However, the 2020 NCAA Tournament was cancelled as a result of COVID-19. The
benefit from the broadcasts of these sporting events in 2021 will be partially
offset by lower political advertising sales.
For 2020, domestic advertising revenues decreased 12% to $8.57 billion from
$9.72 billion for 2019, and international advertising revenues decreased 13% to
$1.18 billion from $1.36 billion for 2019, including the unfavorable impact of
foreign exchange rate changes of 2 percentage points.
Affiliate
Affiliate revenues are principally comprised of fees received from multichannel
video programming distributors ("MVPDs") and third-party live television
streaming services ("virtual MVPDs" or "vMVPDs") for carriage of our cable
networks ("cable affiliate fees"), fees received from television stations
affiliated with the CBS Television Network ("reverse compensation"); fees for
authorizing the MVPDs' and vMVPDs' carriage of our owned television stations
("retransmission fees"); and subscription fees for our streaming services. For
2020, affiliate revenues increased 7% reflecting growth from subscription
streaming revenues, higher reverse compensation and retransmission fee revenues,
and the launch of our basic cable networks on a vMVPD service. Subscription
streaming revenues grew 61% primarily reflecting subscriber growth for CBS All
Access and Showtime OTT, and the launch of BET+ in September 2019 . Reverse
compensation and retransmission fee revenues increased 19%, driven by annual
contractual increases and contract renewals with television stations affiliated
with the CBS Television Network , MVPDs and vMVPDs. These increases were
partially offset by lower linear affiliate fees for our cable networks from
MVPDs, reflecting subscriber declines. For 2020, domestic affiliate revenues
increased 7% to $8.52 billion from $7.94 billion for 2019, while international
affiliate revenues decreased 3% to $645 million from $665 million for 2019,
including the unfavorable impact of foreign exchange rate changes of 2
percentage points.
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 cable and broadcast networks, television stations, 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 2020, content
licensing revenues decreased 8%, reflecting a lower volume of licensing
primarily as a result of several significant licensing agreements for library
programming in the prior-year periods, production shutdowns because of COVID-19,
and significant revenues in the 2019 periods from the licensing of the final
season of several series, including Jane the Virgin and Elementary. These
declines were partially offset by the licensing of the domestic streaming rights
to South Park to an SVOD provider in 2020.
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 earned from the worldwide theatrical
distribution of films through audience ticket sales. For 2020, the declines in
theatrical revenues reflect the impact from the closure or reduction in capacity
of movie theaters in response to COVID-19 throughout most of 2020.
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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)
Other
Other revenues are principally comprised of revenues from the rental of
production facilities and digital revenues from search and e-commerce partners.
For 2020, other revenues decreased 23%, primarily reflecting lower revenues from
the rental of our production facilities as a result of the shutdown of
production due to COVID-19.
Operating Expenses
% of % of
Operating Expenses by Type Operating Operating Increase/(Decrease)
Year Ended December 31, 2020 Expenses 2019 Expenses $ %
Production $ 6,425 43 % $ 6,797 41 % $ (372) (5) %
Programming 3,779 25 4,287 26 (508) (12)
Participation, residual and
distribution 2,634 18 3,147 19 (513) (16)
Programming charges 159 1 589 3 (430) n/m
Other 1,995 13 1,893 11 102 5
Total Operating Expenses $ 14,992 100 % $ 16,713 100 % $ (1,721) (10) %
n/m - not meaningful
Production
Production expenses principally reflect the amortization of costs of
internally-produced television and theatrical film content as well as other
television production costs, including on-air talent. For 2020, the 5% decrease
primarily reflects a lower volume of production resulting from the impact of
COVID-19, including fewer episodes of our original programming and a lower
number of theatrical releases.
Programming
Programming expenses reflect the amortization of acquired programs exhibited on our television broadcast networks, cable networks and television stations. For 2020, the 12% decrease in programming expenses was driven by lower sports programming costs, including from the comparison againstCBS' broadcasts ofNCAA Tournament games in 2019. The decline also reflects the mix of programming on our broadcast network. Participation, Residual and Distribution Participation, residual and distribution costs primarily include participation and residual expenses for television and film programming and other distribution expenses incurred with respect to film and television content, such as print and advertising. For 2020, participation, residual and distribution costs decreased 16% reflecting distribution costs in the prior-year periods to support theatrical releases, including Gemini Man, Rocketman, and Dora and the Lost City of Gold. Theatrical distribution costs were significantly lower in the 2020 periods as a result of the closure or reduced capacity of movie theaters due to COVID-19. The lower expenses also reflect the decline in content licensing revenues, as well as the mix of titles licensed in each year. Programming Charges During 2020, we recorded programming charges of$159 million primarily related to the abandonment of certain incomplete programs resulting from production shutdowns related to COVID-19.
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
II-12
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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)
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.
Other
Other operating expenses primarily include compensation, revenue-sharing costs
with our affiliated stations, and other ancillary and overhead costs associated
with our operations. For 2020, the 5% increase in other operating expenses was
driven by increased revenue-sharing costs as a result of the growth in
retransmission and subscription streaming revenues.
Selling, General and Administrative Expenses
Increase/(Decrease)
Year Ended December 31, 2020 2019 $ %
Selling, general and administrative expenses $ 5,320 $ 5,481 $ (161) (3) %
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 3% decrease in SG&A
expenses was driven by savings from restructuring and other cost savings
initiatives, as well as lower travel and entertainment and other expense
decreases associated with shutdowns resulting from COVID-19. The decrease in
SG&A expenses also includes lower advertising and promotion costs reflecting the
broadcast of fewer original programs, partially offset by increased costs to
support the growth and expansion of our streaming services.
Depreciation and Amortization
Increase/(Decrease)
Year Ended December 31, 2020 2019 $ %
Depreciation and amortization $ 430 $ 438 $ (8) (2) %
Depreciation and amortization expense reflects depreciation of fixed assets,
including transponders and equipment under finance leases, amortization of
finite-lived intangible assets, and impairment of fixed and intangible assets,
when applicable. For 2020, amortization expense included an impairment charge of
$25 million in the TV Entertainment segment to write down the carrying values of
FCC licenses in two markets to their fair values (see Note 6 to the consolidated
financial statements) and accelerated depreciation of $12 million resulting from
the abandonment of technology in connection with synergy plans related to the
Merger (see Note 4 to the consolidated financial statements). For 2019,
amortization expense included an impairment charge of $20 million to reduce the
carrying value of broadcast licenses in Australia to their fair value. The
comparison for depreciation and amortization also includes a decline as a result
of assets that became fully depreciated.
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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)
Restructuring and Other Corporate Matters
During 2020 and 2019, we recorded costs for restructuring and other corporate
matters as follows:
Year Ended December 31, 2020 2019
Severance $ 472 $ 395
Exit costs and other 70 23
Restructuring charges 542 418
Merger-related costs 56 294
Other corporate matters 20 57
Restructuring and other corporate matters $ 618 $ 769
During the year ended December 31, 2020 , we recorded restructuring charges of
$542 million , associated with cost-transformation initiatives in connection with
the Merger in an effort to reduce redundancies across our businesses. These
charges primarily consist of severance costs, including the accelerated vesting
of stock-based compensation. In addition, in 2020 we incurred costs of $56
million in connection with the Merger, consisting of professional fees mainly
associated with integration activities, as well as transaction-related bonuses.
