Document




 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
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
CBS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
04-2949533
(I.R.S. Employer Identification No.)
 
 
51 W. 52nd Street, New York, New York
(Address of principal executive offices)
10019
(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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No o
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.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x
Number of shares of common stock outstanding at July 31, 2018:
Class A Common Stock, par value $.001 per share— 37,507,609
Class B Common Stock, par value $.001 per share— 338,524,891
 




CBS CORPORATION
INDEX TO FORM 10-Q
 
 
Page
 
PART I – FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
Consolidated Statements of Operations (Unaudited) for the
 Three and Six Months Ended June 30, 2018 and June 30, 2017
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the
 Three and Six Months Ended June 30, 2018 and June 30, 2017
 
 
 
 
Consolidated Balance Sheets (Unaudited) at June 30, 2018
 and December 31, 2017
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) for the
 Six Months Ended June 30, 2018 and June 30, 2017
 
 
 
 
 
 
 
Management’s Discussion and Analysis of Results of Operations and Financial Condition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
Legal Proceedings.
 
 
 
 
 
 
Item 5.
Other Information.
 
 
 

- 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
3,466

 
$
3,257

 
$
7,227

 
$
6,600

Costs and expenses:
 

 
 

 
 
 
 
Operating
2,184

 
2,004

 
4,584

 
4,078

Selling, general and administrative
532

 
507

 
1,056

 
995

Depreciation and amortization
56

 
56

 
112

 
111

Restructuring and other corporate matters (Note 3)
35




44



Total costs and expenses
2,807

 
2,567

 
5,796

 
5,184

Operating income
659

 
690

 
1,431

 
1,416

Interest expense
(116
)
 
(111
)
 
(234
)
 
(220
)
Interest income
14

 
15

 
31

 
28

Other items, net
(24
)
 
(16
)
 
(35
)
 
(37
)
Earnings from continuing operations before income taxes and
equity in loss of investee companies
533

 
578

 
1,193

 
1,187

Provision for income taxes
(113
)
 
(169
)
 
(248
)
 
(307
)
Equity in loss of investee companies, net of tax
(20
)
 
(12
)
 
(34
)
 
(29
)
Net earnings from continuing operations
400

 
397

 
911

 
851

Net loss from discontinued operations, net of tax (Note 13)

 
(339
)
 

 
(1,045
)
Net earnings (loss)
$
400

 
$
58

 
$
911

 
$
(194
)
 
 
 
 
 
 
 
 
Basic net earnings (loss) per common share:
 

 
 

 
 
 
 
Net earnings from continuing operations
$
1.06


$
.98


$
2.40


$
2.09

Net loss from discontinued operations
$


$
(.84
)

$


$
(2.57
)
Net earnings (loss)
$
1.06


$
.14


$
2.40


$
(.48
)
 
 
 
 
 
 
 
 
Diluted net earnings (loss) per common share:
 

 
 

 
 
 
 
Net earnings from continuing operations
$
1.05


$
.97


$
2.38


$
2.06

Net loss from discontinued operations
$


$
(.83
)

$


$
(2.53
)
Net earnings (loss)
$
1.05


$
.14


$
2.38


$
(.47
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 

 
 

 
 
 
 
Basic
378

 
405

 
380

 
407

Diluted
381


410


383


413

 
 
 
 
 
 
 
 
Dividends per common share
$
.18

 
$
.18

 
$
.36

 
$
.36

See notes to consolidated financial statements.

-3-



CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in millions)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net earnings (loss)
$
400

 
$
58

 
$
911

 
$
(194
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Cumulative translation adjustments
(8
)
 

 
(14
)
 
2

Amortization of net actuarial loss
15

 
12

 
30

 
24

Total other comprehensive income, net of tax
7

 
12

 
16

 
26

Total comprehensive income (loss)
$
407


$
70


$
927


$
(168
)
See notes to consolidated financial statements.

-4-



CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
 
At
 
At
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
252

 
 
 
$
285

 
Receivables, less allowances of $50 (2018) and $49 (2017)
 
3,597

 
 
 
3,697

 
Programming and other inventory (Note 4)
 
1,876

 
 
 
1,828

 
Prepaid income taxes
 

 
 
 
78

 
Prepaid expenses
 
117

 
 
 
194

 
Other current assets
 
206

 
 
 
191

 
Total current assets
 
6,048

 
 
 
6,273

 
Property and equipment
 
2,984

 
 
 
3,051

 
Less accumulated depreciation and amortization
 
1,747

 
 
 
1,771

 
Net property and equipment
 
1,237

 
 
 
1,280

 
Programming and other inventory (Note 4)
 
3,197

 
 
 
2,881

 
Goodwill
 
4,921

 
 
 
4,891

 
Intangible assets
 
2,655

 
 
 
2,666

 
Other assets
 
2,327

 
 
 
2,852

 
Total Assets
 
$
20,385




$
20,843

 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS EQUITY
 


 
 
 


 
Current Liabilities:
 


 
 
 


 
Accounts payable
 
$
138

 
 
 
$
231

 
Accrued compensation
 
225

 
 
 
343

 
Participants’ share and royalties payable
 
1,071

 
 
 
986

 
Program rights
 
369

 
 
 
373

 
Income taxes payable
 
129

 
 
 

 
Commercial paper (Note 6)
 
370

 
 
 
679

 
Current portion of long-term debt (Note 6)
 
16

 
 
 
19

 
Accrued expenses and other current liabilities
 
1,466

 
 
 
1,341

 
Total current liabilities
 
3,784

 
 
 
3,972

 
Long-term debt (Note 6)
 
9,464

 
 
 
9,464

 
Pension and postretirement benefit obligations
 
1,289

 
 
 
1,328

 
Deferred income tax liabilities, net
 
454

 
 
 
480

 
Other liabilities
 
3,227

 
 
 
3,621

 
 
 


 
 
 


 
Commitments and contingencies (Note 14)
 


 
 
 


 
 
 


 
 
 


 
Stockholders Equity:
 


 
 
 


 
Class A Common Stock, par value $.001 per share; 375 shares authorized;
 38 (2018 and 2017) shares issued
 

 
 
 

 
Class B Common Stock, par value $.001 per share; 5,000 shares authorized;
 835 (2018) and 834 (2017) shares issued
 
1

 
 
 
1

 
Additional paid-in capital
 
43,720

 
 
 
43,797

 
Accumulated deficit
 
(18,250
)
 
 
 
(18,900
)
 
Accumulated other comprehensive loss (Note 8)
 
(646
)
 
 
 
(662
)
 
 
 
24,825

 
 
 
24,236

 
Less treasury stock, at cost; 496 (2018) and 489 (2017) Class B shares
 
22,658

 
 
 
22,258

 
Total Stockholders Equity
 
2,167

 
 
 
1,978

 
Total Liabilities and Stockholders Equity
 
$
20,385

 
 
 
$
20,843

 
See notes to consolidated financial statements.

