UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ____________ to ____________
Commission File Number 001-09553
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
(Address of principal executive offices) | (Zip Code) | |||
(212 ) 975-4321
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding at November 8, 2019:
Class A Common Stock, par value $.001 per share— 22,802,951
Class B Common Stock, par value $.001 per share— 351,924,645
CBS CORPORATION
INDEX TO FORM 10-Q
Page | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. | ||
Item 1A. | ||
- 2-
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements. |
CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues | $ | $ | $ | $ | |||||||||||
Costs and expenses: | |||||||||||||||
Operating | |||||||||||||||
Selling, general and administrative | |||||||||||||||
Depreciation and amortization | |||||||||||||||
Restructuring charges (Note 3) | |||||||||||||||
Merger-related costs and other corporate matters (Note 3) | |||||||||||||||
Gain on sale of assets (Note 1) | ( | ) | |||||||||||||
Total costs and expenses | |||||||||||||||
Operating income | |||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Interest income | |||||||||||||||
Other items, net | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Earnings before income taxes and equity in loss of investee companies | |||||||||||||||
(Provision) benefit for income taxes | ( | ) | ( | ) | ( | ) | |||||||||
Equity in loss of investee companies, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net earnings | $ | $ | $ | $ | |||||||||||
Basic net earnings per common share | $ | $ | $ | $ | |||||||||||
Diluted net earnings per common share | $ | $ | $ | $ | |||||||||||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
See notes to consolidated financial statements.
-3-
CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in millions)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net earnings | $ | $ | $ | $ | |||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Cumulative translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Amortization of net actuarial loss | |||||||||||||||
Total other comprehensive income, net of tax | |||||||||||||||
Total comprehensive income | $ | $ | $ | $ | |||||||||||
See notes to consolidated financial statements.
-4-
CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
At | At | ||||||||||
September 30, 2019 | December 31, 2018 | ||||||||||
ASSETS | |||||||||||
Current Assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowances of $46 (2019) and $41 (2018) | |||||||||||
Programming and other inventory (Note 4) | |||||||||||
Prepaid income taxes | |||||||||||
Prepaid expenses | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
Property and equipment | |||||||||||
Less accumulated depreciation and amortization | |||||||||||
Net property and equipment | |||||||||||
Programming and other inventory (Note 4) | |||||||||||
Goodwill | |||||||||||
Intangible assets | |||||||||||
Operating lease assets (Note 12) | |||||||||||
Deferred income tax assets, net | |||||||||||
Other assets | |||||||||||
Assets held for sale | |||||||||||
Total Assets | $ | $ | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current Liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued compensation | |||||||||||
Participants’ share and royalties payable | |||||||||||
Accrued programming and production costs | |||||||||||
Income taxes payable | |||||||||||
Commercial paper (Note 6) | |||||||||||
Accrued expenses and other current liabilities | |||||||||||
Total current liabilities | |||||||||||
Long-term debt (Note 6) | |||||||||||
Pension and postretirement benefit obligations | |||||||||||
Deferred income tax liabilities, net | |||||||||||
Noncurrent operating lease liabilities (Note 12) | |||||||||||
Other liabilities | |||||||||||
Commitments and contingencies (Note 13) | |||||||||||
Stockholders’ Equity: | |||||||||||
Class A Common Stock, par value $.001 per share; 375 shares authorized; 23 (2019) and 35 (2018) shares issued | |||||||||||
Class B Common Stock, par value $.001 per share; 5,000 shares authorized; 852 (2019) and 838 (2018) shares issued | |||||||||||
Additional paid-in capital | |||||||||||
Accumulated deficit | ( | ) | ( | ) | |||||||
Accumulated other comprehensive loss (Note 8) | ( | ) | ( | ) | |||||||
Less treasury stock, at cost; 500 (2019 and 2018) Class B shares | |||||||||||
Total Stockholders’ Equity | |||||||||||
Total Liabilities and Stockholders’ Equity | $ | $ | |||||||||
See notes to consolidated financial statements.
