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 September 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 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 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 October 31, 2018:
Class A Common Stock, par value $.001 per share— 37,507,526
Class B Common Stock, par value $.001 per share— 336,787,717
 




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

- 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,
 
2018
 
2017
 
2018
 
2017
Revenues
$
3,263

 
$
3,171

 
$
10,490

 
$
9,771

Costs and expenses:
 

 
 

 
 
 
 
Operating
1,922

 
1,862

 
6,506

 
5,940

Selling, general and administrative
549

 
525

 
1,605

 
1,520

Depreciation and amortization
56

 
55

 
168

 
166

Restructuring and other corporate matters (Note 3)
46




90



Total costs and expenses
2,573

 
2,442

 
8,369

 
7,626

Operating income
690

 
729

 
2,121

 
2,145

Interest expense
(115
)
 
(116
)
 
(349
)
 
(336
)
Interest income
12

 
17

 
43

 
45

Loss on early extinguishment of debt

 
(5
)
 

 
(5
)
Other items, net
(17
)
 
(19
)
 
(52
)
 
(56
)
Earnings from continuing operations before income taxes and
equity in loss of investee companies
570

 
606

 
1,763

 
1,793

Provision for income taxes
(64
)
 
(172
)
 
(312
)
 
(479
)
Equity in loss of investee companies, net of tax
(18
)
 
(16
)
 
(52
)
 
(45
)
Net earnings from continuing operations
488

 
418

 
1,399

 
1,269

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

 
174

 

 
(871
)
Net earnings
$
488

 
$
592

 
$
1,399

 
$
398

 
 
 
 
 
 
 
 
Basic net earnings (loss) per common share:
 

 
 

 
 
 
 
Net earnings from continuing operations
$
1.30


$
1.04


$
3.70


$
3.13

Net earnings (loss) from discontinued operations
$


$
.43


$


$
(2.15
)
Net earnings
$
1.30


$
1.48


$
3.70


$
.98

 
 
 
 
 
 
 
 
Diluted net earnings (loss) per common share:
 

 
 

 
 
 
 
Net earnings from continuing operations
$
1.29


$
1.03


$
3.66


$
3.10

Net earnings (loss) from discontinued operations
$


$
.43


$


$
(2.12
)
Net earnings
$
1.29


$
1.46


$
3.66


$
.97

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 

 
 

 
 
 
 
Basic
375

 
401

 
378

 
405

Diluted
379


406


382


410

 
 
 
 
 
 
 
 
Dividends per common share
$
.18

 
$
.18

 
$
.54

 
$
.54

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,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
488

 
$
592

 
$
1,399

 
$
398

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Cumulative translation adjustments
(3
)
 
2

 
(17
)
 
4

Amortization of net actuarial loss
15

 
13

 
45

 
37

Total other comprehensive income, net of tax
12

 
15

 
28

 
41

Total comprehensive income
$
500


$
607


$
1,427


$
439

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, 2018
 
December 31, 2017
ASSETS
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
182

 
 
 
$
285

 
Receivables, less allowances of $48 (2018) and $49 (2017)
 
3,697

 
 
 
3,697

 
Programming and other inventory (Note 4)
 
1,828

 
 
 
1,828

 
Prepaid income taxes
 

 
 
 
78

 
Prepaid expenses
 
137

 
 
 
194

 
Other current assets
 
196

 
 
 
191

 
Total current assets
 
6,040

 
 
 
6,273

 
Property and equipment
 
3,004

 
 
 
3,051

 
Less accumulated depreciation and amortization
 
1,782

 
 
 
1,771

 
Net property and equipment
 
1,222

 
 
 
1,280

 
Programming and other inventory (Note 4)
 
3,868

 
 
 
2,881

 
Goodwill
 
4,921

 
 
 
4,891

 
Intangible assets
 
2,650

 
 
 
2,666

 
Other assets
 
2,367

 
 
 
2,852

 
Total Assets
 
$
21,068




$
20,843

 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS EQUITY
 


 
 