We also incurred costs of $5 million for professional fees associated with
dispositions and other corporate matters, and we recorded a charge of
$15 million to write down property and equipment that has been classified as
held for sale to its fair value less costs to sell.
During the year ended December 31, 2019 , we recorded restructuring charges of
$418 million , primarily for severance costs, including the accelerated vesting
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 were 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 20 to
the consolidated financial statements) and other corporate matters.
Included in restructuring charges for both 2020 and 2019 were costs resulting
from the termination of contractual obligations and charges associated with the
exit of leases.
Gain on Sales
In 2020, we completed the sale of CMG to Red Ventures for $484 million ,
including an estimated working capital adjustment. The purchase price consisted
of a cash payment at closing of $459 million and a credit of $25 million to be
used over five years for the purchase of advertising and licensing of data from
Red Ventures . This transaction resulted in a gain of $214 million .
In 2019, we completed the sale of CBS Television City for
II-14
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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 Expense and Interest Income
Increase/(Decrease)
Year Ended December 31, 2020 2019 $ %
Interest expense $ (1,031) $ (962) $ 69 7 %
Interest income $ 60 $ 66 $ (6) (9) %
The following table presents our outstanding debt balances, excluding finance
leases, and the weighted average interest rate as of December 31, 2020 and 2019:
Weighted Average Weighted Average
At December 31, 2020 Interest Rate 2019 Interest Rate
Total long-term debt $ 19,612 4.80 % $ 17,976 4.70 %
Commercial paper $ - n/a $ 699 2.07 %
Other bank borrowings $ 95 3.50 % $ - n/a
n/a - not applicable
Net Gains from Investments
For 2020, net gains from investments of $206 million primarily reflect an
increase of $213 million in the fair value of our investment in fuboTV, which
was sold in the fourth quarter of 2020, and for 2019 net gains from investments
of $85 million reflect 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.
Loss on Extinguishment of Debt
For 2020, we recorded a loss on extinguishment of debt of
Other Items, Net
The following table presents the components of Other items, net.
Year Ended December 31, 2020 2019
Pension and postretirement benefit costs $ (69) $ (99)
Foreign exchange losses (35) (18)
Other 3 5
Other items, net $ (101) $ (112)
Provision for Income Taxes
The 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 2020, we recorded a provision for income taxes
of $535 million , reflecting an effective income tax rate of 17.0%. Included in
the provision for income taxes was a discrete tax benefit of $110 million ,
primarily consisting of a benefit of $100 million to remeasure our U.K. net
deferred income tax asset as a result of an increase in the U.K. corporate
income tax rate from 17% to 19% enacted during the third quarter, as well as a
benefit of $13 million realized in connection with the preparation of the 2019
tax returns. These items, together with a net tax benefit of $129 million on the
items identified as affecting comparability in Reconciliation of Non-GAAP
Measures, including restructuring and other
II-15
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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)
corporate matters, programming charges, and net gains from investments, reduced our effective income tax rate by 4.1 percentage points.
For 2019, we recorded a tax benefit of$29 million , reflecting an effective income tax rate of (0.9)%. Included in the benefit for income taxes were discrete items of$827 million , primarily consisting of a tax benefit of$768 million resulting from the transfer of intangible assets between our subsidiaries in connection with a reorganization of our international operations, a tax benefit of$44 million realized in connection with the preparation of the 2018 federal tax return, based on further clarity provided by theU.S. government on tax positions relating to the Tax Reform Act, and a tax benefit of$39 million principally related to the bankruptcy of an investee. These items, taken together with a net tax benefit of$102 million on the items identified as affecting comparability in Reconciliation of Non-GAAP Measures, including restructuring and other corporate matters, programming charges, and gain on sales, reduced the effective income tax rate by 23.6 percentage points. InMarch 2020 , theU.S. government enacted tax legislation containing provisions to support businesses during the COVID-19 pandemic (the "CARES Act"), including deferment of the employer portion of certain payroll taxes, refundable payroll tax credits, and technical amendments to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on our consolidated financial statements for 2020. We do not expect the future impact of the CARES Act provisions to be material.
Equity in 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, 2020 2019 $ %
Equity in loss of investee companies $ (47) $ (72) $ 25 35 %
Tax benefit 19 19 - -
Equity in loss of investee companies, net of tax
25 47 %
For 2020, equity in loss of investee companies, net of tax includes an
impairment charge of
Net Earnings Attributable to Noncontrolling Interests
Year Ended December 31, 2020 2019
Net earnings attributable to noncontrolling
interests $ (279) $ (31) For 2020, net earnings attributable to noncontrolling interests primarily reflects our joint venture partners' share of profit from the licensing of the domestic streaming rights to South Park to an SVOD provider in the second quarter of 2020.
II-16
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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)
Net Earnings from Continuing Operations Attributable to
Increase/(Decrease)
Year Ended December 31, 2020 2019 $ %
Net earnings from continuing operations attributable to
$ 2,305 $ 3,168 $ (863) (27) %
Diluted EPS from continuing operations attributable to
$ 3.73 $ 5.13 $ (1.40) (27) % For 2020, net earnings from continuing operations attributable toViacomCBS and diluted EPS from continuing operations each decreased 27%, reflecting higher discrete tax benefits in 2019. Net Earnings from Discontinued Operations, Net of Tax During the fourth quarter of 2020, we entered into an agreement to sell our publishing business, Simon & Schuster, toPenguin Random House LLC , a wholly owned subsidiary ofBertelsmann SE & Co. KGaA . Simon & Schuster has been presented as a discontinued operation in our consolidated financial statements for all periods presented. The following tables set forth details of net earnings from discontinued operations for the years endedDecember 31, 2020 and 2019. Year Ended December 31, 2020 Simon & Schuster Other (a) Total Revenues$ 901 $ -$ 901 Costs and expenses: Operating 573 (19) 554 Selling, general and administrative 172 - 172 Depreciation and amortization 5 - 5 Restructuring charges 10 - 10 Total costs and expenses 760 (19) 741 Operating income 141 19 160 Other items, net (5) - (5) Earnings from discontinued operations 136 19 155 Income tax provision (34) (4) (38) Net earnings from discontinued operations, net of tax$ 102 $ 15 $ 117 Year Ended December 31, 2019 Simon & Schuster Other (a) Total Revenues$ 814 $ -$ 814 Costs and expenses: Operating 510 (50) 460 Selling, general and administrative 166 - 166 Depreciation and amortization 5 - 5 Restructuring charges 6 - 6 Total costs and expenses 687 (50) 637 Operating income 127 50 177 Other items, net (5) - (5) Earnings from discontinued operations 122 50 172 Income tax provision (20) (12) (32) Net earnings from discontinued operations, net of tax$ 102 $ 38 $ 140
(a) Primarily relates to indemnification obligations for leases associated with
the previously discontinued operations of
II-17
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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 41 % $ 10,841 41 % $ 233 2 %
Affiliate 8,602 32 8,376 32 226 3
Content licensing 6,483 24 6,163 23 320 5
Theatrical 547 2 744 3 (197) (26)
Other 292 1 301 1 (9) (3)
Total Revenues $ 26,998 100 % $ 26,425 100 % $ 573 2 %
Advertising
For 2019, the 2% increase in advertising revenues was driven by 5% growth in
domestic advertising revenues, reflecting CBS' broadcast of tentpole sporting
events in 2019, mainly Super Bowl LIII and the national semifinals and
championship games of the NCAA Tournament, as well as higher revenues from our
streaming businesses, including Pluto TV. These increases were partially offset
by lower political advertising sales at our owned television stations, as a
result of the benefit to 2018 from midterm elections. International advertising
revenues decreased 14%, reflecting the unfavorable impact of foreign exchange
rate changes, as well as softness in the Australian and U.K. 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.