-5-
CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Nine Months Ended | |||||||
September 30, | |||||||
2019 | 2018 | ||||||
Operating Activities: | |||||||
Net earnings | $ | $ | |||||
Adjustments to reconcile net earnings to net cash flow provided by operating activities from continuing operations: | |||||||
Depreciation and amortization | |||||||
Deferred tax benefit | ( | ) | ( | ) | |||
Stock-based compensation | |||||||
Equity in loss of investee companies, net of tax and distributions | |||||||
Gain on sale of assets | ( | ) | |||||
Change in assets and liabilities, net of investing and financing activities | ( | ) | ( | ) | |||
Net cash flow provided by operating activities from continuing operations | |||||||
Net cash flow provided by operating activities from discontinued operations | |||||||
Net cash flow provided by operating activities | |||||||
Investing Activities: | |||||||
Investments in and advances to investee companies | ( | ) | ( | ) | |||
Capital expenditures | ( | ) | ( | ) | |||
Acquisitions, net of cash acquired | ( | ) | ( | ) | |||
Proceeds from dispositions | |||||||
Proceeds from sale of investments | |||||||
Other investing activities | |||||||
Net cash flow provided by (used for) investing activities from continuing operations | ( | ) | |||||
Net cash flow used for investing activities from discontinued operations | ( | ) | |||||
Net cash flow provided by (used for) investing activities | ( | ) | |||||
Financing Activities: | |||||||
Repayments of short-term debt borrowings, net | ( | ) | ( | ) | |||
Proceeds from issuance of senior notes | |||||||
Repayment of senior notes | ( | ) | |||||
Payment of finance lease obligations | ( | ) | ( | ) | |||
Payment of contingent consideration | ( | ) | ( | ) | |||
Dividends | ( | ) | ( | ) | |||
Purchase of Company common stock | ( | ) | ( | ) | |||
Payment of payroll taxes in lieu of issuing shares for stock-based compensation | ( | ) | ( | ) | |||
Acquisition of noncontrolling interest | ( | ) | |||||
Proceeds from exercise of stock options | |||||||
Other financing activities | ( | ) | |||||
Net cash flow used for financing activities | ( | ) | ( | ) | |||
Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | |||
Cash, cash equivalents and restricted cash at beginning of period (includes $120 (2019) and $0 (2018) of restricted cash) | |||||||
Cash, cash equivalents and restricted cash at end of period (includes $122 (2019) and $0 (2018) of restricted cash) | $ | $ | |||||
Supplemental disclosure of cash flow information | |||||||
Cash paid for interest | $ | $ | |||||
Cash paid (refunded) for income taxes: | |||||||
Continuing operations | $ | $ | ( | ) | |||
Discontinued operations | $ | $ | ( | ) | |||
See notes to consolidated financial statements.
-6-
CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; in millions)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Class A Common Stock: | |||||||||||||||
Balance, beginning and end of period | $ | $ | $ | $ | |||||||||||
Class B Common Stock: | |||||||||||||||
Balance, beginning and end of period | |||||||||||||||
Additional Paid-In Capital: | |||||||||||||||
Balance, beginning of period | |||||||||||||||
Stock-based compensation | |||||||||||||||
Exercise of stock options | |||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | |||||||||||
Dividends | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Acquisition of noncontrolling interest | ( | ) | |||||||||||||
Balance, end of period | |||||||||||||||
Accumulated Deficit: | |||||||||||||||
Balance, beginning of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net earnings | |||||||||||||||
Adoption of new revenue recognition standard | ( | ) | |||||||||||||
Reclassification of income tax effects of the Tax Reform Act (Note 1) | |||||||||||||||
Balance, end of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Accumulated Other Comprehensive Loss: | |||||||||||||||
Balance, beginning of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Other comprehensive income | |||||||||||||||
Reclassification of income tax effects of the Tax Reform Act (Note 1) | ( | ) | |||||||||||||
Balance, end of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Treasury Stock, at cost: | |||||||||||||||
Balance, beginning of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Class B Common Stock purchased | ( | ) | ( | ) | |||||||||||
Shares paid for tax withholding for stock-based compensation | ( | ) | ( | ) | |||||||||||
Retirement of treasury stock | |||||||||||||||
Balance, end of period | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total Stockholders’ Equity | $ | $ | $ | $ | |||||||||||
See notes to consolidated financial statements.
-7-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except per share amounts)
1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business-CBS Corporation (together with its consolidated subsidiaries unless the context otherwise requires, the “Company” or “CBS Corp.”) is comprised of the following segments: Entertainment (CBS Television, comprised of the CBS Television Network, CBS Television Studios and CBS Global Distribution Group; Network 10; CBS Interactive; CBS Sports Network and CBS Films), Cable Networks (Showtime Networks, Pop and Smithsonian Networks), Publishing (Simon & Schuster) and Local Media (CBS Television Stations and CBS Local Digital Media).