 


 
Current Liabilities:
 


 
 
 


 
Accounts payable
 
$
229

 
 
 
$
231

 
Accrued compensation
 
256

 
 
 
343

 
Participants’ share and royalties payable
 
1,110

 
 
 
986

 
Program rights
 
406

 
 
 
373

 
Income taxes payable
 
68

 
 
 

 
Commercial paper (Note 6)
 
374

 
 
 
679

 
Current portion of long-term debt (Note 6)
 
14

 
 
 
19

 
Accrued expenses and other current liabilities
 
1,536

 
 
 
1,341

 
Total current liabilities
 
3,993

 
 
 
3,972

 
Long-term debt (Note 6)
 
9,465

 
 
 
9,464

 
Pension and postretirement benefit obligations
 
1,226

 
 
 
1,328

 
Deferred income tax liabilities, net
 
563

 
 
 
480

 
Other liabilities
 
3,307

 
 
 
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
 
43,668

 
 
 
43,797

 
Accumulated deficit
 
(17,762
)
 
 
 
(18,900
)
 
Accumulated other comprehensive loss (Note 8)
 
(634
)
 
 
 
(662
)
 
 
 
25,273

 
 
 
24,236

 
Less treasury stock, at cost; 498 (2018) and 489 (2017) Class B shares
 
22,759

 
 
 
22,258

 
Total Stockholders Equity
 
2,514

 
 
 
1,978

 
Total Liabilities and Stockholders Equity
 
$
21,068

 
 
 
$
20,843

 
See notes to consolidated financial statements.

-5-


CBS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
 
Nine Months Ended
 
September 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net earnings
$
1,399

 
$
398

Less: Net loss from discontinued operations, net of tax

 
(871
)
Net earnings from continuing operations
1,399


1,269

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





Depreciation and amortization
168


166

Stock-based compensation
105


129

Equity in loss of investee companies, net of tax and distributions
52


45

Change in assets and liabilities, net of investing and financing activities
(545
)

(674
)
Net cash flow provided by operating activities from continuing operations
1,179


935

Net cash flow provided by operating activities from discontinued operations
1


52

Net cash flow provided by operating activities
1,180


987

Investing Activities:





Investments in and advances to investee companies
(76
)

(67
)
Capital expenditures
(99
)

(112
)
Acquisitions (including acquired television library)
(29
)
 
(258
)
Proceeds from sale of investments

 
10

Proceeds from dispositions


11

Other investing activities
8

 
17

Net cash flow used for investing activities from continuing operations
(196
)

(399
)
Net cash flow used for investing activities from discontinued operations
(23
)

(18
)
Net cash flow used for investing activities
(219
)

(417
)
Financing Activities:





(Repayments of) proceeds from short-term debt borrowings, net
(305
)

140

Proceeds from issuance of senior notes

 
889

Repayment of senior notes

 
(701
)
Proceeds from debt borrowings of CBS Radio

 
40

Repayment of debt borrowings of CBS Radio

 
(23
)
Payment of capital lease obligations
(12
)

(13
)
Payment of contingent consideration
(5
)
 
(7
)
Dividends
(208
)

(224
)
Purchase of Company common stock
(497
)

(1,111
)
Payment of payroll taxes in lieu of issuing shares for stock-based compensation
(59
)

(89
)
Proceeds from exercise of stock options
23


81

Other financing activities
(1
)
 

Net cash flow used for financing activities
(1,064
)

(1,018
)
Net decrease in cash and cash equivalents
(103
)

(448
)
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 $30 (2017) of discontinued operations cash)
$
182


$
174

Supplemental disclosure of cash flow information





Cash paid for interest:
 
 
 
Continuing operations
$
406

 
$
393

Discontinued operations
$

 
$
52

 
 
 
 
Cash (refunded) paid for income taxes:
 
 
 
Continuing operations
$
(19
)
 
$
321

Discontinued operations
$
(3
)
 
$
58

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 10; 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 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, the delivery of the advertising spots that achieve the guarantee represents the performance obligation and revenues are recognized based on the proportion of the audience rating or impressions delivered to the total guaranteed in the contract. 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
For licenses of internally-produced television programming, each individual episode delivered represents a separate performance obligation and revenues are recognized when the episode 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 episode of a television series, which is based on licenses for comparable series within the marketplace. 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.