Affiliate
For 2019, the 3% increase in affiliate revenues reflects 20% growth in reverse
compensation and retransmission fee revenues, driven by annual contractual
increases and contract renewals with MVPDs and vMVPDs, 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
2018 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
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.
Theatrical
For 2019, theatrical revenues decreased 26%, principally reflecting a difficult comparison to 2018, which included the 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%. II-18 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Other
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 in January 2019 .
Operating Expenses
% of Total % of Total
Operating Expenses by Type Operating Operating Increase/(Decrease)
Year Ended December 31, 2019 Expense 2018 Expense $ %
Production $ 6,797 41 % $ 6,483 42 % $ 314 5 %
Programming 4,287 26 3,965 26 322 8
Participation, residual and
distribution 3,147 19 3,057 20 90 3
Programming charges 589 3 162 1 427 n/m
Other 1,893 11 1,732 11 161 9
Total Operating Expenses $ 16,713 100 % $ 15,399 100 % $ 1,314 9 %
n/m - not meaningful
Production
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
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 games 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, Residual and Distribution For 2019, the 3% increase in participation, residual and distribution 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. II-19 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
In addition, 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.
Other
For 2019, the 9% 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 $ 5,481 $ 5,048 $ 433 9 %
For 2019, the 9% 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 $ 438 $ 427 $ 11 3 %
For 2019, depreciation and amortization expense includes an impairment charge of
$20 million to reduce the carrying value of broadcast licenses in Australia 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 $ 395 $ 234
Exit costs and other 23 75
Restructuring charges 418 309
Restructuring-related costs - 52
Merger-related costs 294 -
Other corporate matters 57 128
Restructuring and other corporate matters $ 769 $ 489
During the year ended December 31, 2019 , we recorded restructuring charges of
$418 million , primarily for severance costs, including the accelerated vesting
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 were 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
II-20
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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)
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 20 to the consolidated financial statements) and other corporate
matters.
During the year ended December 31, 2018 , we recorded restructuring charges of
$309 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.
Included in restructuring charges for both 2019 and 2018 were costs resulting
from the termination of contractual obligations and charges associated with the
exit of leases.
Gain on Sales
In 2019, we completed the sale of CBS Television City for $750 million , which
resulted in a gain of $549 million . 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 $ (962) $ (1,030) $ (68) (7) %
Interest income $ 66 $ 79 $ (13) (16) %
The following table presents our outstanding debt balances, excluding finance
leases, and the weighted average interest rate as of December 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 %
Net Gains (Losses) from Investments
For 2019, net gains from investment of $85 million included 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. For 2018, the net loss on investments of $53
million included a loss on marketable securities of $23 million , an impairment
charge of $46 million to write an investment down 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.
Gain on Early Extinguishment of Debt
For 2018, we recorded a gain on extinguishment of debt of $18 million associated
with the redemption of senior notes and debentures prior to maturity totaling
$1.13 billion .
II-21
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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)
Other Items, Net
The following table presents the components of Other items, net.
Year Ended December 31, 2019 2018
Pension and postretirement benefit costs $ (99) $ (65)
Foreign exchange losses (18) (19)
Other 5 (8)
Other items, net $ (112) $ (92)
Benefit (Provision) for Income Taxes
For 2019, we recorded a tax benefit of $29 million , reflecting an effective
income tax rate of (0.9)%. Included in the benefit for income taxes were
discrete items of $827 million , primarily consisting of a tax benefit of $768
million resulting from the transfer of intangible assets between our
subsidiaries in connection with a reorganization of our international
operations, a tax benefit of $44 million realized in connection with the
preparation of the 2018 federal tax return, based on further clarity provided by
the U.S. government on tax positions relating to the Tax Reform Act, and a tax
benefit of $39 million principally related to the bankruptcy of an investee.
These items, taken together with a net tax benefit of $102 million on the items
identified as affecting comparability in Reconciliation of Non-GAAP Measures,
including restructuring and other corporate matters, programming charges, and
gain on sales, reduced the effective income tax rate by 23.6 percentage points.
For 2018, the provision for income taxes was $580 million , reflecting an
effective income tax rate of 14.6%. The provision for income taxes included
discrete items of $297 million , primarily consisting of 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 IRS .
Equity in 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 $ (72) $ (62) $ (10) (16) %
Tax benefit 19 15 4 27
Equity in loss of investee companies, net of tax
(6) (13) %
II-22
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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)
Net Earnings from Continuing Operations Attributable to
Increase/(Decrease)
Year Ended December 31, 2019 2018 $ %
Net earnings from continuing operations attributable to
$ 3,168 $ 3,320 $ (152) (5) %
Diluted EPS from continuing operations attributable to
$ 5.13 $ 5.35 $ (.22) (4) % For 2019, net earnings from continuing operations attributable toViacomCBS and diluted EPS from continuing operations decreased 5% and 4%, respectively, 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 from Discontinued Operations, Net of Tax The following tables set forth details of net earnings from discontinued operations for the years endedDecember 31, 2019 and 2018. Year Ended December 31, 2019 Simon & Schuster Other (a) Total Revenues$ 814 $ -$ 814 Costs and expenses: Operating 510 (50) 460 Selling, general and administrative 166 - 166 Depreciation and amortization 5 - 5 Restructuring charges 6 - 6 Total costs and expenses 687 (50) 637 Operating income 127 50 177 Other items, net (5) - (5) Earnings from discontinued operations 122 50 172 Income tax provision (20) (12) (32) Net earnings from discontinued operations, net of tax$ 102 $ 38 $ 140 Year Ended December 31, 2018 Simon & Schuster Other (a) Total Revenues$ 825 $ -$ 825 Costs and expenses: Operating 518 (42) 476 Selling, general and administrative 158 - 158 Depreciation and amortization 6 - 6 Restructuring charges 1 - 1 Total costs and expenses 683 (42) 641 Operating income 142 42 184 Other items, net (2) - (2) Earnings from discontinued operations 140 42 182 Income tax provision (37) (10) (47) Net earnings from discontinued operations, net of tax$ 103 $ 32 $ 135
(a) Primarily relates to indemnification obligations for leases associated with the previously discontinued operations of Famous Players.