Merger Agreement with Viacom Inc.-On August 13, 2019, CBS Corp. and Viacom Inc. (“Viacom”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), as amended as of October 16, 2019, pursuant to which CBS Corp. and Viacom agreed to combine their respective businesses. The Merger Agreement provides that Viacom will merge with and into CBS Corp. (the “Merger”), with CBS Corp. continuing as the surviving company, upon the terms and subject to the conditions therein. At the effective time of the Merger (the “Effective Time”), the name of the combined company will be changed to “ViacomCBS Inc.” (“ViacomCBS”).
At the Effective Time, (1) each share of Viacom Class A Common Stock issued and outstanding immediately prior to the Effective Time, other than shares held directly by Viacom as treasury shares or held by CBS Corp., will be converted automatically into 0.59625 shares of ViacomCBS Class A Common Stock, and (2) each share of Viacom Class B Common Stock issued and outstanding immediately prior to the Effective Time, other than shares held directly by Viacom as treasury shares or held by CBS Corp., will be converted automatically into 0.59625 shares of ViacomCBS Class B Common Stock (together with ViacomCBS Class A Common Stock, the “ViacomCBS Common Stock”). At the Effective Time, each share of CBS Corp. Class A Common Stock and each share of CBS Corp. Class B Common Stock (together with CBS Corp. Class A Common Stock, the “CBS Corp. Common Stock”) issued and outstanding immediately prior to the Effective Time, will remain an issued and outstanding share of ViacomCBS Class A Common Stock and ViacomCBS Class B Common Stock, respectively.
On October 16, 2019, CBS Corp. and Viacom entered into an amendment to the Merger Agreement pursuant to which CBS Corp. and Viacom agreed to delist the CBS Corp. Common Stock from the New York Stock Exchange and to list the ViacomCBS Common Stock on the NASDAQ Global Select Market following the Effective Time.
The Merger Agreement provides that the executive officers of ViacomCBS will include, among others, Mr. Robert M. Bakish, the current President and Chief Executive Officer of Viacom, who will serve as President and Chief Executive Officer of ViacomCBS; Ms. Christina Spade, the current Executive Vice President, Chief Financial Officer of CBS Corp., who will serve as Executive Vice President, Chief Financial Officer of ViacomCBS; and Ms. Christa D’Alimonte, the current Executive Vice President, General Counsel and Secretary of Viacom, who will serve as Executive Vice President, General Counsel and Secretary of ViacomCBS. Mr. Joseph R. Ianniello, the current President and Acting Chief Executive Officer of CBS Corp., will serve as Chairman and Chief Executive Officer of the CBS business of ViacomCBS. In addition, under the Merger Agreement, the Company and Viacom have agreed to take all actions necessary to cause the ViacomCBS board of directors to consist of 13 members, comprised of six CBS Corp. directors, four Viacom directors, two directors designated by National Amusements, Inc. (“NAI”), and the ViacomCBS Chief Executive Officer.
On October 25, 2019, the Company’s Registration Statement on Form S-4, which was filed with the Securities and Exchange Commission (“SEC”) in connection with the pending Merger, was declared effective by the SEC. On October 28, 2019, NAI and a wholly owned subsidiary of NAI (together with NAI, the “NAI Parties”), the controlling stockholder of each of CBS Corp. and Viacom, delivered written consents that constitute receipt of stockholder approval for each of CBS Corp. and Viacom with respect to the adoption of the Merger Agreement and
-8-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
related approvals. The Company expects the Merger to close by early December 2019, subject to other customary closing conditions.
The Merger will be accounted for as a transaction between entities under common control as NAI is the controlling stockholder of each of CBS Corp. and Viacom. Upon the closing of the Merger, the net assets of Viacom will be combined with those of the Company at their historical carrying amounts and the companies will be presented on a combined basis for all historical periods presented.
Basis of Presentation-The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC. These financial statements should be read in conjunction with the more detailed financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows of the Company for the periods presented. Certain previously reported amounts have been reclassified to conform to the current presentation.
Use of Estimates-The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Noncurrent Receivables-Noncurrent receivables of $1.83 billion at September 30, 2019 and $1.55 billion at December 31, 2018 are included in “Other assets” on the Company’s Consolidated Balance Sheets and primarily relate to revenues recognized under long-term television licensing arrangements. Television license fee revenues are recognized at the beginning of the license period in which programs are made available to the licensee for exhibition, while the related cash is collected over the term of the license period.