The performance obligation for the Company’s affiliate agreements is a license to the Company’s programming provided through the continuous delivery of live linear feeds and, for agreements with MVPDs, also includes a license to programming for video on demand viewing. Affiliate and subscription fees are recognized over the term of the agreement as the Company continuously provides its customer with the right to use its programming. For agreements that provide for a variable fee, revenues are determined each month based on an agreed upon contractual rate applied to the number of subscribers to the customer’s service. For agreements that provide for a fixed fee, which primarily include agreements with television stations affiliated with the CBS Television Network (“network affiliates”), revenues are recognized based on the relative fair value of the content provided over the term of the agreement, which is determined based on the fair value of the network affiliate’s service and the value of the Company’s programming. For affiliate and subscription fee revenues, payments are generally due monthly.

Noncurrent Receivables-Noncurrent receivables of $1.60 billion and $1.59 billion at September 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.


-8-



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

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 $259 million and $284 million at September 30, 2018 and January 1, 2018, respectively. The change in deferred revenue for the nine months ended September 30, 2018 primarily reflects $178 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 September 30, 2018, unrecognized revenue attributable to unsatisfied performance obligations under the Company’s long-term contracts was $3.41 billion, of which $522 million is expected to be recognized for the remainder of 2018, $1.58 billion for 2019, $771 million for 2020, and $534 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”) 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 7 million stock options for each of the three and nine months ended September 30, 2018 and 4 million stock options for each of the three and nine months ended September 30, 2017.

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)
2018
 
2017
 
2018
 
2017
Weighted average shares for basic EPS
375

 
401

 
378

 
405

Dilutive effect of shares issuable under stock-based
compensation plans
4

 
5

 
4

 
5

Weighted average shares for diluted EPS
379

 
406

 
382

 
410

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.


-9-



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

Additional Paid-In Capital-For the nine months ended September 30, 2018 and 2017, the Company recorded dividends of $206 million and $221 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 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 items 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 $47 million of net benefit costs in “Other items, net” on the Consolidated Statement of Operations for the three and nine months ended September 30, 2018, respectively, representing the components of net benefit cost other than service cost. This guidance is required to be applied retrospectively and therefore, $22 million and $65 million of expenses, previously presented within operating income, have been reclassified to “Other items, net” for the three and nine months ended September 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

-10-



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

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.

Accounting Pronouncements Not Yet Adopted
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.

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 interim and annual periods beginning 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.

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.


-11-



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

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 is in the process of implementing new lease accounting software for administering its leases under the new guidance. 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 nine months ended September 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
RSUs and PSUs
$
7

 
$
38

 
$
86

 
$
109

Stock options
7

 
6

 
19

 
20

Stock-based compensation expense, before income taxes
14

 
44

 
105

 
129

Related tax benefit
(3
)
 
(17
)
 
(26
)
 
(50
)
Stock-based compensation expense, net of tax benefit
$
11

 
$
27

 
$
79

 
$
79

Stock-based compensation expense for the three and nine months ended September 30, 2018 includes forfeitures of $28 million and accelerations of $6 million relating to changes in senior management, which are included in “Restructuring and other corporate matters” on the Consolidated Statements of Operations. During the nine months ended September 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 $53.96. RSUs granted during the first nine 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 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 nine months ended September 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 nine months of 2018 vest over a

-12-



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

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 at September 30, 2018 was $201 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 September 30, 2018 was $40 million, which is expected to be recognized over a weighted average period of 2.6 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 September 30, 2018, the cumulative settlements for the 2018, 2017 and 2016 restructuring charges were $67 million, of which $56 million was for severance costs and $11 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
 
