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 inViacomCBS Inc.'s Annual Report filed on Form 10-K for the fiscal year endedDecember 31, 2019 . References in this document to "ViacomCBS ," the "Company," "we," "us" and "our" refer toViacomCBS Inc. 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 the three and nine months endedSeptember 30, 2020 compared with the three and nine months endedSeptember 30, 2019 . •Segment Results of Operations-Analysis of our results on a reportable segment basis for the three and nine months endedSeptember 30, 2020 compared with the three and nine months endedSeptember 30, 2019 . •Liquidity and Capital Resources-Discussion of our cash flows for the nine months endedSeptember 30, 2020 compared with the nine months endedSeptember 30, 2019 and of our outstanding debt, commitments and contingencies existing as ofSeptember 30, 2020 . •Legal Matters-Discussion of legal matters to which we are involved.
Overview
ViacomCBS is a leading global media and entertainment company that creates content and experiences for audiences worldwide. Merger with Viacom Inc. OnDecember 4, 2019 , Viacom Inc. ("Viacom") merged with and intoCBS Corporation ("CBS"), withCBS 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 ofCBS and Viacom (and remains the controlling stockholder ofViacomCBS ). Upon the closing of the Merger, the net assets of Viacom were combined with those ofCBS at their historical carrying amounts and the companies have been presented on a combined basis for all periods presented. Impact of COVID-19 The coronavirus disease ("COVID-19") pandemic has negatively impacted, and is expected to continue to impact, the macroeconomic environment inthe United States and globally, as well as our business, financial condition and results of operations. As a result of COVID-19, we have experienced a material negative impact on our advertising revenues because of weakness in the advertising market as advertisers have sought to reduce their own costs in response to the pandemic's impact on their businesses, and because of the cancellation of sporting events for which we have broadcast rights, such as theNCAA Division I Men's Basketball Championship (the "NCAA Tournament"), and the delay of the 2020-21 television broadcast season as a result of a temporary shutdown of production of our programming. We are not able to predict whether future sporting events will be cancelled or postponed, or whether advertising revenues from these broadcasts, or advertising budgets and the advertising market generally, will return to or be comparable to historical levels. While we expect the negative impact to continue for the remainder of the year, the rate of decline was lower in the third quarter and we expect further improvement in the fourth quarter. -34- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) (Tabular dollars in millions, except per share amounts) COVID-19 also led to a temporary shutdown of production of our television and film programming, which resulted in the abandonment of certain program materials in the second quarter that were not completed, delays in deliveries of programming to third parties, and fewer original programs and live events airing on our broadcast and cable networks. Many productions resumed in the third quarter; however, we are not able to predict whether we will encounter future production delays or shutdowns. In addition, the cost of production will be impacted by incremental costs required to adhere to new health and safety protocols as a result of COVID-19. We may also experience lower demand for the licensing of our programming in the near term as licensees implement financial austerity measures and aim to reduce costs. As a result, content licensing revenues have been negatively impacted and may continue to be negatively impacted in the near to medium term. In addition, our theatrical revenues have been negatively impacted by the closure or reduction in capacity of movie theaters that show our films, either voluntarily or as a result of government orders or restrictions on public gatherings in response to COVID-19, which has impacted our theatrical release strategy in 2020. We have rescheduled certain theatrical releases to dates in 2021 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 to movie theaters (even upon their reopening) at the same levels they previously did, or whether revenues from theatrical releases will be comparable to historical levels. COVID-19 could also have a negative impact on our affiliate revenues, as consumers may seek to reduce discretionary spending by cutting back or foregoing subscriptions to cable television or other multichannel video programming distributors ("MVPDs") and virtual MVPDs. The continuing impact of COVID-19 could be material to our business, financial condition and results of operations. The magnitude of the impact will depend on numerous evolving factors that we may not be able to accurately predict, 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. 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, particularly over the near to medium term. 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 for Pluto TV. We are also utilizing our deep library of content to help mitigate the impact of COVID-19 and working proactively to offset a portion of the revenue losses through cost-savings initiatives. In addition, results in the fourth quarter are expected to benefit from political advertising revenues associated with theU.S. Presidential election. 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. -35- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) (Tabular dollars in millions, except per share amounts)