Deferred Revenues-Deferred revenues of $416 million at September 30, 2019 and $274 million at December 31, 2018 are primarily included within “Accrued expenses and other current liabilities” on the Company’s Consolidated Balance Sheets. These amounts consist mainly of cash received related to advertising arrangements and the licensing of television programming for which the revenues have not yet been earned. The change in deferred revenues for the nine months ended September 30, 2019 primarily reflects cash payments received during the period for which the performance obligation was not satisfied prior to the end of the period offset by $168 million of revenues recognized that were included in deferred revenues at December 31, 2018.
Unrecognized Revenues Under Contract-As of September 30, 2019, unrecognized revenue attributable to unsatisfied performance obligations under the Company’s long-term contracts was $4.14 billion, of which $572 million is expected to be recognized for the remainder of 2019, $1.64 billion for 2020, $1.11 billion for 2021, and $820 million thereafter. These amounts only include contracts subject to a guaranteed fixed amount or the guaranteed minimum under variable contracts. Such amounts change on a regular basis as the Company renews existing agreements or enters into new agreements. Unrecognized revenues under contract disclosed above do not include (i) contracts with an original expected term of one year or less, mainly consisting of the Company’s
-9-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
advertising contracts (ii) contracts for which variable consideration is determined based on the customer’s subsequent sale or usage, mainly consisting of affiliate and subscription fee agreements and (iii) long-term licensing agreements for multiple programs for which the Company’s right to invoice corresponds with the value of the programs provided to the customer.
Leases-The Company has operating leases primarily for office space, equipment, satellite transponders and studio facilities and finance leases for satellite transponders and office equipment. The Company determines that a contract contains a lease if it obtains substantially all of the economic benefits of, and the right to direct the use of, an asset identified in the contract. For leases with terms greater than 12 months, the Company records a right-of-use asset and a lease liability representing the present value of future lease payments. The discount rate used to measure the lease asset and liability is determined at the beginning of the lease term using the rate implicit in the lease, if readily determinable, or the Company’s collateralized incremental borrowing rate. For those contracts that include fixed rental payments for both the use of the asset (“lease costs”) as well as for other occupancy or service costs relating to the asset (“non-lease costs”), the Company includes both the lease costs and non-lease costs in the measurement of the lease asset and liability. The Company also owns buildings and production facilities where it leases space to lessees.
The Company’s leases have remaining terms ranging from one to 16 years and often contain renewal options to extend the lease for periods of generally up to five years. For leases that contain renewal options, the Company includes the renewal period in the lease term if it is reasonably certain that the option will be exercised. Lease expenses and income are recognized on a straight-line basis over the lease term, with the exception of variable lease costs, which are expensed as incurred, and leases of assets used in the production of programming, which are capitalized in programming assets and amortized over the projected useful life of the related programming.
Restricted Cash-Restricted cash of $122 million at September 30, 2019 and $120 million at December 31, 2018 is included within “Other assets” on the Company’s Consolidated Balance Sheets and consists of amounts held in a grantor trust related to the separation and settlement agreement between the Company and the former Chairman of the Board, President and Chief Executive Officer of the Company (see Note 13).
The table below presents a reconciliation of weighted average shares used in the calculation of basic and diluted EPS.
Three Months Ended | Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | |||||||
Weighted average shares for basic EPS | |||||||||||
Dilutive effect of shares issuable under stock-based compensation plans | |||||||||||
Weighted average shares for diluted EPS | |||||||||||
-10-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
Other Liabilities-Other liabilities consist primarily of the noncurrent portion of residual liabilities of previously disposed businesses, participants’ share and royalties payable, program rights obligations, long-term tax liabilities, deferred compensation and other employee benefit accruals.
Additional Paid-In Capital-For the nine months ended September 30, 2019 and 2018, the Company recorded dividends of $205 million and $206 million, respectively, as a reduction to additional paid-in capital as the Company had an accumulated deficit balance.
Gain on Sale of Assets-During the first quarter of 2019, the Company completed the sale of its CBS Television City property and sound stage operation (“CBS Television City”) for $750 million. The Company has guaranteed a specified level of cash flows to be generated by the business during the first five years following the completion of the sale. Included on the Company’s Consolidated Balance Sheet at September 30, 2019 is a liability of $123 million, reflecting the present value of the estimated amount payable under the guarantee obligation. This transaction resulted in a gain of $549 million ($386 million, net of tax), which includes a reduction for the guarantee obligation. CBS Television City has been classified as held for sale on the Company’s Consolidated Balance Sheet at December 31, 2018.