II-23
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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)
SegmentsWe operate in the following three segments:
TV ENTERTAINMENT:TV Entertainment consists of theCBS Television Network , our domestic broadcast network;CBS Studios andCBS Media Ventures , our television production and syndication operations; our CBS-branded streaming services, including CBS All Access (to be rebranded as Paramount+ inMarch 2021 ) and CBSN, among others;CBS Sports Network , our cable network focused on college athletics and other sports; andCBS Television Stations , our owned broadcast television stations.TV Entertainment's revenues are generated primarily from advertising sales, the licensing and distribution of content, and affiliate revenues, comprised of reverse compensation, retransmission fees, and subscription fees for our streaming services. CABLE NETWORKS: Cable Networks operates a portfolio of premium subscription cable networks, includingShowtime ; basic cable networks includingBET , Nickelodeon,MTV ,Comedy Central , Paramount Network, and Smithsonian Channel, among others; streaming services including Pluto TV, Showtime OTT, Noggin, and BET+; international extensions of these brands; and our international free-to-air broadcast networks, including Network 10,Channel 5 and Telefe. Cable Networks' revenues are generated primarily from affiliate revenues, comprised of fees from MVPDs and vMVPDs for carriage of our cable networks, and subscription fees from our streaming services; advertising sales; and the licensing of our content and brands.
FILMED ENTERTAINMENT: Our
During the fourth quarter of 2020, we entered into an agreement to sell Simon & Schuster, which was previously reported as the Publishing segment. Simon & Schuster has been presented as a discontinued operation in our consolidated financial statements for all periods presented.
We present operating income (loss) excluding depreciation and amortization,
stock-based compensation, costs for restructuring and other corporate matters,
programming charges and gain on sales, 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 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 19 to
the consolidated financial statements.
II-24
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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)
Segment Results of Operations - 2020 vs. 2019
% of Total % of Total Increase/(Decrease)
Year Ended December 31, 2020 Revenues 2019 Revenues $ % Revenues: TV Entertainment$ 10,700 42 %$ 11,924 44 % $ (1,224) (10) % Cable Networks 12,589 50 12,449 46 140 1 Filmed Entertainment 2,562 10 2,990 11 (428) (14) Corporate/Eliminations (566) (2) (365) (1) (201) (55) Total Revenues$ 25,285 100 %$ 26,998 100 % $ (1,713) (6) % Increase/(Decrease) Year Ended December 31, 2020 2019 $ % Adjusted OIBDA: TV Entertainment$ 1,857 $ 2,443 $ (586) (24) % Cable Networks 3,746 3,515 231 7 Filmed Entertainment 215 80 135 169 Corporate/Eliminations (500) (449) (51) (11) Stock-based compensation (186) (196) 10 5 Total Adjusted OIBDA 5,132 5,393 (261) (5) Depreciation and amortization (430) (438) 8 2 Restructuring and other corporate matters (618) (769) 151 n/m Programming charges (159) (589) 430 n/m Gain on sales 214 549 (335) n/m Total Operating Income$ 4,139 $ 4,146 $ (7) - % n/m - not meaningful Increase/(Decrease) Year Ended December 31, 2020 2019 $ % Depreciation and Amortization: TV Entertainment$ 162 $ 150 $ 12 8 % Cable Networks 205 219 (14) (6) Filmed Entertainment 36 37 (1) (3) Corporate 27 32 (5) (16) Total Depreciation and Amortization$ 430 $ 438 $ (8) (2) % II-25 --------------------------------------------------------------------------------
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, 2020 2019 $ %
Advertising $ 5,035 $ 6,008 $ (973) (16) %
Affiliate 3,129 2,550 579 23
Content licensing 2,369 3,157 (788) (25)
Other 167 209 (42) (20)
Revenues $ 10,700 $ 11,924 $ (1,224) (10) %
Adjusted OIBDA $ 1,857 $ 2,443 $ (586) (24) %
Revenues
For 2020, the 10% decrease in revenues was mainly driven by the comparison
against CBS' broadcasts of tentpole sporting events in 2019, the impact of
COVID-19 on our business during 2020, including weakness in the advertising
market and the delay to the start of the television broadcast season, and lower
content licensing revenues, partially offset by growth in affiliate revenues.
Advertising
The 16% decrease in advertising revenues was primarily driven by the
aforementioned impact of COVID-19, as well as the comparison against CBS'
broadcasts of Super Bowl LIII and the NCAA Tournament in 2019. Under the current
contract with the NFL, the Super Bowl is broadcast on the CBS Television Network
on a rotating basis with other networks through the 2022 season, with CBS
broadcasting these games in 2019 and 2021. The 2020 NCAA Tournament, which was
scheduled to be broadcast by CBS in the first quarter of 2020, was cancelled as
a result of COVID-19. In addition, the national semifinals and championship
games of the NCAA Tournament, which are broadcast by CBS every other year
through 2032 under agreements with the NCAA and Turner, were broadcast on CBS in
the second quarter of 2019. Advertising revenues in 2020 benefited from record
political advertising associated with the U.S. presidential election in 2020.
Affiliate
Affiliate revenues grew 23%, reflecting 19% growth in reverse compensation and retransmission fee revenues, as well as subscriber growth at CBS All Access.
Content Licensing Content licensing revenues decreased 25%, mainly due to a lower volume of licensing of our programming during 2020, as 2019 included several significant licensing agreements for library programming and the licensing of the final season of several series, including Jane the Virgin and Elementary, and 2020 was impacted by production delays related to COVID-19.
Other
Other revenues decreased 20%, primarily reflecting lower revenues from the rental of our production facilities as a result of production shutdowns due to COVID-19.
Revenues in 2021 will benefit from theCBS Television Network's broadcasts of Super Bowl LV and the national semifinals and championship games of theNCAA Tournament. Comparability in 2021 will be negatively II-26 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
impacted, however, by lower political advertising revenues driven by the
comparison against the
Adjusted OIBDA
Adjusted OIBDA decreased 24% driven by the decline in revenues and increased
costs to support the growth and expansion of CBS All Access. These decreases
were partially offset by lower production and programming costs as a result of
the comparison against the broadcast of major sporting events in 2019,
production shutdowns in 2020 due to COVID-19, and the mix of programming.
Participation expense was also lower as a result of the decline in content
licensing revenues.
Cable Networks
Increase/(Decrease)
Year Ended December 31, 2020 2019 $ % Advertising$ 4,743 $ 5,129 $ (386) (8) % Affiliate 6,037 6,052 (15) - Content licensing 1,809 1,268 541 43 Revenues$ 12,589 $ 12,449 $ 140 1 % Adjusted OIBDA$ 3,746 $ 3,515 $ 231 7 % Revenues
For 2020, revenues increased 1%, due to higher content licensing revenues, mainly reflecting the licensing of the domestic streaming rights for South Park to an SVOD provider, partially offset by a decline in advertising revenues. Domestic revenues increased 4% while international revenues decreased 10%, including a 2-percentage point unfavorable impact of foreign exchange rate changes.
Advertising
Advertising revenues decreased 8% primarily driven by the adverse effects of COVID-19. Domestic advertising revenues decreased 6%, reflecting lower linear impressions, including from weakness in the advertising market as a result of COVID-19. This decrease was partially offset by growth from our streaming businesses, including revenues from Pluto TV, which was acquired inMarch 2019 , and higher pricing. International advertising revenues decreased 12%, primarily reflecting weakness in the advertising market. Foreign exchange rate changes had an unfavorable impact of 1 percentage point on both worldwide and international advertising revenues.