Operational Highlights - Three Months Ended
Increase/(Decrease)
Three Months Ended September 30, 2020 2019 $ %
GAAP:
Revenues $ 6,116 $ 6,698 $ (582) (9) %
Operating income $ 959 $ 1,036 $ (77) (7) %
Net earnings from continuing operations
attributable to ViacomCBS $ 612 $ 626 $ (14) (2) %
Diluted EPS from continuing operations
attributable to ViacomCBS $ .99 $ 1.01 $ (.02) (2) %
Net cash flow provided by operating activities
$ 914 183 % Non-GAAP: (a) Adjusted OIBDA$ 1,109 $ 1,266 $ (157) (12) % Adjusted net earnings from continuing operations attributable to ViacomCBS$ 561 $ 680 $ (119) (18) % Adjusted diluted EPS from continuing operations attributable to ViacomCBS$ .91 $ 1.10 $ (.19) (17) % Free cash flow$ 1,333 $ 391 $ 942 241 % (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 inthe United States ("GAAP"). For the three months endedSeptember 30, 2020 , revenues decreased 9% to$6.12 billion , 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, and production shutdowns. The decline in revenues also reflects the benefit to the prior-year period from several significant licensing agreements for library programming and the licensing of the final season of several series. These decreases were partially offset by growth from our streaming services, including CBS All Access, Pluto TV and theShowtime streaming subscription offering ("Showtime OTT"), as well as BET+, which launched inSeptember 2019 . Revenues from our domestic streaming and digital video business grew 56% to$636 million for the three months endedSeptember 30, 2020 . Operating income for the three months endedSeptember 30, 2020 decreased 7% from the same prior-year period. This comparison was impacted by items identified as affecting comparability, including restructuring charges and costs associated with other corporate matters. See "Reconciliation of Non-GAAP Measures." The 12% decrease in adjusted operating income before depreciation and amortization ("Adjusted OIBDA") is the result of the revenue decline, partially offset by lower costs, which were driven by decreases in production and distribution costs, mainly resulting from production shutdowns and fewer theatrical releases; lower advertising and promotion costs; and the benefit from cost savings, including from restructuring activities. These cost decreases were partially offset by the timing of incentive compensation expenses. For the three months endedSeptember 30, 2020 , net earnings from continuing operations attributable toViacomCBS and diluted earnings per share ("EPS") from continuing operations each decreased 2% from the same prior-year period. These comparisons were impacted by items affecting comparability, including the aforementioned items, as well as a loss on extinguishment of debt in 2020 and discrete tax items in each period. Adjusted net earnings from continuing operations attributable toViacomCBS and adjusted diluted EPS decreased 18% and 17%, respectively, primarily reflecting lower Adjusted OIBDA. Adjusted OIBDA, adjusted net earnings -36- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) (Tabular dollars in millions, except per share amounts) from continuing operations attributable toViacomCBS 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. Operational Highlights - Nine Months EndedSeptember 30, 2020 versus Nine Months EndedSeptember 30, 2019 Consolidated results of operations Increase/(Decrease) Nine Months Ended September 30, 2020 2019 $ % GAAP: Revenues$ 19,060 $ 20,941 $ (1,881) (9) % Operating income$ 3,162 $ 4,286 $ (1,124) (26) % Net earnings from continuing operations attributable to ViacomCBS$ 1,598 $ 3,543 $ (1,945) (55) % Diluted EPS from continuing operations attributable to ViacomCBS$ 2.59 $ 5.74 $ (3.15) (55) %
Net cash flow provided by operating activities