September 30, 2018
Entertainment
 
$
45

 
 
 
$
6

 
 
 
$
(26
)
 
 
 
$
25

 
Cable Networks
 
1

 
 
 

 
 
 
(1
)
 
 
 

 
Publishing
 
3

 
 
 
1

 
 
 
(2
)
 
 
 
2

 
Local Media
 
14

 
 
 
11

 
 
 
(7
)
 
 
 
18

 
Corporate
 
3

 
 
 
7

 
 
 
(4
)
 
 
 
6

 
Total
 
$
66

 
 
 
$
25

 
 
 
$
(40
)
 
 
 
$
51

 
 
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 nine months ended September 30, 2018, the Company recorded expenses of $46 million and $65 million, respectively, primarily for professional fees related to legal proceedings and the ongoing investigations at the Company. (See Note 14). The nine-month period also included professional fees related to the evaluation of a potential combination with Viacom Inc.

-13-



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, 2018
 
December 31, 2017
Acquired program rights
 
$
2,373

 
 
 
$
2,234

 
Acquired television library
 
99

 
 
 
99

 
Internally produced programming:
 
 
 
 
 
 
 
Released
 
2,481

 
 
 
1,780

 
In process and other
 
680

 
 
 
543

 
Publishing, primarily finished goods
 
63

 
 
 
53

 
Total programming and other inventory
 
5,696

 
 
 
4,709

 
Less current portion
 
1,828

 
 
 
1,828

 
Total noncurrent programming and other inventory
 
$
3,868

 
 
 
$
2,881

 

5) RELATED PARTIES
National Amusements, Inc. 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 was a director of CBS Corp. until his resignation on September 9, 2018. Mr. Andelman serves as a director of NAI. At September 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. 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 Corp. director Ms. Shari Redstone. Mr. Andelman also currently serves as a trustee. No member of the Company’s management is a trustee of the SMR Trust. See “Legal Matters” in Note 14 for information regarding recently settled litigation involving the foregoing parties.

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 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 $76 million and $38 million for the three months ended September 30, 2018 and 2017, respectively, and $105 million and $111 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company leases production facilities, licenses feature films and purchases advertising spots from various subsidiaries of Viacom Inc. The total amounts for these transactions were $9 million and $4 million for the three months ended September 30, 2018 and 2017, respectively, and $21 million and $13 million for the nine months ended September 30, 2018 and 2017, respectively.


-14-



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

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 September 30, 2018 and December 31, 2017.
 
At
 
At
 
September 30, 2018
 
December 31, 2017
Receivables
 
$
40

 
 
 
$
93

 
Other assets (Receivables, noncurrent)
 
25

 
 
 
11

 
Total amounts due from Viacom
 
$
65

 
 
 
$
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 $14 million and $5 million for the three months ended September 30, 2018 and 2017, respectively and $67 million and $54 million for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018 and December 31, 2017, total amounts due from these joint ventures were $23 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.
6) BANK FINANCING AND DEBT
The following table sets forth the Company’s debt.

At
 
At

September 30, 2018
 
December 31, 2017
Commercial paper

$
374




$
679


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

9,433




9,426


Obligations under capital leases

46




57


Total debt

9,853




10,162


Less commercial paper

374




679


Less current portion of long-term debt

14




19


Total long-term debt, net of current portion

$
9,465




$
9,464


(a) At September 30, 2018 and December 31, 2017, the senior debt balances included (i) a net unamortized discount of $60 million and $65 million, respectively, (ii) unamortized deferred financing costs of $44 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 September 30, 2018 and December 31, 2017.