Affiliate
Domestic affiliate revenues remained flat, as the declines in subscribers at our cable networks were offset by growth from our subscription streaming services, including Showtime OTT, BET+, and Noggin, and the launch of our basic cable networks on a vMVPD service. International affiliate revenues decreased 3%, including a 1-percentage point unfavorable impact of foreign exchange rate changes.Content Licensing The 43% increase in content licensing revenues was primarily the result of growth from the domestic licensing of programming to SVOD providers, mainly from South Park, and higher download-to-own revenues, led by sales of Yellowstone. II-27 --------------------------------------------------------------------------------
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 increased 7%, driven by the revenue growth and lower SG&A
expenses, reflecting lower advertising and promotion costs due to the broadcast
of fewer original programs, savings from restructuring and other cost savings
initiatives, as well as lower travel and entertainment expenses associated with
shutdowns resulting from COVID-19. These cost decreases were partially offset by
higher participation costs associated with the mix of titles licensed each year.
Filmed Entertainment
Increase/(Decrease)
Year Ended December 31, 2020 2019 $ %
Theatrical $ 180 $ 547 $ (367) (67) %
Home Entertainment 709 623 86 14
Licensing 1,598 1,709 (111) (6)
Other 75 111 (36) (32)
Revenues $ 2,562 $ 2,990 $ (428) (14) %
Adjusted OIBDA $ 215 $ 80 $ 135 169 %
Revenues
For 2020, the 14% decrease in revenues reflects the impact from the closure or
reduction in capacity of movie theaters in response to COVID-19 throughout most
of 2020.
Theatrical
The 67% decrease in theatrical revenues reflects the impact from the closure or reduction in capacity of movie theaters throughout most of 2020. Theatrical revenues during the current year benefited from the theatrical release of Sonic the Hedgehog in the first quarter, while the prior year benefited from several significant theatrical releases.Home Entertainment The 14% increase in home entertainment revenues was driven by higher sales of catalog titles and titles fromMiramax , which was acquired in 2020. The current year benefited from the 2020 releases of Sonic the Hedgehog and Terminator: Dark Fate, as well as Gemini Man, which was released in the home entertainment market in late 2019, while the prior-year benefited from Bumblebee, Rocketman, Mission: Impossible - Fallout and Instant Family.
Licensing
The 6% decrease in licensing revenues was primarily due to lower revenues from the licensing of catalog titles, television programming produced for third parties and music rights. These decreases were partially offset by the licensing ofMiramax titles in 2020 and current year releases, including Lovebirds and the international licensing of The SpongeBob Movie: Sponge on the Run. Adjusted OIBDA Adjusted OIBDA increased$135 million as the revenue decline was more than offset by lower distribution and film production costs resulting from fewer theatrical releases in the current year due to COVID-19. Fluctuations in results for theFilmed Entertainment segment may occur as a result of the timing of the recognition of II-28 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
distribution costs, including print and advertising, 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. 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 44 % $ 11,061 42 % $ 863 8 %
Cable Networks 12,449 46 12,683 48 (234) (2)
Filmed Entertainment 2,990 11 2,956 11 34 1
Corporate/Eliminations (365) (1) (275) (1) (90) (33)
Total Revenues $ 26,998 100 % $ 26,425 100 % $ 573 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
Corporate/Eliminations (449) (433) (16) (4)
Stock-based compensation (196) (201) 5 2
Total Adjusted OIBDA 5,393 6,140 (747) (12)
Depreciation and amortization (438) (427) (11) (3)
Restructuring and other corporate matters (769) (489) (280) n/m
Programming charges (589) (162) (427) n/m
Gain on sale 549 - 549 n/m
Total Operating Income $ 4,146 $ 5,062 $ (916) (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)
Corporate 32 35 (3) (9)
Total Depreciation and Amortization $ 438 $ 427 $ 11 3 %
II-29
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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)
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) % 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 byCBS' broadcasts of Super Bowl LIII and the national semifinals and championship games of theNCAA Tournament in 2019, partially offset by the timing of other sporting events and lower political advertising as a result of the benefit to 2018 from midterm elections. 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 reverse compensation and retransmission fee 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. II-30 --------------------------------------------------------------------------------
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, revenues decreased 2% from 2018, reflecting an unfavorable impact from foreign exchange rate changes of 2-percentage points. Domestic revenues remained substantially flat compared with 2018 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 2018 and included an unfavorable impact of foreign exchange rate changes of 3-percentage points. Domestic advertising revenues increased 6%, reflecting higher revenues from our streaming businesses, including 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 andU.K. 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 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.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.
Adjusted OIBDA Adjusted OIBDA decreased 19%, driven by lower revenues as well as increased investment in content and higher advertising and promotion expenses.
II-31
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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)
Filmed Entertainment 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 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 2018, which included the 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.
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 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. II-32 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Liquidity and Capital Resources
Sources and Uses of Cash
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 tax 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 our
$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
During the year endedDecember 31, 2020 , we issued$4.50 billion of senior notes with interest rates ranging from 4.20% to 4.95% and due dates from 2025 to 2050. The net proceeds from these issuances are being used for the redemption of our long-term debt as well as for general corporate purposes. During the year endedDecember 31, 2020 , we redeemed, prior to maturity, senior notes, debentures, and junior subordinated debentures totaling$2.77 billion , for an aggregate redemption price of$2.88 billion . During the fourth quarter of 2020, we announced that we entered into an agreement to sell Simon & Schuster for$2.175 billion in cash, which is expected to close in 2021, subject to customary closing conditions, including regulatory approvals. In addition, we completed the sale of CMG for cash proceeds of$459 million and advertising and data licensing credits of$25 million . These divestitures are a result of a strategic review of our non-core assets. Proceeds from these transactions will be used to invest in our strategic growth priorities, including in streaming, as well as to fund the dividend and pay down debt. The ongoing impact of COVID-19 could have a negative effect on our financial condition or our ability to fund operations, dividends or future investment opportunities due to an increase in the cost of, or difficulty in, obtaining debt or equity financing, or our ability to comply with the leverage covenant in our Credit Facility in the future. The magnitude of the continuing impact on our financial condition and results of operations will depend on numerous evolving factors that we may not be able to accurately predict or control, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19. II-33 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
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.
At December 31, 2020 , we had $2.36 billion of remaining availability under our
share repurchase program. Any 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.