Acquisition-In March 2019, the Company acquired the remaining 50 % interest in Pop, a general entertainment cable network, for $50 million, bringing the Company’s ownership to 100 %. The assets acquired primarily consist of goodwill and other identifiable intangible assets. The results of Pop are included in the Cable Networks segment from the date of acquisition.
Recently Adopted Accounting Pronouncements
Leases
During the first quarter of 2019, the Company adopted Financial Accounting Standards Board (“FASB”) guidance on the accounting for leases, which supersedes previous lease guidance. Under this guidance, for all leases with terms in excess of one year, the Company recognizes on its balance sheet a lease liability and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance retains a distinction between finance leases and operating leases and the classification criteria is substantially similar to previous guidance. Additionally, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed. The Company applied the modified retrospective method of adoption and therefore, results for reporting periods beginning after January 1, 2019 are presented under the new guidance while prior periods have not been adjusted. As a result of this guidance, the Company’s Consolidated Balance Sheet at September 30, 2019 included right-of-use assets of $1.00 billion and lease liabilities of $1.08 billion for its operating leases. This guidance did not have an impact on the Company’s Consolidated Statement of Operations. See Note 12 for additional information.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
During the first quarter of 2019, the Company adopted FASB guidance that permits an entity to reclassify certain income tax effects of federal tax legislation enacted in December 2017 (the “Tax Reform Act”) on items within accumulated other comprehensive income (“AOCI”) to retained earnings. As a result of the Tax Reform Act, in 2017, the Company remeasured its deferred income tax assets and liabilities to reflect the reduction in the federal income tax rate from 35% to 21%. The remeasurement was recognized in net earnings and as a result, the income tax effects of the Tax Reform Act on items within AOCI remained at historical rates (“stranded tax effects”). During the first quarter of 2019, as a result of the adoption of this guidance, the Company elected to reclassify the stranded tax effects of $176 million relating to its pension and postretirement obligations from AOCI to
-11-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
accumulated deficit. This guidance also requires entities to disclose their accounting policy for releasing stranded tax effects, unrelated to the Tax Reform Act, from AOCI. For pension and postretirement benefit plans, the Company releases stranded tax effects from AOCI when the pension and postretirement plans are terminated.
Targeted Improvements to Accounting for Hedging Activities
During the first quarter of 2019, the Company adopted FASB amended guidance for hedge accounting, which expands the eligibility of hedging strategies that qualify for hedge accounting, modifies the recognition and presentation of hedges in the financial statements, and changes how companies assess hedge effectiveness. In addition, this guidance amends and expands disclosure requirements. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
Improvements to Accounting for Costs of Films and License Agreements for Program Materials
In March 2019, the FASB issued guidance on the accounting for costs of films and episodic television series, which aligns the accounting for capitalizing production costs of episodic television series with the guidance for films. As a result, the capitalization of costs incurred to produce episodic television series will no longer be limited to the amount of revenue contracted in the initial market until persuasive evidence of a secondary market exists. In addition, this guidance requires the Company to test for impairment of television series on a title-by-title basis or together with other series as part of a group, based on the predominant monetization strategy of the series. This guidance also removes the requirement to classify all capitalized costs for produced television series as noncurrent on the balance sheet and adds new disclosure requirements relating to costs for acquired and produced television series. The Company is currently evaluating the impact of this guidance, which is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.
Collaborative Arrangements: Clarifying the Interaction with the New Revenue Standard
In November 2018, the FASB issued guidance to clarify that certain transactions between parties to collaborative arrangements should be accounted for in accordance with FASB revenue guidance when the counterparty is a customer. This guidance also prohibits the presentation of collaborative arrangements as revenues from contracts with customers if the counterparty is not a customer. This guidance, which is required to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, is not expected to have an impact on the Company’s consolidated financial statements.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
In August 2018, the FASB issued guidance on the accounting for implementation costs of a cloud computing arrangement that is considered to be a service contract. This guidance requires companies to follow the guidance for capitalizing costs associated with internal-use software to determine which costs to capitalize in a cloud computing arrangement that is a service contract. The guidance also specifies the financial statement presentation for capitalized implementation costs and the related amortization, as well as required financial statement disclosures. The Company is currently evaluating the impact of this guidance, which is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.