-5-


CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 
Six Months Ended
 
June 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net earnings (loss)
$
911

 
$
(194
)
Less: Net loss from discontinued operations, net of tax

 
(1,045
)
Net earnings from continuing operations
911


851

Adjustments to reconcile net earnings from continuing operations to net cash flow
provided by operating activities from continuing operations:





Depreciation and amortization
112


111

Stock-based compensation
91


85

Equity in loss of investee companies, net of tax and distributions
34


29

Change in assets and liabilities, net of investing and financing activities
(103
)

(167
)
Net cash flow provided by operating activities from continuing operations
1,045


909

Net cash flow (used for) provided by operating activities from discontinued operations
(2
)

29

Net cash flow provided by operating activities
1,043


938

Investing Activities:





Investments in and advances to investee companies
(71
)

(65
)
Capital expenditures
(62
)

(68
)
Acquisitions
(29
)
 
(21
)
Other investing activities
2

 
15

Net cash flow used for investing activities from continuing operations
(160
)

(139
)
Net cash flow used for investing activities from discontinued operations
(23
)

(13
)
Net cash flow used for investing activities
(183
)

(152
)
Financing Activities:





Repayments of short-term debt borrowings, net
(309
)

(187
)
Proceeds from debt borrowings of CBS Radio

 
24

Repayment of debt borrowings of CBS Radio

 
(5
)
Payment of capital lease obligations
(8
)

(8
)
Payment of contingent consideration
(5
)
 
(7
)
Dividends
(140
)

(151
)
Purchase of Company common stock
(394
)

(845
)
Payment of payroll taxes in lieu of issuing shares for stock-based compensation
(58
)

(89
)
Proceeds from exercise of stock options
22


39

Other financing activities
(1
)
 

Net cash flow used for financing activities
(893
)

(1,229
)
Net decrease in cash and cash equivalents
(33
)

(443
)
Cash and cash equivalents at beginning of period
(includes $24 (2017) of discontinued operations cash)
285


622

Cash and cash equivalents at end of period
(includes $9 (2017) of discontinued operations cash)
$
252


$
179

Supplemental disclosure of cash flow information





Cash paid for interest:
 
 
 
Continuing operations
$
231

 
$
217

Discontinued operations
$

 
$
39

 
 
 
 
Cash paid for income taxes:
 
 
 
Continuing operations
$
31

 
$
272

Discontinued operations
$

 
$
46

See notes to consolidated financial statements.

-6-



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, CBS Studios International, and CBS Television Distribution; Network Ten; CBS Interactive; and CBS Films), Cable Networks (Showtime Networks, CBS Sports Network and Smithsonian Networks), Publishing (Simon & Schuster) and Local Media (CBS Television Stations and CBS Local Digital Media).

Discontinued Operations-On November 16, 2017, the Company completed the disposition of CBS Radio Inc. (“CBS Radio”) through a split-off. CBS Radio has been presented as a discontinued operation in the Company’s consolidated financial statements (See Note 13).

Basis of Presentation-The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission (“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, 2017.

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.

Revenues
Advertising Revenues-Advertising revenues, net of agency commissions, are recognized when the advertising spots are aired on television or displayed on digital platforms. If there is a guarantee to deliver a targeted audience rating or number of impressions, revenues are recognized as the actual audience rating or impressions are delivered. Audience ratings and impressions are determined based on data provided by independent third-party companies. Advertising contracts, which are generally short-term, are billed monthly, with payments due shortly after the invoice date.

Advertising revenues are primarily generated by the Entertainment and Local Media segments.
Content Licensing and Distribution Revenues-Content licensing and distribution revenues are generated from the licensing of internally-produced television programming, fees from the distribution of third-party programming, and the publishing and distribution of consumer books.


-7-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

Program Licensing and Distribution
Revenues from the licensing of internally-produced television programming are recognized when the content is made available to the licensee for exhibition and the license period has begun. For license agreements containing multiple deliverables, revenues are allocated based on the relative standalone selling price of each program. Agreements to license programming are often long term, with collection terms ranging from one to five years.

The Company also distributes programs on behalf of third parties. In such arrangements, the Company generally obtains control of the program before selling it to the customer. Therefore, revenues from such distribution arrangements, which include both content licensing and advertising revenues, are recognized based on the gross amount of consideration received from the customer, with a participation expense recognized for the fees paid to the third-party producer.

Substantially all of the Company’s program licensing and distribution revenues are generated by the Entertainment segment, with the remainder generated by the Cable Networks segment.

Publishing
Publishing revenues are recognized when merchandise is shipped or electronically delivered to the consumer. Consumer print books are generally sold with a right of return. The Company records a returns reserve and corresponding decrease in revenue at the time of sale based upon historical trends. For publishing revenues, payments are due shortly after shipment or electronic delivery.

Affiliate and Subscription Fees-A majority of the Company’s affiliate and subscription fees are generated by the Cable Networks segment and consist of fees received from multichannel video programming distributors (“MVPDs”) for carriage of the Company’s cable networks and subscription fees for the Showtime digital streaming subscription offering. The Entertainment segment generates affiliate and subscription fees primarily from television stations affiliated with the CBS Television Network and subscribers to CBS All Access, its owned streaming subscription service. In addition, the Local Media segment generates retransmission fees from MVPDs for carriage of the Company’s television stations.

Affiliate and subscription fees are recognized as access to the Company’s content is provided to the customer over the term of the agreement. 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 the customer’s service. For agreements that provide for a fixed fee, revenues are recognized based on the relative fair value provided over the term of the agreement. For affiliate and subscription fee revenues, payments are generally due monthly.

Noncurrent Receivables-Noncurrent receivables of $1.54 billion and $1.59 billion at June 30, 2018 and January 1, 2018, respectively, are included in “Other assets” on the Company’s Consolidated Balance Sheets and primarily relate to revenues recognized under long-term television licensing arrangements.