$ 876 52 % Non-GAAP: (a) Adjusted OIBDA$ 4,061 $ 4,367 $ (306) (7) % Adjusted net earnings from continuing operations attributable to ViacomCBS$ 2,029 $ 2,490 $ (461) (19) % Adjusted diluted EPS from continuing operations attributable to ViacomCBS$ 3.29 $ 4.04 $ (.75) (19) % Free cash flow$ 2,352 $ 1,438 $ 914 64 % (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 GAAP. For the nine months endedSeptember 30, 2020 , revenues decreased 9% to$19.06 billion , driven by the adverse effects of COVID-19 on our business as well as the comparison againstCBS' broadcasts of Super Bowl LIII and theNCAA Tournament in the first half of 2019. TheSuper Bowl is broadcast on theCBS Television Network on a rotating basis with other networks through the 2022 season under the current contract with theNational Football League (the "NFL") and the 2020NCAA Tournament, which was scheduled to be broadcast onCBS in the first quarter of 2020, was cancelled as a result of concerns about COVID-19. These decreases were partially offset by growth from our streaming services, including CBS All Access, Pluto TV, Showtime OTT, and BET+. Revenues from our domestic streaming and digital video business grew 44% to$1.60 billion for the nine months endedSeptember 30, 2020 . Operating income for the nine months endedSeptember 30, 2020 decreased 26% from the same prior-year period. This comparison 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 of assets in the first quarter of 2019. See "Reconciliation of Non-GAAP Measures." Adjusted OIBDA decreased 7%, primarily reflecting the decline in revenues, partially offset by lower operating expenses, as a result of production shutdowns, the absence in the 2020 period of certain major sporting events, fewer theatrical film releases, lower advertising and promotion costs reflecting the broadcast of fewer original programs, and the benefit from cost savings, including from restructuring activities. -37- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition (Continued) (Tabular dollars in millions, except per share amounts) For the nine months endedSeptember 30, 2020 , net earnings from continuing operations attributable toViacomCBS and diluted EPS from continuing operations each decreased 55% from the same prior-year period. These comparisons were impacted by items identified as affecting comparability, including the aforementioned items, a loss on extinguishment of debt in 2020, as well as discrete tax items. Adjusted net earnings from continuing operations attributable toViacomCBS and adjusted diluted EPS each decreased 19%, 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 toViacomCBS 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 flow of$2.57 billion for the nine months endedSeptember 30, 2020 compared with$1.69 billion for the nine months endedSeptember 30, 2019 . Free cash flow for the nine months endedSeptember 30, 2020 was$2.35 billion compared with$1.44 billion for the same prior-year period. 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 increases 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 for the nine months endedSeptember 30, 2020 and 2019 included payments for restructuring, merger-related costs and costs to achieve synergies of$483 million and$168 million , respectively. Also included in free cash flow for 2020 are capital expenditures of$32 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 three and nine months endedSeptember 30, 2020 and 2019 included certain items identified as affecting comparability. Adjusted OIBDA, adjusted earnings from continuing operations before income taxes, adjusted provision for income taxes, adjusted net earnings from continuing operations attributable toViacomCBS , and adjusted diluted EPS from continuing operations (together, the "adjusted measures") exclude the impact of these items and are measures of performance not calculated in accordance with GAAP. We use these measures to, among other things, evaluate our operating performance. These measures are among the primary measures used by management for planning and forecasting of future periods, and they are important indicators of our operational strength and business performance. In addition, we use Adjusted OIBDA to, among other things, value prospective acquisitions. We believe these measures are relevant and useful for investors because they allow investors to view performance in a manner similar to the method used by our management; provide a clearer perspective on our underlying performance; and make it easier for investors, analysts and peers to compare our operating performance to other companies in our industry and to compare our year-over-year results. Because the adjusted measures are measures of performance not calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, operating income, earnings from continuing operations before income taxes, (provision) benefit for income taxes, net earnings from continuing operations attributable toViacomCBS or diluted EPS from continuing operations, as applicable, as indicators of operating performance. These measures, as we calculate them, may not be comparable to similarly titled measures employed by other companies. -38- -------------------------------------------------------------------------------- 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Operating income (GAAP) $ 959 $ 1,036 $ 3,162 $ 4,286
Depreciation and amortization (a) 98 108 335 323
Restructuring and other corporate matters (b) 52 122 443 307
Programming charges (b) - - 121 -
Gain on sale of assets (b) - - - (549)
Adjusted OIBDA (Non-GAAP) $ 1,109 $ 1,266 $ 4,061 $ 4,367
(a) The nine months ended September 30, 2020 includes an impairment charge for
FCC licenses of $25 million and 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.