-15-



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

At September 30, 2018, the Company classified $600 million of debt maturing in August 2019 as long-term debt on the Consolidated Balance Sheet, reflecting its intent and ability to refinance this debt on a long-term basis.
Commercial Paper
The Company had outstanding commercial paper borrowings under its $2.5 billion commercial paper program of $374 million and $679 million at September 30, 2018 and December 31, 2017, respectively, each with maturities of less than 90 days. The weighted average interest rate for these borrowings was 2.41% at September 30, 2018 and 1.88% at December 31, 2017.
Credit Facility
At September 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 September 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 September 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.
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,
2018
 
2017
 
2018
 
2017
Components of net periodic cost:
 
 
 
 
 
 
 
Service cost
$
7

 
$
7

 
$

 
$

Interest cost
38

 
48

 
3

 
4

Expected return on plan assets
(45
)
 
(50
)
 

 

Amortization of actuarial loss (gain) (a)
24

 
26

 
(4
)
 
(5
)
Net periodic cost
$
24

 
$
31

 
$
(1
)
 
$
(1
)
 
Pension Benefits
 
Postretirement Benefits
Nine Months Ended September 30,
2018

2017

2018

2017
Components of net periodic cost:
 
 
 
 
 
 
 
Service cost
$
23

 
$
22

 
$

 
$

Interest cost
112

 
143

 
11

 
13

Expected return on plan assets
(135
)
 
(151
)
 

 

Amortization of actuarial loss (gain) (a)
72

 
77

 
(13
)
 
(16
)
Net periodic cost
$
72

 
$
91

 
$
(2
)
 
$
(3
)
(a) Reflects amounts reclassified from accumulated other comprehensive loss to net earnings.

-16-



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

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 third quarter of 2018, the Company repurchased 1.8 million shares of its Class B Common Stock under its share repurchase program for $100 million, at an average cost of $55.13 per share. During the nine months ended September 30, 2018, the Company repurchased 9.4 million shares of its Class B Common Stock for $500 million, at an average cost of $52.94 per share, leaving $2.56 billion of authorization at September 30, 2018.

During the third quarter of 2018, the Company declared a quarterly cash dividend of $.18 per share on its Class A and Class B Common Stock, resulting in total dividends of $68 million, which were paid on October 1, 2018. During the nine months ended September 30, 2018, the Company declared total per share cash dividends of $.54 on its Class A and Class B Common Stock, resulting in total dividends of $206 million.
On May 17, 2018, the Company’s Board of Directors voted 11 to 3 in favor of 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 and conditioned the issuance of such dividend on Delaware court approval (the “May 2018 Stock Dividend”). In connection with the settlement agreement involving legal proceedings in the Delaware Court of Chancery, on September 9, 2018, the Board rescinded the May 2018 Stock Dividend. See “Legal Matters” in Note 14 for related information.
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
(17
)
 

 
 
(17
)
 
Reclassifications to net earnings

 
45

(a) 
 
45

 
Net other comprehensive income (loss)
(17
)
 
45


 
28

 
At September 30, 2018
$
142

 
$
(776
)

 
$
(634
)
 
 
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
4

 

 
 
4

 
Reclassifications to net earnings

 
37

(a) 
 
37

 
Net other comprehensive income
4

 
37

 
 
41

 
At September 30, 2017
$
155

 
$
(881
)
 
 
$
(726
)
 
(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 $14 million and $24 million for the nine months ended September 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 September 30,

Nine Months Ended September 30,
 
2018

2017

2018

2017
Provision for income taxes, including interest and before
other discrete items (a)
$
120

 
$
187

 
$
370

 
$
548

Impact of tax law changes (b)
(54
)
 

 
(54
)
 

Excess tax benefits from stock-based compensation (c)


(10
)
 


(41
)
Other discrete items (d)
(2
)

(5
)

(4
)