Deferred Revenues-Deferred revenues primarily consist of cash received related to advertising arrangements and the licensing of television programming for which the revenues have not yet been earned. Advertising revenues that have been deferred are recognized when the required audience rating or impressions are delivered and revenues deferred under licensing arrangements are recognized when the content is made available to the customer.
 
Deferred revenues are primarily short term and included within “Accrued expenses and other current liabilities” on the Company’s Consolidated Balance Sheets. Total deferred revenues were $210 million and $284 million at June 30, 2018 and January 1, 2018, respectively. The change in deferred revenue for the six months ended June 30,

-8-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

2018 reflects $167 million of revenues recognized that were included in deferred revenues at January 1, 2018, offset by cash payments received during the period for which the performance obligation was not satisfied prior to the end of the period.

Unrecognized Revenues Under Contract-As of June 30, 2018, unrecognized revenue attributable to unsatisfied performance obligations under the Company’s long-term contracts was $3.60 billion, of which $1.01 billion is expected to be recognized for the remainder of 2018, $1.40 billion for 2019, $738 million for 2020, and $442 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 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.

Net Earnings (Loss) per Common Share-Basic net earnings (loss) per share (“EPS”) is based upon net earnings (loss) divided by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the effect of the assumed exercise of stock options and vesting of restricted stock units (“RSUs”) and market-based performance share units (“PSUs”) only in the periods in which such effect would have been dilutive. Excluded from the calculation of diluted EPS because their inclusion would have been anti-dilutive, were 8 million stock options and RSUs for each of the three and six months ended June 30, 2018 and 4 million stock options for each of the three and six months ended June 30, 2017.

The table below presents a reconciliation of weighted average shares used in the calculation of basic and diluted EPS.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in millions)
2018
 
2017
 
2018
 
2017
Weighted average shares for basic EPS
378

 
405

 
380

 
407

Dilutive effect of shares issuable under stock-based
compensation plans
3

 
5

 
3

 
6

Weighted average shares for diluted EPS
381

 
410

 
383

 
413

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, deferred compensation and other employee benefit accruals.

Additional Paid-In Capital-For the six months ended June 30, 2018 and 2017, the Company recorded dividends of $138 million and $148 million, respectively, as a reduction to additional paid-in capital as the Company had an accumulated deficit balance.

Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
During the first quarter of 2018, the Company adopted Financial Accounting Standards Board (“FASB”) guidance on the recognition of revenues which provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most existing revenue recognition guidance. The main principle under this guidance

-9-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

is that an entity should recognize revenue at the amount it expects to be entitled to in exchange for the transfer of goods or services to customers. The Company applied the modified retrospective method of adoption with the cumulative effect of the initial adoption of $261 million reflected as an adjustment to the opening balance of accumulated deficit as of January 1, 2018. Prior periods continue to be presented under previous accounting guidance (See Note 12).

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
During the first quarter of 2018, the Company adopted FASB amended guidance on the presentation of net periodic pension and postretirement benefit cost (“net benefit cost”). This guidance requires the Company to present the service cost component of net benefit cost in the same line item(s) on the statement of operations as other compensation costs of the related employees. All of the other components of net benefit cost are presented in the statement of operations separately from the service cost component and below the subtotal of operating income. As a result of the adoption of this guidance, the Company presented $16 million and $31 million of net benefit costs in “Other items, net” on the Consolidated Statement of Operations for the three and six months ended June 30, 2018, respectively, representing the components of net benefit cost other than service cost. This guidance is required to be applied retrospectively and therefore, $21 million and $43 million of expenses, previously presented within operating income, have been reclassified to “Other items, net” for the three and six months ended June 30, 2017, respectively.

Stock Compensation: Scope of Modification Accounting
During the first quarter of 2018, the Company adopted FASB amended guidance on the accounting for stock-based compensation which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award as equity or liability changes as a result of the change in the terms or conditions of a share-based payment award. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

Clarifying the Definition of a Business
During the first quarter of 2018, the Company adopted FASB amended guidance on the accounting for business combinations which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

Intra-Entity Transfers of Assets Other than Inventory
During the first quarter of 2018, the Company adopted FASB amended guidance on the accounting for income taxes, which eliminates the exception in existing guidance that defers the recognition of the tax effects of intra-entity asset transfers other than inventory until the transferred asset is sold to a third party. Under this guidance, an entity recognizes the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.


-10-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

Accounting Pronouncements Not Yet Adopted
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued amended guidance that permits an entity to reclassify the income tax effects of federal tax legislation enacted in December 2017 (the “Tax Reform Act”) on items within accumulated other comprehensive income to retained earnings. The Company is currently evaluating the impact of this guidance, which is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.

Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued 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. This guidance, which is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, is not expected to have a material impact on the Company’s consolidated financial statements.

Leases
In February 2016, the FASB issued new guidance on the accounting for leases, which supersedes previous lease guidance. Under this guidance, for all leases with terms in excess of one year, including operating leases, the Company will be required to recognize 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. This guidance is effective for the Company in the first quarter of 2019. The Company is currently reviewing its lease portfolio, evaluating the impact of this guidance on its consolidated balance sheet and assessing system requirements. The Company will apply the modified retrospective method of adoption as of January 1, 2019 and comparative periods will continue to be presented under existing lease guidance.
2) STOCK-BASED COMPENSATION
The following table summarizes the Company’s stock-based compensation expense for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
RSUs and PSUs
$
41

 
$
38

 
$
79

 
$
71

Stock options
6

 
7

 
12

 
14

Stock-based compensation expense, before income taxes
47

 
45

 
91

 
85

Related tax benefit
(12
)
 
(18
)
 
(23
)
 
(33
)
Stock-based compensation expense, net of tax benefit
$
35

 
$
27

 
$
68

 
$
52

During the six months ended June 30, 2018, the Company granted 3 million RSUs for CBS Corp. Class B Common Stock with a weighted average per unit grant-date fair value of $53.95. RSUs granted during the first six months of 2018 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

-11-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

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. During the six months ended June 30, 2018, the Company also granted awards of market-based PSUs. The number of shares that will be issued upon vesting of the PSUs is based on the Company’s stock price performance over a designated measurement period, as well as the achievement of established operating goals. The fair value of the PSUs is determined on the grant date using a Monte Carlo simulation model and is expensed over the required employee service period. The fair value of the PSU awards granted during the six months ended June 30, 2018 was $17 million

During the six months ended June 30, 2018, the Company also granted 2 million stock options with a weighted average exercise price of $54.32. Stock options granted during the first six months of 2018 vest over a four-year service period and expire eight years from the date of grant. Compensation expense for stock options is determined based on the grant date fair value of the award calculated using the Black-Scholes options-pricing model.