Three Months Ended September 30, 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) $ 671 $ (38) $ 612 $ .99
Items affecting comparability:
Restructuring and other corporate
matters (a) 52 (13) 39 .06
Loss on extinguishment of debt 23 (5) 18 .03
Discrete tax items (b) - (117) (117) (.19)
Impairment of an equity-method
investment - - 9 .02
Adjusted (Non-GAAP) $ 746 $ (173) $ 561 $ .91
(a) Primarily reflects severance, exit costs and other costs related to the
Merger.
(b) Primarily reflects a benefit from the remeasurement of our UK net deferred
income tax asset as a result of an increase in the UK corporate income tax rate
from 17% to 19% enacted during the third quarter.
Three Months Ended September 30, 2019
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) $ 782 $ (126) $ 626 $ 1.01
Items affecting comparability:
Restructuring and other corporate
matters (a) 122 (1) 121 .20
Gains from investments (12) 3 (9) (.02)
Discrete tax items (b) - (58) (58) (.09)
Adjusted (Non-GAAP) $ 892 $ (182) $ 680 $ 1.10
(a) Primarily reflects costs incurred in connection with the Merger and
severance costs.
(b) Primarily reflects tax benefits 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 federal tax legislation enacted in
December 2017 (the "Tax Reform Act").
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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)
Nine Months Ended September 30, 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) $ 2,265 $ (377) $ 1,598 $ 2.59
Items affecting comparability:
Restructuring and other corporate
matters (a) 443 (94) 349 .57
Impairment charge (b) 25 (6) 19 .03
Depreciation of abandoned technology
(c) 12 (3) 9 .01
Programming charges (d) 121 (29) 92 .15
Gains from investments (e) (32) 8 (24) (.04)
Loss on extinguishment of debt 126 (29) 97 .16
Discrete tax items (f) - (120) (120) (.19)
Impairment of an equity-method
investment - - 9 .01
Adjusted (Non-GAAP) $ 2,960 $ (650) $ 2,029 $ 3.29
(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 of FCC 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 an increase to the carrying value of an equity security based on
the market price of a similar security.
(f) Primarily reflects a benefit from the remeasurement of our UK net deferred
income tax asset as a result of an increase in the UK corporate income tax rate
from 17% to 19% enacted during the third quarter.
Nine Months Ended September 30, 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) $ 3,614 $ 9 $ 3,543 $ 5.74
Items affecting comparability:
Restructuring and other corporate
matters (a) 307 (46) 261 .43
Gain on sale of assets (b) (549) 163 (386) (.63)
Gains from investments (c) (89) 19 (70) (.11)
Discrete tax items (d) - (858) (858) (1.39)
Adjusted (Non-GAAP) $ 3,283 $ (713) $ 2,490 $ 4.04
(a) Reflects severance, exit costs, costs associated with the settlement of a
commercial dispute, and other legal proceedings involving the Company.
(b) Reflects a gain on the sale of the CBS Television City property and sound
stage operation ("CBS Television City").
(c) Reflects a gain on marketable securities of $78 million and a gain of $11
million on the sale of an international joint venture.
(d) 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 net tax benefit of $58 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 $32 million principally related to the
bankruptcy of an investee.
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