-12-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued amended guidance that eliminates, adds and clarifies certain disclosure requirements for defined benefit pension or other postretirement plans. The Company is currently evaluating the impact of this guidance, which is required to be applied retrospectively and is effective for annual periods ending after December 15, 2020, with early adoption permitted.
Changes to the Disclosure Requirements for Fair Value Measurements
In August 2018, the FASB issued amended guidance that eliminates, adds and modifies certain disclosure requirements for fair value measurements. This guidance, which is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, is not expected to have an impact on the Company’s consolidated financial statements.
2) STOCK-BASED COMPENSATION
The following table summarizes the Company’s stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018.
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
RSUs and PSUs | $ | $ | $ | $ | |||||||||||
Stock options | |||||||||||||||
Stock-based compensation expense, before income taxes | |||||||||||||||
Related tax benefit | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Stock-based compensation expense, net of tax benefit | $ | $ | $ | $ | |||||||||||
Stock-based compensation expenses for the three and nine months ended September 30, 2019 includes $6 million for the accelerated vesting of stock-based compensation that is triggered by the Merger. Stock-based compensation for the three and nine months ended September 30, 2018 included forfeitures of $28 million and accelerations of $6 million relating to changes in senior management. Each of these items are included in “Merger-related costs and other corporate matters” on the Consolidated Statements of Operations.
During the nine months ended September 30, 2019, the Company granted 4 million RSUs for CBS Corp. Class B Common Stock with a weighted average per unit grant-date fair value of $50.24 . RSUs granted during the first nine months of 2019 generally vest over a one- to four-year service period. Compensation expense for RSUs is determined based upon the market price of the shares underlying the awards on the date of grant. For certain RSU awards the number of shares an employee earns ranges from 0 % to 120 % of the target award, based on the outcome of established performance conditions. Compensation expense is recorded based on the probable outcome of the performance conditions.
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CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
3) RESTRUCTURING, MERGER-RELATED COSTS AND OTHER CORPORATE MATTERS
Restructuring Charges
During the first quarter of 2019, the Company initiated a restructuring plan under which severance payments are being provided to certain eligible employees who voluntarily elected to participate. The Company also implemented additional restructuring plans during the first quarter of 2019 across several of its businesses in connection with a continued effort to reduce its cost structure. As a result, the Company recorded restructuring charges of $108 million in the first quarter of 2019, reflecting $98 million of severance costs and $10 million of costs associated with exiting contractual obligations and other related costs.
During the year ended December 31, 2018, the Company recorded restructuring charges of $67 million, reflecting $57 million of severance costs and $10 million of costs associated with exiting contractual obligations and other related costs. During the year ended December 31, 2017, the Company recorded restructuring charges of $63 million, reflecting $54 million of severance costs and $9 million of costs associated with exiting contractual obligations and other related costs.
As of September 30, 2019, the cumulative settlements for the 2019, 2018 and 2017 restructuring charges were $140 million, of which $126 million was for severance costs and $14 million was for costs associated with contractual obligations and other related costs. The Company expects to substantially utilize its restructuring reserves by the end of 2020.
Balance at | 2019 | 2019 | Balance at | ||||||||||||||||||||
December 31, 2018 | Charges | Settlements | September 30, 2019 | ||||||||||||||||||||
Entertainment | $ | $ | $ | ( | ) | $ | |||||||||||||||||
Cable Networks | ( | ) | |||||||||||||||||||||
Publishing | ( | ) | |||||||||||||||||||||
Local Media | ( | ) | |||||||||||||||||||||
Corporate | ( | ) | |||||||||||||||||||||
Total | $ | $ | $ | ( | ) | $ | |||||||||||||||||
Balance at | 2018 | 2018 | Balance at | ||||||||||||||||||||
December 31, 2017 | Charges | Settlements | December 31, 2018 | ||||||||||||||||||||
Entertainment | $ | $ | $ | ( | ) | $ | |||||||||||||||||
Publishing | ( | ) | |||||||||||||||||||||
Local Media | ( | ) | |||||||||||||||||||||
Corporate | ( | ) | |||||||||||||||||||||
Total | $ | $ | $ | ( | ) | $ | |||||||||||||||||
Merger-related Costs and Other Corporate Matters
For the three and nine months ended September 30, 2019, the Company incurred costs of $80 million and $83 million, respectively, in connection with the pending Merger with Viacom, consisting of financial advisory, legal and other professional fees, as well as contractual executive compensation, including the accelerated vesting of stock-based compensation, that is triggered by the Merger. For the nine-month period, the Company also incurred costs of $10 million associated with legal proceedings involving the Company (see Note 13) and other corporate matters. During the three and nine months ended September 30, 2018, the Company recorded expenses of $46 million and $65 million, respectively, primarily for professional fees associated with legal proceedings, investigations at the Company and other corporate matters.