Total unrecognized compensation cost related to unvested RSUs and PSUs at June 30, 2018 was $278 million, which is expected to be recognized over a weighted average period of 2.5 years. Total unrecognized compensation cost related to unvested stock option awards at June 30, 2018 was $50 million, which is expected to be recognized over a weighted average period of 2.8 years.
3) RESTRUCTURING AND OTHER CORPORATE MATTERS
During the second quarter of 2018, in a continued effort to reduce its cost structure, the Company initiated restructuring plans across several of its businesses, primarily for the reorganization of certain business operations. As a result, the Company recorded restructuring charges of $25 million, reflecting $17 million of severance costs and $8 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. During the year ended December 31, 2016, the Company recorded restructuring charges of $30 million, reflecting $19 million of severance costs and $11 million of costs associated with exiting contractual obligations and other related costs.
As of June 30, 2018, the cumulative settlements for the 2018, 2017 and 2016 restructuring charges were $48 million, of which $42 million was for severance costs and $6 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 2019.
 
Balance at
 
2018
 
2018
 
Balance at
 
December 31, 2017
 
Charges
 
Settlements
 
June 30, 2018
Entertainment
 
$
45

 
 
 
$
6

 
 
 
$
(15
)
 
 
 
$
36

 
Cable Networks
 
1

 
 
 

 
 
 
(1
)
 
 
 

 
Publishing
 
3

 
 
 
1

 
 
 
(1
)
 
 
 
3

 
Local Media
 
14

 
 
 
11

 
 
 
(3
)
 
 
 
22

 
Corporate
 
3

 
 
 
7

 
 
 
(1
)
 
 
 
9

 
Total
 
$
66

 
 
 
$
25

 
 
 
$
(21
)
 
 
 
$
70

 

-12-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

 
Balance at
 
2017
 
2017
 
Balance at
 
December 31, 2016
 
Charges
 
Settlements
 
December 31, 2017
Entertainment
 
$
17

 
 
 
$
44

 
 
 
$
(16
)
 
 
 
$
45

 
Cable Networks
 
4

 
 
 

 
 
 
(3
)
 
 
 
1

 
Publishing
 
1

 
 
 
5

 
 
 
(3
)
 
 
 
3

 
Local Media
 
6

 
 
 
12

 
 
 
(4
)
 
 
 
14

 
Corporate
 
2

 
 
 
2

 
 
 
(1
)
 
 
 
3

 
Total
 
$
30

 
 
 
$
63

 
 
 
$
(27
)
 
 
 
$
66

 
During the three and six months ended June 30, 2018, the Company recorded expenses of $10 million and $19 million, respectively, primarily for professional fees related to the evaluation of a potential combination with Viacom Inc. and legal proceedings involving the Company and National Amusements, Inc. (“NAI”) (See Note 14).
4) PROGRAMMING AND OTHER INVENTORY
 
At
 
At
 
June 30, 2018
 
December 31, 2017
Acquired program rights
 
$
2,284

 
 
 
$
2,234

 
Acquired television library
 
99

 
 
 
99

 
Internally produced programming:
 
 
 
 
 
 
 
Released
 
2,148

 
 
 
1,780

 
In process and other
 
483

 
 
 
543

 
Publishing, primarily finished goods
 
59

 
 
 
53

 
Total programming and other inventory
 
5,073

 
 
 
4,709

 
Less current portion
 
1,876

 
 
 
1,828

 
Total noncurrent programming and other inventory
 
$
3,197

 
 
 
$
2,881

 

5) RELATED PARTIES
National Amusements, Inc. NAI is the controlling stockholder of CBS Corp. and Viacom Inc. 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 Inc. 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 Inc. Mr. David R. Andelman is a director of CBS Corp. and serves as a director of NAI. At June 30, 2018, NAI directly or indirectly owned approximately 79.7% 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. Although the Company has previously disclosed, after receiving confirmation from NAI, that NAI is controlled by Mr. Redstone through the Sumner M. Redstone National Amusements Trust (the “SMR Trust”), in connection with this report, NAI declined the Company’s requests to confirm that NAI is currently controlled by Mr. Redstone through the SMR Trust. NAI continues to confirm that the SMR Trust 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 and that 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 directors Ms. Shari Redstone and Mr. David R. Andelman. No member of the Company’s management is a trustee of the SMR Trust. The Company has asserted in its amended verified complaint described in “Legal Matters” in Note 14 that Ms. Shari Redstone effectively controls NAI, although issues relating to control are subject to legal proceedings in the Delaware Court of Chancery. See “Legal Matters” in Note 14 for a description of legal proceedings in the Delaware Court of Chancery.


-13-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

Viacom Inc. On February 1, 2018, the Company announced that its Board of Directors established a special committee of independent directors to evaluate a potential combination with Viacom Inc. In May 2018, the committee determined that a merger of the Company and Viacom Inc. is not in the best interests of the Company’s stockholders (other than NAI). See “Legal Matters” in Note 14 for a description of legal proceedings in the Delaware Court of Chancery.

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 Inc. Viacom Inc. also distributes certain of the Company’s television programs in the home entertainment market. The Company’s total revenues from these transactions were $10 million and $19 million for the three months ended June 30, 2018 and 2017, respectively, and $29 million and $73 million for the six months ended June 30, 2018 and 2017, respectively.

The Company leases production facilities and purchases advertising spots from various subsidiaries of Viacom Inc. The total amounts for these transactions were $6 million and $4 million for the three months ended June 30, 2018 and 2017, respectively, and $12 million and $9 million for the six months ended June 30, 2018 and 2017, respectively.

The following table presents the amounts due from Viacom Inc. in the normal course of business as reflected on the Company’s Consolidated Balance Sheets. Amounts due to Viacom Inc. were minimal at June 30, 2018 and December 31, 2017.
 
At
 
At
 
June 30, 2018
 
December 31, 2017
Receivables
 
$
34

 
 
 
$
93

 
Other assets (Receivables, noncurrent)
 
14

 
 
 
11

 
Total amounts due from Viacom
 
$
48

 
 
 
$
104

 
Other Related Parties. The Company has equity interests in two domestic television networks and several international joint ventures for television channels from which the Company earns revenues primarily by selling its television programming. Total revenues earned from sales to these joint ventures were $22 million and $20 million for the three months ended June 30, 2018 and 2017, respectively and $53 million and $49 million for the six months ended June 30, 2018 and 2017, respectively. At June 30, 2018 and December 31, 2017, total amounts due from these joint ventures were $16 million and $27 million, respectively.