(28
)
Provision for income taxes
$
64


$
172


$
312


$
479

Effective income tax rate
11.2
%

28.4
%

17.7
%

26.7
%
(a) The lower tax provision for the three and nine months ended September 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 (the “Tax Reform Act”).
(b) During the third quarter of 2018, in connection with the preparation of its 2017 federal tax return, the Company elected to utilize a federal tax law provision that was retroactively renewed in 2018. This tax law provision allowed the Company to immediately expense certain qualified production costs on its 2017 tax return. As a result, during the third quarter of 2018, the Company established a deferred tax liability associated with this deduction at the 2017 federal tax rate of 35%, and concurrently recorded a net tax benefit of $69 million, primarily reflecting the re-measurement of this deferred tax liability at the reduced federal corporate tax rate of 21% under the Tax Reform Act. This benefit was partially offset by a charge of $15 million to adjust the provisional amount of transition tax on cumulative foreign earnings and profits that resulted from the enactment of the Tax Reform Act in 2017. See discussion below.
(c) 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.
(d) For the nine months ended September 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 of $129 million, reflecting the estimated transition tax of $407 million on cumulative foreign earnings and profits, offset by an estimated benefit of $278 million 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 nine months ended September 30, 2018. During the third quarter of 2018, the Company recorded a charge of $15 million to adjust the provisional amount of transition tax on cumulative foreign earnings and profits. 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 additional 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.

-18-



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

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 September 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 $9.57 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.

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 September 30, 2018 and December 31, 2017, the notional amount of all foreign exchange contracts was $391 million and $410 million, respectively.
Gains (losses) recognized on derivative financial instruments were as follows:
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Financial Statement Account
Non-designated foreign exchange contracts
$

 
$
(9
)
 
$
13

 
$
(29
)
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.

-19-



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

The following tables set forth the Company’s assets and liabilities measured at fair value on a recurring basis at September 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 September 30, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Foreign currency hedges
$

 
$
9

 
$

 
$
9

Total Assets
$

 
$
9

 
$

 
$
9

Liabilities:
 
 
 
 
 
 
 
Deferred compensation
$

 
$
375

 
$

 
$
375

Foreign currency hedges

 
1

 

 
1

Total Liabilities
$

 
$
376

 
$

 
$
376

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

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
 
Nine Months Ended

September 30,
 
September 30,

2018
 
2017

2018
 
2017
Revenues:











Entertainment
$
2,151


$
1,815


$
7,232


$
6,346

Cable Networks
569


840


1,769


1,954

Publishing
240


228


607


595

Local Media
434

 
397

 
1,269

 
1,218

Corporate/Eliminations
(131
)

(109
)

(387
)

(342
)
Total Revenues
$
3,263


$
3,171


$
10,490


$
9,771


-20-



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

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Intercompany Revenues:
 
 
 
 
 
 
 
Entertainment
$
135

 
$
111

 
$
394

 
$
348

Cable Networks
2

 

 
2

 

Local Media
3

 
4

 
13

 
10

Total Intercompany Revenues
$
140

 
$
115

 
$
409

 
$
358

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Segment Operating Income (Loss):
 
 
 
 
 
 
 
Entertainment
$
377

 
$
350

 
$
1,225

 
$
1,104

Cable Networks
248

 
296

 
734

 
801

Publishing
51

 
47

 
98

 
91

Local Media
124

 
106

 
370

 
358

Corporate
(64
)
 
(70
)
 
(216
)
 
(209
)
Restructuring and other corporate matters
(46
)
 

 
(90
)
 

Operating income
690


729


2,121


2,145

Interest expense
(115
)
 
(116
)
 
(349
)
 
(336
)
Interest income
12

 
17

 
43

 
45

Loss on early extinguishment of debt

 
(5
)
 

 
(5
)
Other items, net
(17
)
 
(19
)
 
(52
)
 
(56
)
Earnings from continuing operations before income taxes
and equity in loss of investee companies
570

 
606

 
1,763

 
1,793

Provision for income taxes
(64
)
 
(172
)
 
(312
)
 
(479
)
Equity in loss of investee companies, net of tax
(18
)
 
(16
)
 
(52
)
 
(45
)
Net earnings from continuing operations
488

 
418

 
1,399

 
1,269

Net earnings (loss) from discontinued operations, net of tax

 
174

 

 
(871
)
Net earnings
$
488

 
$
592

 
$
1,399

 
$
398


-21-



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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Depreciation and Amortization:
 
 
 
 
 
 
 