-14-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
4) PROGRAMMING AND OTHER INVENTORY
At | At | ||||||||||
September 30, 2019 | December 31, 2018 | ||||||||||
Acquired program rights | $ | $ | |||||||||
Acquired television library | |||||||||||
Internally produced programming: | |||||||||||
Released | |||||||||||
In process and other | |||||||||||
Publishing, primarily finished goods | |||||||||||
Total programming and other inventory | |||||||||||
Less current portion | |||||||||||
Total noncurrent programming and other inventory | $ | $ | |||||||||
5) RELATED PARTIES
National Amusements, Inc. National Amusements, Inc. is the controlling stockholder of CBS Corp. and Viacom. Mr. Sumner M. Redstone, the controlling stockholder, chairman of the board of directors and chief executive officer of NAI, is the Chairman Emeritus of CBS Corp. and the Chairman Emeritus of Viacom. In addition, Ms. Shari Redstone, Mr. Sumner M. Redstone’s daughter, is the president and a director of NAI and the vice chair of the Board of Directors of each of CBS Corp. and Viacom. At September 30, 2019, NAI directly or indirectly owned approximately 78.9 % of CBS Corp.’s voting Class A Common Stock, and owned approximately 10.4 % of CBS Corp.’s Class A Common Stock and non-voting Class B Common Stock on a combined basis. NAI is controlled by Mr. Redstone through the Sumner M. Redstone National Amusements Trust (the “SMR Trust”), which owns 80 % of the voting interest of NAI, and such voting interest of NAI held by the SMR Trust is voted solely by Mr. Redstone until his incapacity or death. The SMR Trust provides that in the event of Mr. Redstone’s death or incapacity, voting control of the NAI voting interest held by the SMR Trust will pass to seven trustees, who will include CBS Corporation director Ms. Shari Redstone. No member of the Company’s management is a trustee of the SMR Trust.
On August 13, 2019, the Company and Viacom entered into the Merger Agreement, as amended as of October 16, 2019, which provides that Viacom will merge with and into CBS Corp., with CBS Corp. continuing as the surviving company, upon the terms and subject to the conditions therein. Concurrently with the execution of the Merger Agreement, CBS Corp. and Viacom entered into a Support Agreement (the “Support Agreement”) with the NAI Parties. Pursuant to the Support Agreement, on October 28, 2019, the NAI Parties delivered written consents that constitute receipt of stockholder approval for each of CBS Corp. and Viacom with respect to the adoption of the Merger Agreement and related approvals. Also on August 13, 2019, CBS Corp., Viacom, the NAI Parties and certain other persons affiliated or associated with NAI entered into a Governance Agreement (the “Governance Agreement”) regarding ViacomCBS governance matters, such as the composition of the ViacomCBS board of directors, among other matters, and the Company and NAI, among other parties, entered into an amendment (the “Amendment to Settlement Agreement”) to the Settlement and Release Agreement dated as of September 9, 2018 (the “Settlement Agreement”) among such parties, providing for the deletion of certain provisions in the Settlement Agreement regarding matters that will be governed by the Governance Agreement. The Governance Agreement and the Amendment to Settlement Agreement will become effective at the Effective Time. See Note 1 for additional information regarding the pending Merger.
-15-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
Viacom Inc. As part of its normal course of business, the Company licenses its television content, leases production facilities and sells advertising spots to various subsidiaries of Viacom. Viacom also distributes certain of the Company’s television programs in the home entertainment market. The Company’s total revenues from these transactions were $19 million and $42 million for the three months ended September 30, 2019 and 2018, respectively, and $45 million and $71 million for the nine months ended September 30, 2019 and 2018, respectively.
The Company leases production facilities, licenses feature films and purchases advertising spots from various subsidiaries of Viacom. The total amounts for these transactions were $13 million and $9 million for the three months ended September 30, 2019 and 2018, respectively, and $31 million and $21 million for the nine months ended September 30, 2019 and 2018, respectively.