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.

-14-



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

June 30, 2018
 
December 31, 2017
Commercial paper

$
370




$
679


Senior debt (2.30% - 7.875% due 2019 - 2045) (a)

9,430




9,426


Obligations under capital leases

50




57


Total debt

9,850




10,162


Less commercial paper

370




679


Less current portion of long-term debt

16




19


Total long-term debt, net of current portion

$
9,464




$
9,464


(a) At June 30, 2018 and December 31, 2017, the senior debt balances included (i) a net unamortized discount of $61 million and $65 million, respectively, (ii) unamortized deferred financing costs of $45 million and $47 million, respectively, and (iii) a decrease in the carrying value of the debt relating to previously settled fair value hedges of $4 million and $3 million, respectively. The face value of the Company’s senior debt was $9.54 billion at both June 30, 2018 and December 31, 2017.

Commercial Paper
The Company had outstanding commercial paper borrowings under its $2.5 billion commercial paper program of $370 million and $679 million at June 30, 2018 and December 31, 2017, respectively, each with maturities of less than 90 days. The weighted average interest rate for these borrowings was 2.42% at June 30, 2018 and 1.88% at December 31, 2017.

Credit Facility
At June 30, 2018, 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 June 30, 2018, the Company’s Consolidated Leverage Ratio was approximately 3.0x.

The Consolidated Leverage Ratio is the ratio of the Company’s indebtedness from continuing operations, adjusted to exclude certain capital 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 June 30, 2018, 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.

-15-



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 June 30,
2018
 
2017
 
2018
 
2017
Components of net periodic cost:
 
 
 
 
 
 
 
Service cost
$
8

 
$
8

 
$

 
$

Interest cost
37

 
47

 
4

 
5

Expected return on plan assets
(45
)
 
(51
)
 

 

Amortization of actuarial loss (gain) (a)
24

 
26

 
(4
)
 
(6
)
Net periodic cost
$
24

 
$
30

 
$

 
$
(1
)
 
Pension Benefits
 
Postretirement Benefits
Six Months Ended June 30,
2018

2017

2018

2017
Components of net periodic cost:
 
 
 
 
 
 
 
Service cost
$
16

 
$
15

 
$

 
$

Interest cost
74

 
95

 
8

 
9

Expected return on plan assets
(90
)
 
(101
)
 

 

Amortization of actuarial loss (gain) (a)
48

 
51

 
(9
)
 
(11
)
Net periodic cost
$
48

 
$
60

 
$
(1
)
 
$
(2
)
(a) Reflects amounts reclassified from accumulated other comprehensive loss to net earnings (loss).
The service cost component of net periodic cost is presented on the Consolidated Statements of Operations within operating income and all other components of net periodic cost are presented within “Other items, net.”
8) STOCKHOLDERS’ EQUITY
During the second quarter of 2018, the Company repurchased 3.8 million shares of its Class B Common Stock under its share repurchase program for $200 million, at an average cost of $52.17 per share. During the six months ended June 30, 2018, the Company repurchased 7.6 million shares of its Class B Common Stock for $400 million, at an average cost of $52.42, leaving $2.66 billion of authorization at June 30, 2018.

During the second quarter of 2018, the Company declared a quarterly cash dividend of $.18 on its Class A and Class B Common Stock, resulting in total dividends of $69 million, which were paid on July 1, 2018.

-16-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

On May 17, 2018, the Company’s Board of Directors declared a pro rata dividend of 0.5687 of a share of the Company’s voting Class A Common Stock for each share of the Company’s Class A Common Stock and non-voting Class B Common Stock to stockholders of record as of the close of business on the record date, contingent on Delaware court approval. The record date for the dividend would be 10 days after such Delaware court approval or on the next business day after the 10-day period. If the dividend is issued, shares outstanding and EPS for prior periods would be adjusted to reflect the issuance of additional shares resulting from the dividend. The dividend, if issued, would dilute NAI’s voting interest from approximately 79.7% at June 30, 2018 to approximately 20%. The dividend would not dilute the economic interests of any of the Company’s stockholders. See “Legal Matters” in Note 14 for a description of legal proceedings in the Delaware Court of Chancery.
Accumulated Other Comprehensive Income (Loss)
The following tables summarize the changes in the components of accumulated other comprehensive loss.
 
Cumulative
Translation
Adjustments
 
Net Actuarial
Loss and Prior
Service Cost
 
Accumulated
Other
Comprehensive Loss
At December 31, 2017
$
159

 
$
(821
)
 
 
$
(662
)
 
Other comprehensive loss before reclassifications
(14
)
 

 
 
(14
)
 
Reclassifications to net earnings

 
30

(a) 
 
30

 
Net other comprehensive income (loss)
(14
)
 
30


 
16

 
At June 30, 2018
$
145

 
$
(791
)

 
$
(646
)
 
 
Cumulative
Translation
Adjustments
 
Net Actuarial
Loss and Prior
Service Cost
 
Accumulated
Other
Comprehensive Loss
At December 31, 2016
$
151

 
$
(918
)
 
 
$
(767
)
 
Other comprehensive income before reclassifications
2

 

 
 
2

 
Reclassifications to net loss

 
24

(a) 
 
24

 
Net other comprehensive income
2

 
24

 
 
26

 
At June 30, 2017
$
153

 
$
(894
)
 
 
$
(741
)
 
(a)
Reflects amortization of net actuarial losses. See Note 7.
The net actuarial losses related to pension and other postretirement benefit plans included in other comprehensive income are net of tax provisions of $9 million and $16 million for the six months ended June 30, 2018 and 2017, respectively.

-17-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

9) INCOME TAXES
The provision for income taxes represents federal, state and local, and foreign income taxes on earnings from continuing operations before income taxes and equity in loss of investee companies.
 