Cash Flows
The changes in cash, cash equivalents and restricted cash were as follows:
Increase/ (Decrease) Increase/ (Decrease)
Year Ended December 31, 2020 2019 2020 vs. 2019 2018 2019 vs. 2018
Cash provided by operating activities from:
Continuing operations $ 2,215 $ 1,171 $ 1,044 $ 3,324 $ (2,153)
Discontinued operations 79 59 20 140 (81)
Cash provided by operating activities 2,294 1,230 1,064 3,464 (2,234)
Cash provided by (used for) investing activities
from:
Continuing operations 63 (145) 208 (581) 436
Discontinued operations (7) (10) 3 (30) 20
Cash provided by (used for) investing activities 56 (155) 211 (611) 456
Cash used for financing activities (90) (1,216) 1,126 (2,531) 1,315
Effect of exchange rate changes on cash, cash
equivalents and restricted cash 25 (1) 26 (25) 24
Net increase (decrease) in cash, cash
equivalents and
restricted cash $ 2,285 $ (142) $ 2,427 $ 297 $ (439)
Operating Activities. The increase in cash provided by operating activities
from continuing operations for 2020 compared to 2019 was primarily driven by
significantly lower spending, including for programming, production, advertising
and distribution costs resulting from production shutdowns related to COVID-19
and cost savings, as well as lower payments for income taxes. These impacts were
partially offset by the decline in revenues and higher payments for
restructuring, merger-related costs, and costs to achieve synergies.
The decrease in cash provided by operating activities from continuing operations
for 2019 compared with 2018 was primarily driven by increased spending for
television and film programming, higher payments for income taxes and payments
of $132 million associated with costs related to the Merger.
Cash paid for income taxes from continuing operations decreased to $411
million for 2020 from $560 million for 2019. The comparison was impacted by a
payment in 2019 as a result of guidance issued by the U.S. 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 .
The increase in cash payments for income taxes from continuing operations for
2019 compared to $153 million for 2018 was primarily due to the aforementioned
payment in 2019, as well as a benefit to 2018 from the application of a federal
income tax overpayment carryforward from 2017.
II-34
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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)
Cash provided by operating activities from discontinued operations reflects the
operating activities of Simon & Schuster.
Investing Activities
Year Ended December 31, 2020 2019 2018
Investments (a) $ (59) $ (171) $ (161)
Capital expenditures (324) (345) (345)
Acquisitions, net of cash acquired (b) (147) (399) (118)
Proceeds from dispositions (c) 593 756 39
Other investing activities from continuing operations - 14 4
Cash flow provided by (used for) investing activities from continuing operations
63 (145) (581)
Cash flow used for investing activities from discontinued operations (7)
(10) (30)
Cash flow provided by (used for) investing activities $
56
(a) Primarily includes our investment in The CW. (b) 2020 primarily reflects the acquisition ofMiramax , a global film and television studio. 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. (c) 2020 reflects the sale of CMG and marketable securities. 2019 primarily reflects the sale of CBS Television City. Financing Activities Year Ended December 31, 2020 2019 2018
(Repayments of) proceeds from short-term debt borrowings, net
4,375 492 -
Repayment of long-term debt (2,901) (910) (1,102)
Dividends (600) (595) (599)
Purchase of the Company's Class B Common Stock (58) (57) (586)
Payment of payroll taxes in lieu of issuing shares for stock-based compensation
(93) (56) (67)
All other financing activities, net (107) (115) (172)
Cash flow used for financing activities $ (90) $ (1,216) $ (2,531)
Free Cash Flow
Free cash flow is a non-GAAP financial measure. Free cash flow reflects our net
cash flow provided by operating activities from continuing operations 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 operating
activities from continuing operations 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
II-35
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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)
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 from continuing operations as a
measure of liquidity or net earnings 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 from continuing operations to free cash flow.
Year Ended
2020 2019 2018
Net cash flow provided by operating activities from
continuing operations (GAAP) $ 2,215 $ 1,171 $ 3,324
Capital expenditures (324) (345) (345)
Free cash flow (Non-GAAP) $ 1,891 $ 826 $ 2,979
Dividends
We declared a quarterly cash dividend on our Class A and Class B Common Stock
during each of the quarters of 2020, resulting in total dividends for the year
of $601 million , or $.96 per share. On December 19, 2019 , we declared a
quarterly cash dividend of $.24 per share on our Class A and Class B Common
Stock, resulting in total dividends of $150 million . 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. During the first
three quarters of 2019, CBS declared total per share dividends of $.54 ,
resulting in total dividends of $205 million . For the year ended December 31,
2018 , CBS declared total per share dividends of $.72 , resulting in total annual
dividends of $274 million . During the first three quarters of 2019, Viacom
declared total per share dividends of $.60 , resulting in total dividends of $245
million . For the year ended December 31, 2018 , Viacom declared total per share
dividends of $.80 , resulting in total annual dividends of $325 million .
On
Share Repurchase Program During 2020, we repurchased 1.3 million shares of ViacomCBS Class B Common Stock under our share repurchase program for$50 million , at an average cost of$38.63 per share. AtDecember 31, 2020 ,$2.36 billion of authorization remained under the share repurchase program. II-36 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
Capital Structure
The following table sets forth our debt.
At December 31, 2020 2019
Commercial paper $ - $ 699
Senior debt (2.250%-7.875% due 2021-2050) 18,455 16,690
Junior debt (5.875%-6.250% due 2057) 1,157 1,286
Other bank borrowings 95 -
Obligations under finance leases 26 44
Total debt (a) 19,733 18,719
Less commercial paper - 699
Less current portion of long-term debt 16 18
Total long-term debt, net of current portion $ 19,717 $ 18,002 (a) At
During the year endedDecember 31, 2020 , we issued$4.50 billion of senior notes with interest rates ranging from 4.20% to 4.95% and due dates from 2025 to 2050. The net proceeds from these issuances are being used for the redemption of our long-term debt as well as for general corporate purposes. During the year endedDecember 31, 2020 , we redeemed, prior to maturity, senior notes, debentures, and junior subordinated debentures totaling$2.77 billion , for an aggregate redemption price of$2.88 billion . These redemptions resulted in a pre-tax loss on extinguishment of debt of$126 million ($97 million , net of tax). During the year endedDecember 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 dueAugust 2019 . During 2019, we also repaid the$220 million aggregate principal amount of our 5.625% senior notes dueSeptember 2019 and the$90 million aggregate principal amount of our 2.75% senior notes dueDecember 2019 . During the year endedDecember 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 extinguishment of debt of$18 million ($14 million , net of tax). 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 Investor Services, Inc. orS&P Global Ratings downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the II-37 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
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. At December 31, 2020 , the outstanding
principal amount of our 2.25% senior notes due February 2022 and 3.45% senior
notes due October 2026 was $35 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.
Commercial Paper
In January 2020 , our commercial paper program was increased to $3.50 billion
from $2.50 billion in conjunction with the new $3.50 billion revolving credit
facility described below. At December 31, 2020 , we had no outstanding commercial
paper borrowings. At December 31, 2019 , we had $699 million outstanding
commercial paper borrowings under our commercial paper program at a weighted
average interest rate of 2.07% and maturities of less than 90 days.
Credit Facility
In January 2020 , the $2.50 billion revolving credit facility held by CBS prior
to the Merger, with a maturity in June 2021 , was terminated and the revolving
credit facility held by Viacom prior to the Merger, with a maturity in February
2024 , was amended and restated to a $3.50 billion revolving credit facility with
a maturity in January 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
generally based on either the prime rate in the U.S. or LIBOR plus a margin
based on our senior unsecured debt rating, depending on the type and tenor of
the loans entered. The Credit Facility has one principal financial covenant that
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 quarters following a
qualified acquisition) at the end of each quarter. 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 the covenant as of
December 31, 2020 .