The following table presents the amounts due from Viacom in the normal course of business as reflected on the Company’s Consolidated Balance Sheets. Amounts due to Viacom. were minimal at September 30, 2019 and December 31, 2018.
At | At | ||||||||||
September 30, 2019 | December 31, 2018 | ||||||||||
Receivables | $ | $ | |||||||||
Other assets (Receivables, noncurrent) | |||||||||||
Total amounts due from Viacom | $ | $ | |||||||||
See the aforementioned section entitled “National Amusements, Inc.” for information relating to the Merger Agreement, Support Agreement and Governance Agreement involving CBS Corp. and Viacom and Note 1 for additional information regarding the pending Merger.
Other Related Parties. The Company has equity interests in a domestic television network and several international joint ventures for television channels from which the Company earns revenues primarily by licensing its television programming. In addition, the Company held a 50 % equity interest in Pop, a general entertainment cable network. In March 2019, the Company acquired the remaining 50 % interest in Pop for $50 million, bringing the Company’s ownership to 100 %. Total revenues earned from sales to these joint ventures were $12 million and $14 million for the three months ended September 30, 2019 and 2018, respectively, and $101 million and $67 million for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, total amounts due from these joint ventures were $11 million and $34 million, respectively. Amounts associated with Pop are included above through the date of acquisition.
The Company, through the normal course of business, is involved in transactions with other related parties that have not been material in any of the periods presented.
-16-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
6) BANK FINANCING AND DEBT
The following table sets forth the Company’s debt.
At | At | ||||||||||
September 30, 2019 | December 31, 2018 | ||||||||||
Commercial paper | $ | $ | |||||||||
Senior debt (2.30% - 7.875% due 2019 - 2045) (a) | |||||||||||
Obligations under finance leases | |||||||||||
Total debt | |||||||||||
Less commercial paper | |||||||||||
Less current portion of long-term debt | |||||||||||
Total long-term debt, net of current portion | $ | $ | |||||||||
(a) At September 30, 2019 and December 31, 2018, the senior debt balances included (i) a net unamortized discount of $57 million and $58 million, respectively, (ii) unamortized deferred financing costs of $42 million and $43 million at September 30, 2019 and December 31, 2018, respectively, and (iii) a decrease in the carrying value of the debt relating to previously settled fair value hedges of $6 million and $5 million, respectively. The face value of the Company’s senior debt was $9.44 billion and $9.54 billion at September 30, 2019 and December 31, 2018, respectively.
In March 2019, the Company issued $500 million of 4.20 % senior notes due 2029. The Company used the net proceeds from this issuance in the redemption of its $600 million outstanding 2.30 % senior notes due August 2019.
Commercial Paper
The Company had outstanding commercial paper borrowings under its $2.5 billion commercial paper program of $50 million and $674 million at September 30, 2019 and December 31, 2018, respectively, each with maturities of less than 60 days. The weighted average interest rate for these borrowings was 2.25 % and 3.02 % at September 30, 2019 and December 31, 2018, respectively.
Credit Facility
At September 30, 2019, the Company had a $2.5 billion revolving credit facility (the “Credit Facility”) which expires in June 2021. The Credit Facility requires the Company to maintain a maximum Consolidated Leverage Ratio of 4.5x at the end of each quarter as further described in the Credit Facility. At September 30, 2019, the Company’s Consolidated Leverage Ratio was approximately 3.1x.
The Consolidated Leverage Ratio is the ratio of the Company’s indebtedness from continuing operations, adjusted to exclude certain finance lease obligations, at the end of a quarter, to the Company’s Consolidated EBITDA for the trailing four consecutive quarters. Consolidated EBITDA is defined in the Credit Facility as operating income plus interest income and before depreciation, amortization and certain other noncash items.
The Credit Facility is used for general corporate purposes. At September 30, 2019, the Company had no borrowings outstanding under the Credit Facility and the remaining availability under the Credit Facility, net of outstanding letters of credit, was $2.49 billion.
-17-
CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)
7) PENSION AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic cost for the Company’s pension and postretirement benefit plans were as follows:
Pension Benefits | Postretirement Benefits | ||||||||||||||
Three Months Ended September 30, | 2019 | 2018 | 2019 | 2018 | |||||||||||
Components of net periodic cost: | |||||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||
Interest cost | |||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | |||||||||||
Amortization of actuarial loss (gain) (a) | |||||||||||||||