Three Months Ended June 30,

Six Months Ended June 30,
 
2018

2017

2018

2017
Provision for income taxes, including interest and before other
discrete items (a)
$
112

 
$
176

 
$
250

 
$
361

Excess tax benefits from stock-based compensation (b)


(4
)
 


(31
)
Other discrete items (c)
1


(3
)

(2
)

(23
)
Provision for income taxes
$
113


$
169


$
248


$
307

Effective income tax rate
21.2
%

29.2
%

20.8
%

25.9
%
(a) The lower tax provision for the three and six months ended June 30, 2018 primarily reflects a reduction in the federal corporate income tax rate from 35% to 21% as a result of the enactment of new federal tax legislation in December 2017.
(b) Reflects the difference between the tax benefit from stock-based compensation expense and the deduction on the tax return associated with the exercise of stock options and vesting of RSUs. This difference occurs because stock-based compensation expense is recorded based on the grant-date fair value of the award, whereas the tax deduction is based on the fair value on the date the stock option is exercised or the RSU vests.
(c) For the six months ended June 30, 2017, primarily reflects tax benefits from the resolution of certain state income tax matters.
In December 2017, the U.S. government enacted the Tax Reform Act containing significant changes to U.S. federal tax law, including a reduction in the federal corporate tax rate from 35% to 21% and a one-time transition tax on cumulative foreign earnings and profits. For the year ended December 31, 2017, the Company recorded a net provisional charge for the estimated transition tax on cumulative foreign earnings and profits, offset by an estimated benefit to adjust the Company’s deferred income tax balances as a result of the reduced corporate income tax rate. The Tax Reform Act also includes a deduction for foreign derived intangible income and a tax on global intangible low-taxed income (“GILTI”), which imposes a U.S. tax on certain income earned by the Company’s foreign subsidiaries. The Company included the tax on GILTI in its tax provision for the three and six months ended June 30, 2018. The Company will complete its analysis of the Tax Reform Act within one year from its enactment. Such analysis will include finalizing and recording any adjustments to provisional estimates, as well as determining whether to treat the tax on GILTI as a period cost when incurred or as a component of deferred taxes.
10) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The Company’s carrying value of financial instruments approximates fair value, except for notes and debentures, which are not recorded at fair value. At June 30, 2018 and December 31, 2017, the carrying value of the Company’s senior debt was $9.43 billion and the fair value, which is estimated based on quoted market prices for similar liabilities (Level 2) and includes accrued interest, was $9.58 billion and $10.16 billion, respectively.

The Company uses derivative financial instruments primarily to modify its exposure to market risks from fluctuations in foreign currency exchange rates. The Company does not use derivative instruments unless there is an underlying exposure and, therefore, the Company does not hold or enter into derivative financial instruments for speculative trading purposes.


-18-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

Foreign Exchange Contracts

Foreign exchange forward contracts have principally been used to hedge projected cash flows, in currencies such as the British Pound, the Euro, the Canadian Dollar and the Australian Dollar, generally for periods up to 24 months. The Company designates forward contracts used to hedge committed and forecasted foreign currency transactions as cash flow hedges. Gains or losses on the effective portion of designated cash flow hedges are initially recorded in other comprehensive income and reclassified to the statement of operations when the hedged item is recognized. Additionally, the Company enters into non-designated forward contracts to hedge non-U.S. dollar denominated cash flows.

At June 30, 2018 and December 31, 2017, the notional amount of all foreign exchange contracts was $381 million and $410 million, respectively.
Gains (losses) recognized on derivative financial instruments were as follows:
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Financial Statement Account
Non-designated foreign exchange contracts
$
17

 
$
(12
)
 
$
13

 
$
(20
)
Other items, net
The fair value of the Company’s derivative instruments was not material to the Consolidated Balance Sheets for any of the periods presented.
The following tables set forth the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017. These assets and liabilities have been categorized according to the three-level fair value hierarchy established by the FASB, which prioritizes the inputs used in measuring fair value. Level 1 is based on publicly quoted prices for the asset or liability in active markets. Level 2 is based on inputs that are observable other than quoted market prices in active markets, such as quoted prices for the asset or liability in inactive markets or quoted prices for similar assets or liabilities. Level 3 is based on unobservable inputs reflecting the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.
At June 30, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Foreign currency hedges
$

 
$
10

 
$

 
$
10

Total Assets
$

 
$
10

 
$

 
$
10

Liabilities:
 
 
 
 
 
 
 
Deferred compensation
$

 
$
364

 
$

 
$
364

Foreign currency hedges

 
2

 

 
2

Total Liabilities
$

 
$
366

 
$

 
$
366

At December 31, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Foreign currency hedges
$

 
$
5

 
$

 
$
5

Total Assets
$

 
$
5

 
$

 
$
5

Liabilities:
 
 
 
 
 
 
 
Deferred compensation
$

 
$
363

 
$

 
$
363

Foreign currency hedges

 
10

 

 
10

Total Liabilities
$

 
$
373

 
$

 
$
373


-19-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

The fair value of foreign currency hedges is determined based on the present value of future cash flows using observable inputs including foreign currency exchange rates. The fair value of deferred compensation liabilities is determined based on the fair value of the investments elected by employees.
11) SEGMENT AND REVENUE INFORMATION
The following tables set forth the Company’s financial information by reportable segment. The Company’s operating segments, which are the same as its reportable segments, have been determined in accordance with the Company’s internal management structure, which is organized based upon products and services.

Three Months Ended
 
Six Months Ended

June 30,
 
June 30,

2018
 
2017

2018
 
2017
Revenues:











Entertainment
$
2,365


$
2,184


$
5,081


$
4,531

Cable Networks
591


571


1,200


1,114

Publishing
207


206


367


367

Local Media
420

 
412

 
835

 
821

Corporate/Eliminations
(117
)

(116
)

(256
)

(233
)
Total Revenues
$
3,466


$
3,257


$
7,227


$
6,600

Revenues generated between segments primarily reflect advertising sales, content licensing and station affiliation fees. These transactions are recorded at market value as if the sales were to third parties and are eliminated in consolidation.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Intercompany Revenues:
 
 
 
 
 
 
 
Entertainment
$
120

 
$
118

 
$
259

 
$
237

Local Media
5

 
3

 
10

 
6

Total Intercompany Revenues
$
125

 
$
121

 
$
269

 
$
243


-20-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

The Company presents operating income (loss) excluding costs for restructuring and other corporate matters, where applicable, (“Segment Operating Income”) as the primary measure of profit and loss for its operating segments in accordance with FASB guidance for segment reporting. The Company believes the presentation of Segment Operating Income is relevant and useful for investors because it allows investors to view segment performance in a manner similar to the primary method used by the Company’s management and enhances their ability to understand the Company’s operating performance.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Segment Operating Income (Loss):
 
 
 
 
 
 
 
Entertainment
$
356

 
$
351

 
$
848

 
$
754

Cable Networks
256

 
255

 
486

 
505

Publishing
31

 
29

 
47

 
44

Local Media
128

 
128

 
246

 
252

Corporate
(77
)
 