At December 31, 2020 , we had no borrowings outstanding under the Credit Facility
and the remaining availability under the Credit Facility, net of outstanding
letters of credit, was $3.50 billion .
Other Bank Borrowings
At December 31, 2020 , we had $95 million of bank borrowings with a weighted
average interest rate of 3.50% under Miramax's $300 million credit facility,
which matures in April 2023 .
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)
Contractual Obligations
As of December 31, 2020 , payments due by period under our significant
contractual obligations with remaining terms in excess of one year were as
follows:
Payments Due by Period
2026 and
Total 2021 2022-2023 2024-2025 Thereafter
Off-Balance Sheet Arrangements
Programming and talent commitments (a)
1,377 501 614 201 61
On-Balance Sheet Arrangements
Operating leases (c) 2,269 372 575 406 916
Long-term debt obligations (d) 20,210 - 2,165 2,942 15,103
Interest commitments on long-term debt
(e) 14,756 970 1,904 1,680 10,202
Finance leases (including interest) (f) 28 17 9 2 -
Other long-term contractual obligations
(g) 1,734 - 1,261 440 33
Total $ 50,226 $ 4,485 $ 10,797 $ 6,895 $ 28,049
(a) Our programming and talent commitments include $5.98 billion for sports
programming rights and $3.87 billion relating to the production and licensing of
television and film programming, including 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. Amounts reflect future minimum
payments, excluding interest.
(d) Reflects long-term debt obligations 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,
excluding interest.
(g) Reflects long-term contractual obligations recorded on the Consolidated
Balance Sheet, including program liabilities; participations; 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 $308 million and related interest and penalties, redeemable
noncontrolling interest of $197 million , our guarantee liability of $100 million
relating to the sale of CBS Television City, lease indemnification obligations
of $67 million , residual liabilities of previously disposed businesses, and
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 2021, we expect to make contributions of approximately $15 million to our
qualified pension plans for minimum funding requirements under ERISA and $86
million to our non-qualified pension plans to satisfy the benefit payments due
under these plans. Also in 2021, we expect to contribute approximately $39
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. At
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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)
December 31, 2020 , the outstanding letters of credit and surety bonds
approximated $144 million and were not recorded on the Consolidated Balance
Sheet.
CBS Television City. In connection with the sale of CBS Television City in 2019,
we 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 in
"Other current liabilities" and "Other liabilities" on the Consolidated Balance
Sheet at December 31, 2020 is a liability of $100 million , reflecting the
present value of the remaining estimated amount payable under the guarantee
obligation.
Lease Guarantees. We have certain indemnification obligations with respect to
leases primarily associated with the previously discontinued operations of
Famous Players. These lease commitments amounted to $67 million as of
December 31, 2020 , and are presented within "Other liabilities" on the
Consolidated Balance Sheet. The amount of lease commitments varies over time
depending on expiration or termination of individual underlying leases, or the
related indemnification obligation, and foreign exchange rates, among other
things. We may also have exposure for certain other expenses related to the
leases, such as property taxes and common area maintenance. We believe our
accrual is sufficient to meet any future obligations based on our consideration
of available financial information, the lessees' historical performance in
meeting their lease obligations and the underlying economic factors impacting
the lessees' business models.
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 our 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
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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)
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.
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.
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 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.
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.
Film and Television Production and Programming Costs
Costs incurred to produce television programs and feature films are capitalized
when incurred and amortized over the projected life of each television program
or feature film. The costs incurred in acquiring television series and feature
film programming rights, including advances, are capitalized when the license
period has begun and the program is accepted and available for airing. The costs
of programming rights licensed under multi-year sports
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)
programming agreements are capitalized if the rights payments are made before
the related economic benefit has been received. Acquired programming rights,
including rights for sports programming, are expensed over the shorter of the
license period or the period in which an economic benefit is expected to be
derived.
For internally-produced television programs and feature films that are
predominantly monetized on an individual basis, we use an
individual-film-forecast computation method to amortize capitalized production
costs and to accrue estimated liabilities for participations and residuals over
the applicable title's life cycle based upon the ratio of current period
revenues to estimated remaining total gross revenues to be earned ("Ultimate
Revenues") for each title. 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
timing of amortization of capitalized production costs and expensing of
participation and residual costs.
For television programming, our estimate of Ultimate Revenues includes revenues
to be earned within 10 years from the delivery of the first episode, or, if
still in production, 5 years from the delivery of the most recent episode, if
later. These estimates are based on the past performance of similar television
programs in a market, the performance in the initial markets and future firm
commitments to license 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. Prior to the release of feature films, we
estimate Ultimate Revenues based on the historical performance of similar
content and pre-release market research (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.
For acquired film libraries, our estimate of Ultimate Revenues is for a period within 20 years from the date of acquisition.
For programming that is predominantly monetized as part of a film group, which includes our acquired programming rights and certain internally-produced television programs, capitalized costs are amortized based on an estimate of the timing of our usage of and benefit from such programming. Such estimates require management's judgement and include consideration of factors such as expected revenues to be derived from the programming, the expected number of future airings, and, for acquired programming, the length of the license period. If initial airings are expected to generate higher revenues, an accelerated method of amortization is used. These estimates are periodically reviewed and updated based on information available throughout the contractual term or life of each program.
We test a film group or individual television program or feature film for impairment when events or circumstances indicate that its fair value may be less than its unamortized cost. If the result of the impairment test
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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)
indicates that the carrying value exceeds the estimated fair value, an
impairment charge will then be recorded for the amount of the difference. In
addition, unamortized costs for internally-produced or acquired programming that
have been substantively abandoned are written off.
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, 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.
FCC 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, 2020 , we had 14 television markets with FCC license
book values.
For our annual impairment test, we perform qualitative assessments for each
television market that we estimate has an aggregate fair value of FCC licenses
that significantly exceed their respective carrying values. Additionally, we
consider the duration of time since a quantitative test was performed. For the
2020 annual impairment test, we performed qualitative assessments for 10 of our
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 average market share. We also considered
the macroeconomic impact on discount rates and growth rates. 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 a quantitative impairment test on these
markets was unnecessary.
A quantitative impairment test of FCC 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 long-term
growth rate, which is based on projected long-range inflation and industry
projections.
During the second quarter of 2020, based on an assessment of the relevant
factors that could impact the fair value of FCC licenses, including the effects
of COVID-19, we determined that an interim impairment test was necessary for
three markets in which we hold FCC licenses. The impairment test indicated that
the estimated fair values of FCC licenses in two markets were lower than their
respective carrying values, which resulted from recent declines in industry
projections in the markets where these FCC licenses are held, that were further
accelerated by COVID-19. Accordingly, we recorded an impairment charge of $25
million to write down the carrying values of these FCC licenses to their
aggregate estimated fair value of $216 million . This charge is included within
"Depreciation and amortization" in the Consolidated Statement of Operations
recorded within the TV Entertainment segment. Additionally, the estimated fair
value of the FCC license in the third market exceeded its carrying value of $53
million by 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)
For the 2020 annual test, we performed a quantitative impairment test for the
three markets tested during the second quarter, as well as a fourth U.S.
television market. The impairment tests indicated that the estimated fair values
of FCC licenses in the three markets we tested during the second quarter, which
had an aggregate carrying value of FCC licenses of $269 million at December 31,
2020 , were within 10% of their respective carrying values. The fourth market had
a fair value that exceeded its carrying value by more than 20%.