Entertainment
$
31


$
29


$
92


$
85

Cable Networks
5


5


16


17

Publishing
1


2


4


5

Local Media
11

 
11

 
33

 
34

Corporate
8


8


23


25

Total Depreciation and Amortization
$
56


$
55


$
168


$
166

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Stock-based Compensation:
 
 
 
 
 
 
 
Entertainment
$
17

 
$
16

 
$
48

 
$
48

Cable Networks
4

 
3

 
10

 
9

Publishing
1

 
1

 
3

 
3

Local Media
3

 
3

 
9

 
9

Corporate (a)
(11
)
 
21

 
35

 
60

Total Stock-based Compensation
$
14

 
$
44

 
$
105

 
$
129

(a) Included in the three and nine months ended September 30, 2018 are forfeitures of $28 million and accelerations of $6 million relating to changes in senior management.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018

2017
 
2018

2017
Capital Expenditures:
 
 
 
 
 
 
 
Entertainment
$
19


$
25


$
56


$
63

Cable Networks
5


5


12


12

Publishing
2


1


4


2

Local Media
6

 
8

 
15

 
20

Corporate
5

 
5

 
12

 
15

Total Capital Expenditures
$
37

 
$
44

 
$
99

 
$
112

 
At
 
At
 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
 
 
 
 
Entertainment
 
$
12,763

 
 
 
$
12,626

 
Cable Networks
 
3,008

 
 
 
2,878

 
Publishing
 
1,047

 
 
 
906

 
Local Media
 
3,996

 
 
 
4,042

 
Corporate/Eliminations
 
242

 
 
 
378

 
Discontinued operations
 
12

 
 
 
13

 
Total Assets
 
$
21,068

 
 
 
$
20,843

 

-22-



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

The following table presents the Company’s revenues disaggregated into categories based on the nature of such revenues.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Revenues by Type
2018
 
2017
 
2018
 
2017
Advertising
$
1,263

 
$
1,106

 
$
4,323

 
$
4,008

Content licensing and distribution:
 
 
 
 
 
 
 
Programming
693

 
632

 
2,417

 
2,166

Publishing
240

 
228

 
607

 
595

Affiliate and subscription fees
1,008

 
1,145

 
2,976

 
2,835

Other
59

 
60

 
167

 
167

Total Revenues
$
3,263

 
$
3,171

 
$
10,490

 
$
9,771

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 nine months ended September 30, 2018, respectively, revenues and operating expenses relating to such distribution arrangements were each $93 million and $217 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.


-23-



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

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 nine months ended September 30, 2018 if license renewals were recognized under previous accounting guidance.
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2018
Revenues
 
$
41

 
 
 
$
182

 
Operating expenses
 
19

 
 
 
82

 
Operating income
 
22

 
 
 
100

 
Less: Provision for income taxes
 
5

 
 
 
21

 
Net earnings from continuing operations
 
$
17

 
 
 
$
79

 
Diluted EPS from continuing operations
 
$
.04

 
 
 
$
.21

 
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 $116 million at September 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 September 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
$
(89
)
Programming and other inventory (noncurrent)
$
(45
)
Other assets (noncurrent receivables)
$
386

 
 
Liabilities
 
Other current liabilities
$
(141
)
Deferred income tax liabilities, net
$
46

Participants’ share and royalties payable
$
165

 
 
Accumulated deficit
$
182

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 earnings (loss) from discontinued operations for the three and nine months ended September 30, 2017.
 
Three Months Ended

Nine Months Ended
 
September 30, 2017

September 30, 2017
Revenues
 
$
300

 
 
 
$
856

 
Costs and expenses:
 


 
 
 
 
 
Operating
 
113

 
 
 
307

 
Selling, general and administrative
 
120

 
 
 
370

 
Market value adjustment (a)
 
(100
)
 
 
 
980

 
Restructuring charges (b)
 

 
 
 
7

 
Total costs and expenses
 
133

 
 
 
1,664

 
Operating income (loss)
 
167

 
 
 
(808
)
 
Interest expense