(73
)
 
(152
)
 
(139
)
Restructuring and other corporate matters
(35
)
 

 
(44
)
 

Operating income
659


690


1,431


1,416

Interest expense
(116
)
 
(111
)
 
(234
)
 
(220
)
Interest income
14

 
15

 
31

 
28

Other items, net
(24
)
 
(16
)
 
(35
)
 
(37
)
Earnings from continuing operations before income taxes
and equity in loss of investee companies
533

 
578

 
1,193

 
1,187

Provision for income taxes
(113
)
 
(169
)
 
(248
)
 
(307
)
Equity in loss of investee companies, net of tax
(20
)
 
(12
)
 
(34
)
 
(29
)
Net earnings from continuing operations
400

 
397

 
911

 
851

Net loss from discontinued operations, net of tax

 
(339
)
 

 
(1,045
)
Net earnings (loss)
$
400

 
$
58

 
$
911

 
$
(194
)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Depreciation and Amortization:
 
 
 
 
 
 
 
Entertainment
$
31


$
27


$
61


$
56

Cable Networks
5


6


11


12

Publishing
2


2


3


3

Local Media
11

 
12

 
22

 
23

Corporate
7


9


15


17

Total Depreciation and Amortization
$
56


$
56


$
112


$
111

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Stock-based Compensation:
 
 
 
 
 
 
 
Entertainment
$
16

 
$
17

 
$
31

 
$
32

Cable Networks
3

 
3

 
6

 
6

Publishing
1

 
1

 
2

 
2

Local Media
3

 
3

 
6

 
6

Corporate
24

 
21

 
46

 
39

Total Stock-based Compensation
$
47

 
$
45

 
$
91

 
$
85


-21-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018

2017
 
2018

2017
Capital Expenditures:
 
 
 
 
 
 
 
Entertainment
$
20


$
24


$
37


$
38

Cable Networks
3


4


7


7

Publishing
1




2


1

Local Media
5

 
7

 
9

 
12

Corporate
3

 
6

 
7

 
10

Total Capital Expenditures
$
32

 
$
41

 
$
62

 
$
68

 
At
 
At
 
June 30, 2018
 
December 31, 2017
Assets:
 
 
 
 
 
 
 
Entertainment
 
$
12,236

 
 
 
$
12,626

 
Cable Networks
 
2,938

 
 
 
2,878

 
Publishing
 
956

 
 
 
906

 
Local Media
 
3,993

 
 
 
4,042

 
Corporate/Eliminations
 
249

 
 
 
378

 
Discontinued operations
 
13

 
 
 
13

 
Total Assets
 
$
20,385

 
 
 
$
20,843

 
The following table presents the Company’s revenues disaggregated into categories based on the nature of such revenues.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Revenues by Type
2018
 
2017
 
2018
 
2017
Advertising
$
1,327

 
$
1,299

 
$
3,060

 
$
2,902

Content licensing and distribution:
 
 
 
 
 
 
 
Programming
889

 
850

 
1,724

 
1,534

Publishing
207

 
206

 
367

 
367

Affiliate and subscription fees
989

 
848

 
1,968

 
1,690

Other
54

 
54

 
108

 
107

Total Revenues
$
3,466

 
$
3,257

 
$
7,227

 
$
6,600


-22-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

12) ADOPTION OF “REVENUE FROM CONTRACTS WITH CUSTOMERS”
On January 1, 2018, the Company adopted FASB Accounting Standards Codification 606 (“ASC 606”) on the recognition of revenues using the modified retrospective method applied to all contracts. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior periods have not been adjusted. The Company recorded an increase to accumulated deficit of $261 million as of January 1, 2018 reflecting the cumulative impact of the adoption of ASC 606.

The adoption of ASC 606 primarily resulted in two changes to the Company’s revenue recognition policies.

Revenues from Distribution Arrangements
Revenues from the Company’s distribution of third-party content are now recognized based on the gross amount of consideration received from the customer, with an offsetting participation expense recognized for the fees paid to the third party. Under previous accounting guidance, such revenues, which include content licensing and distribution revenues and advertising revenues, were recognized at the net amount retained by the Company after the payment of fees to the third party. For the three and six months ended June 30, 2018, respectively, revenues and operating expenses relating to such distribution arrangements were each $61 million and $124 million higher under ASC 606 than the amounts that would have been reported under previous accounting guidance, with no impact to operating income.

Revenues from the Renewal of Licensing Agreements
Revenues associated with the renewal of an existing license agreement are now recognized at the beginning of the renewal period. Under previous accounting guidance, these revenues were recognized upon the execution of such renewal. Content licensing and distribution revenue comparisons will continue to be impacted by fluctuations resulting from the timing of when Company-owned television series are made available for multiyear licensing agreements. Therefore, this change is not expected to have a material impact on the trend of the Company’s financial results. Additionally, historically, on an annual basis, revenues from renewals executed each year have approximated revenues associated with renewal periods that began in the same year.

The following table presents the amount by which each applicable financial statement line item on the Consolidated Statement of Operations would have decreased for the three and six months ended June 30, 2018 if license renewals were recognized under previous accounting guidance.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2018
Revenues
 
$
29

 
 
 
$
141

 
Operating expenses
 
14

 
 
 
63

 
Operating income
 
15

 
 
 
78

 
Less: Provision for income taxes
 
3

 
 
 
16

 
Net earnings from continuing operations
 
$
12

 
 
 
$
62

 
Diluted EPS from continuing operations
 
$
.03

 
 
 
$
.16

 

-23-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

In addition, the adoption of ASC 606 resulted in certain classification changes on the Consolidated Balance Sheet. The primary change is the reclassification of the sales returns reserve relating to the publishing business to “Other current liabilities.” Such amount, which was $108 million at June 30, 2018, was previously presented as a reduction to receivables.

The following table presents the amount by which each applicable financial statement line item on the Consolidated Balance Sheet at June 30, 2018 would increase (decrease) if all of the above changes resulting from the adoption of ASC 606 were presented under previous accounting guidance.
Assets
 
Receivables, net
$
(82
)
Programming and other inventory (noncurrent)
$
(47
)
Other assets (noncurrent receivables)
$
436

 
 
Liabilities
 
Other current liabilities
$
(151
)
Deferred income tax liabilities, net
$
51

Participants’ share and royalties payable
$
208

 
 
Accumulated deficit
$
199

ASC 606 also requires enhanced disclosures relating to the Company’s revenues from contracts with customers (See Note 1), including the disaggregation of revenues into categories (See Note 11).
13) DISCONTINUED OPERATIONS
On November 16, 2017, the Company completed the split-off of CBS Radio through an exchange offer, in which the Company accepted 17.9 million shares of CBS Corp. Class B Common Stock from its stockholders in exchange for the 101.4 million shares of CBS Radio common stock that it owned. Immediately following the exchange offer, each share of CBS Radio common stock was converted into one share of Entercom Communications Corp. (“Entercom”) Class A common stock upon completion of the merger.