The estimated fair values of FCC 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 further decline in the local television advertising marketplace
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; 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, 2020 , we had four
reporting units. For the 2020 annual impairment test, we tested two reporting
units for impairment as of August 31 and the remaining 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 2020 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 actual and expected
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.
A quantitative goodwill impairment test, when performed, includes estimating the
fair value of a reporting unit using an income approach based on a discounted
cash flow analysis and/or a market-based approach. 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 shift
by advertisers to competing advertising platforms, changes in consumer behavior
and/or a decrease in audience acceptance of our content 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
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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)
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 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 continually evaluate these estimates based on changes in the relevant facts and circumstances and events that may impact estimates. While we believe that our accrual for matters related to our predecessor operations, including environmental and asbestos, are adequate, there can be no assurance that circumstances will not change in future periods. It is difficult to predict future asbestos liabilities as events and circumstances may impact the estimate of our 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.
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 accumulated 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, 2020 , the unrecognized actuarial losses included in accumulated other comprehensive loss decreased slightly from the prior year-end due primarily to the favorable performance of pension plan assets and the inclusion of a curtailment gain associated with the elimination of benefit accruals for future service as a result of a plan amendment for our remaining active pension plans. These items were mostly offset by a decrease in the discount rate. A 25 basis point change in the discount rate would result in an estimated change to the accumulated benefit obligation of approximately$135 million and would not have a material impact on 2021 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 2021 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 II-45 --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Results of Operations and Financial Condition (Continued)
(Tabular dollars in millions, except per share amounts)
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
by U.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 $308 million at December 31, 2020 is properly recorded.
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 following matters
are not likely, in the aggregate, to result in a material adverse effect on our
business, financial condition and results of operations.
Litigation Relating to the Merger
Beginning on February 20, 2020 , three purported CBS stockholders filed separate
derivative and/or putative class action lawsuits in the Court of Chancery of the
State of Delaware . On March 31, 2020 , the Court consolidated the three lawsuits
and appointed Bucks County Employees' Retirement Fund and International Union of
Operating Engineers of Eastern Pennsylvania and Delaware as co-lead plaintiffs
for the consolidated action. On April 14, 2020 , the lead plaintiffs filed a
Verified Consolidated Class Action and Derivative Complaint (as used in this
paragraph, the "Complaint") against Shari E. Redstone , NAI, Sumner M. Redstone
National Amusements Trust , members of 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 nominal defendant ViacomCBS Inc. The Complaint
alleges breaches of fiduciary duties to CBS stockholders in connection with the
negotiation and approval of the Agreement and Plan of Merger dated as of August
13, 2019 , as amended on October 16, 2019 (the "Merger Agreement"). The Complaint
also alleges waste and unjust enrichment in connection with Mr. Ianniello's
compensation. The Complaint seeks unspecified damages, costs and expenses, as
well as other relief. On June 5, 2020 , the defendants filed motions to dismiss.
On January 27, 2021 , the Court dismissed one disclosure claim, while allowing
all other claims against the defendants to proceed. Discovery on the surviving
claims will now proceed. 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.
Beginning on November 25, 2019 , four purported Viacom stockholders filed
separate putative class action lawsuits in the Court of Chancery of the State of
Delaware . On January 23, 2020 , the Court consolidated the four lawsuits. On
February 6, 2020 , the Court appointed California Public Employees' Retirement
System ("CalPERS") as lead plaintiff for the consolidated action. On February
28, 2020 , CalPERS, together with Park Employees' and Retirement Board Employees'
Annuity and Benefit Fund of Chicago and Louis M. Wilen , filed a First Amended
Verified Class Action Complaint (as used in this paragraph, the "Complaint")
against NAI, NAI
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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)
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 . The Complaint
alleges breaches of fiduciary duties to Viacom stockholders in connection with
the negotiation and approval of the Merger Agreement. The Complaint seeks
unspecified damages, costs and expenses, as well as other relief. On May 22,
2020 , the defendants filed motions to dismiss. On December 29, 2020 , the Court
dismissed the claims against Mr. Bakish , while allowing the claims against the
remaining defendants to proceed. Discovery on the surviving claims will now
proceed. 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.
Investigation-Related Matters
As announced on August 1, 2018 , the CBS Board of Directors 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 of Directors announced the completion of its investigation, certain
findings of the investigation and the CBS Board of Directors' 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.
On August 27, 2018 and on October 1, 2018 , Gene Samit and John Lantz ,
respectively, filed putative class action lawsuits 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 of
Directors. 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
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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)
trust pursuant to the Separation Agreement. On December 17, 2018 , the CBS Board
of Directors 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 of Directors' 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 of Directors 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. Accordingly, no accrual for this matter has been made in our
consolidated financial statements.
Litigation Related to Television Station Owners
On September 9, 2019 , the Company was added as a defendant in a multi-district
putative class action lawsuit filed in the United States District Court for the
Northern District of Illinois . The lawsuit was filed by parties that claim to
have purchased broadcast television spot advertising beginning on or about
January 1, 2014 on television stations owned by one or more of the defendant
television station owners and alleges the sharing of allegedly competitively
sensitive information among such television stations in alleged violation of the
Sherman Antitrust Act. The action, which names the Company among fourteen total
defendants, seeks monetary damages, attorneys' fees, costs and interest as well
as injunctions against the allegedly unlawful conduct. On October 8, 2019 , the
Company and other defendants filed a motion to dismiss the matter, which was
denied by the court on November 6, 2020 . 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.
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, 2020 , we had pending approximately 30,710 asbestos claims, as
compared with approximately 30,950 as of December 31, 2019 and 31,570 as of
December 31, 2018 . During 2020, we received approximately 2,910 new claims and
closed or moved to an inactive docket approximately 3,150 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 factors. Our total costs for the years 2020 and 2019 for
settlement and defense of asbestos claims after insurance recoveries and net of
tax were approximately $35 million and $58 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.
II-48
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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)
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 sufficient 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 theU.S. , resulting in exposure to movements in foreign exchange rates when translating from the foreign local currency to theU.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. AtDecember 31, 2020 and 2019, the notional amount of all foreign currency contracts was$1.27 billion and$1.44 billion , respectively. For 2020,$740 million related to future production costs and$529 million related to our foreign currency balances and other expected foreign currency cash flows. 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. II-49 --------------------------------------------------------------------------------
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 2020 would increase or decrease
interest expense by approximately $4 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, 2020 or 2019 but in the future we may use
derivatives to manage our exposure to interest rates.
At December 31, 2020 , the carrying value of our outstanding notes and debentures
was $19.61 billion and the estimated fair value was $24.5 billion . A 1% increase
or decrease in interest rates would decrease or increase the fair value of our
notes and debentures by approximately $1.61 billion and $3.28 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, 2020 or 2019, due to the wide variety of customers, markets and
geographic areas to which our products and services are sold.
Related Parties
See Note 8 to the consolidated financial statements.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet
Adopted
See Note 1 to the consolidated financial statements.
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