-24-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

The following table sets forth details of net loss from discontinued operations for the three and six months ended June 30, 2017.
 
Three Months Ended

Six Months Ended
 
June 30, 2017

June 30, 2017
Revenues
 
$
306

 
 
 
$
556

 
Costs and expenses:
 


 
 
 
 
 
Operating
 
105

 
 
 
194

 
Selling, general and administrative
 
128

 
 
 
250

 
Market value adjustment (a)
 
365

 
 
 
1,080

 
Restructuring charges (b)
 
7

 
 
 
7

 
Total costs and expenses
 
605

 
 
 
1,531

 
Operating loss
 
(299
)
 
 
 
(975
)
 
Interest expense
 
(20
)
 
 
 
(39
)
 
Other items, net
 
(1
)
 
 
 
(1
)
 
Loss from discontinued operations
 
(320
)
 
 
 
(1,015
)
 
Income tax provision
 
(19
)
 
 
 
(30
)
 
Net loss from discontinued operations, net of tax
 
$
(339
)
 
 
 
$
(1,045
)
 
(a) During 2017, prior to its split-off, CBS Radio was measured each reporting period at the lower of its carrying amount or fair value less cost to sell. The value of the transaction with Entercom was determined based on Entercom’s stock price at the closing of the transaction and therefore, the Company recorded a market value adjustment to adjust the carrying value of CBS Radio to the value indicated by the stock valuation of Entercom.
(b) Reflects restructuring charges associated with the reorganization of certain business operations, including severance costs and costs associated with exiting contractual obligations.
14) COMMITMENTS AND CONTINGENCIES
Guarantees
The Company has 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 June 30, 2018, the outstanding letters of credit and surety bonds approximated $107 million and were not recorded on the Consolidated Balance Sheet.

In the course of its business, the Company both provides and receives indemnities which are intended to allocate certain risks associated with business transactions. Similarly, the Company 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. The Company records a liability for its indemnification obligations and other contingent liabilities when probable and reasonably estimable.

Legal Matters
General. On an ongoing basis, the Company vigorously defends itself in numerous lawsuits and proceedings and responds to various investigations and inquiries from federal, state, local and international authorities (collectively, “litigation’’). Litigation may be brought against the Company without merit, is inherently uncertain and always difficult to predict. However, based on its understanding and evaluation of the relevant facts and circumstances, the Company believes that the below-described legal matters and other litigation to which it is a party are not likely, in the aggregate, to have a material adverse effect on its results of operations, financial position or cash flows, other than with respect to In re CBS Corporation Litigation, Consol. C.A. No. 2018-0342-AGB (Del. Ch.) described below, the potential impact of which cannot be ascertained at this time. Under the Separation Agreement between

-25-



CBS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular dollars in millions, except per share amounts)

the Company and Viacom Inc., the Company and Viacom Inc. have agreed to defend and indemnify the other in certain litigation in which the Company and/or Viacom Inc. is named.
Litigation Involving the Company and Its Controlling Stockholder, National Amusements, Inc., Among Others, in the Delaware Court of Chancery. On May 14, 2018, the Company and certain of the Company’s independent directors filed a lawsuit in the Delaware Court of Chancery against NAI, Ms. Shari Redstone, Mr. Sumner M. Redstone, NAI Entertainment Holdings LLC (“NAIEH”) and the Sumner M. Redstone National Amusements Trust (the “SMR Trust”). The verified complaint alleged, among other things, that NAI, Mr. Sumner M. Redstone and Ms. Shari Redstone had breached their fiduciary duties to the Company’s stockholders by abusing their control to threaten the independent corporate governance of the Company, and NAIEH and the SMR Trust had aided and abetted those breaches of fiduciary duty.  

On May 16, 2018, each of NAI and NAIEH delivered to the Company a written consent purporting to immediately effect certain amendments (the “Purported Bylaw Amendments”) to the Company’s amended and restated bylaws (the “Bylaws”). The Purported Bylaw Amendments, if valid and upon becoming effective, would (1) change the vote required and otherwise restrict the ability of the Company’s Board of Directors to declare and pay any dividend upon the capital stock of the Company, (2) change the vote required and otherwise restrict the ability of the Company’s Board of Directors to adopt, amend, alter, change or repeal any provisions of the Bylaws and (3) modify, in certain respects, the Company's existing Bylaw provision providing that the Court of Chancery of the State of Delaware is the exclusive jurisdiction for certain types of corporate litigation. On May 17, 2018, the Court denied the Company’s motion for a temporary restraining order against NAI, Mr. Sumner M. Redstone, Ms. Shari Redstone, NAIEH and the SMR Trust. Also on May 17, 2018, the Company’s Board of Directors declared a pro rata dividend of 0.5687 of a share of the Company’s voting Class A Common Stock for each share of the Company's Class A Common Stock and non-voting Class B Common Stock to stockholders of record as of the close of business on the record date, contingent on Delaware court approval (the “May 2018 Stock Dividend”).

On May 23, 2018, the Company and certain of the Company’s independent directors filed an amended verified complaint in the above matter. The amended verified complaint alleges, among other things, that NAI, NAIEH, Mr. Sumner M. Redstone, Ms. Shari Redstone and the SMR Trust form a controlling stockholder group and have breached their fiduciary duties to the Company’s stockholders by abusing their control to threaten the independent corporate governance of the Company and that the Purported Bylaw Amendments are invalid or were ineffective as of May 17, 2018. The amended verified complaint seeks a declaration that the May 2018 Stock Dividend is valid and permissible, a declaration that the Purported Bylaw Amendments are invalid or were ineffective as of May 17, 2018 and an injunction against any action by NAI, Mr. Sumner M. Redstone, Ms. Shari Redstone, NAIEH or the SMR Trust to interfere with the composition of the Company’s Board of Directors or to modify the Company’s governance documents before the issuance of any shares pursuant to the May 2018 Stock Dividend.