To Invest or Not Invest
April 29, 2018
Capella University
Viacom, Inc. is a leader in branded entertainment. They offer entertainment across,
television, motion pictures and digital media platforms. Viacom, Inc. is the parent company to
Paramount Pictures, CBS, Nickelodeon, BET, Comedy Central and MTV has an aggressive
strategy to stabilize the business and continue to grow a strong foundation. In fiscal 2017,
Viacom’s revenues increased six percent to $13.3 billion; adjusted operating income held steady
at $2.7 billion after decreasing 30% in fiscal 2016 and their net earnings and diluted earnings per
share increased by double digits to $1.9 billion and $4.67 respectively (Viacom).
At the end of Viacom’s fiscal year end, September 30, 2017, their assets were
$23,698,000, their total liabilities were $11,119.000 and the stockholders’ equity was
$6,035,000. (Edgar).
Given the company grew 6% to $13.3 billion, reflecting gains across Filmed
Entertainment and Media Networks segments, operating income decreased 1% to $2.49 billion,
reflecting higher segment expenses partially offset by revenue growth and the adjusted operating
income was flat at $2.74 billion. Net earnings from continuing operations attributable to Viacom
grew 30% to $1.87 billion, principally due to gains on asset sales, and adjusted net earnings from
continuing operations attributable to Viacom improved 3% to $1.51 billion, principally driven by
a decrease in the adjusted effective tax rate. Diluted earnings per share for the full fiscal year
increased $1.06 to $4.67, while adjusted diluted earnings per share increased $0.09 to $3.77, it is
fair to say that if the company were liquidated at the end of the fiscal year, the shareholders
would be guaranteed to receive their fair share of owners’ equity.
Viacom’s noncurrent liabilities for the 2017 fiscal year was $3,982,000. We had $486
million and $547 million of noncurrent trade receivables as of September 30, 2017 and 2016,
respectively. Accounts receivables are principally related to long-term television license
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arrangements at Filmed Entertainment and subscription video-on-demand and other OTT
arrangements at Media Networks. These amounts are included within Other assets noncurrent in our Consolidated Balance Sheets. Such amounts are due in accordance with the
underlying terms of the respective agreements with companies that are investment grade or with
which we have historically done business under similar terms. We have determined that credit
loss allowances are generally not considered necessary for these amounts. (10K)
1. What was the company's current ratio for the fiscal year?
Viacom had an inflow of cash from investing activities for acquisitions and capital
expenditures in the amount of $329,000. Viacom’s cash flow was $1,510,000.00 because they
generate a significant percentage of our cash flow from operating activities. Advertising is
generally purchased by large media buying agencies and our affiliate revenues are earned from
cable and direct-to-home satellite television operators and other distributors. The Filmed
Entertainment segment’s operational results and ability to generate cash flow from operations
substantially depend on the number and timing of films and television series in development and
production, the level and timing of print and advertising costs, and the public’s response to our
theatrical film and home entertainment releases. In general, our segments require relatively low
levels of capital expenditures in relation to our annual cash flow from operations. This
contributes to our ability to generate cash flow for future investment in our content and business
operations, which we expect to be able to maintain over time.
Viacom believes that its cash flows from operating activities together with its credit
facility provide Viacom with adequate resources to fund their anticipated ongoing cash
requirements. Viacom anticipates that future debt maturities will be funded with cash and cash
equivalents, cash flows from operating activities and future access to capital markets, including
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its credit facility. This cash flow is different from the operating income because their measure of
segment performance is adjusted operating income. Adjusted operating income is defined as
operating income, before equity-based compensation and certain other items identified as
affecting comparability, when applicable.
2. What is the company's revenue recognition policy? (Hint: Look in the notes to the
financial statements.)
Loss on extinguishment of debt: We redeemed senior notes and debentures totaling $3.3 billion in
2017, resulting in the recognition of a net pre-tax extinguishment loss of $20 million within Other
Items, net in the Consolidated Statement of Earnings.
Investment impairment: We recognized a $10 million impairment loss included within Other items,
net in the Consolidated Statement of Earnings in connection with the write-down of a cost method
investment in 2017.
Discrete tax benefit: The net discrete tax benefit was principally related to the recognition of foreign
tax credits realized during the-fourth fiscal quarter of 2017 on the distribution to Viacom’s U.S. group
of certain securities, the reversal of a valuation allowance on capital loss carryforwards in connection
with the sale of our investment in EPIX and the release of tax reserves with respect to certain
effectively settled tax positions.
Viacom calculates the General and Administrative expenses as
2015
2016
2017
3. Calculate general, administrative, and selling expenses as a percentage of sales for
the past three fiscal years. By what percentage did these expenses increase or
decrease? This is calculated as Percentage Change = (Current Year % − Prior Year
%) / Prior Year %.
For the fiscal year 2017, the total asset turnover was .57% (revenue ($13,263,000)
divided by total asset ($23,103,000). This high turnover rate was due to the purchase of
_________.
The prepaid assets are located on the consolidated balance sheets are $523,000 and other
liabilities are $434,000.
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Viacom reported its deferred revenue of $463,000 and other liabilities of ($294,000) on
the balance sheet.
Prepaid rent is reported as a current asset while deferred rent is reported on the balance
sheet as a noncurrent or long-term asset. An accrued liability is an expense that Viacom has
incurred but has not yet paid and is located on the balance sheet. Short term and long-term
investment in certain films released during the fiscal would generate the interest income that is
reported on the income statement.
4. What are the company's earnings per share (basic only) for the three years
reported?
5. Compute the company's net profit margin for the three years reported. What does
the trend suggest to you?
6. How much cash and cash equivalents does the company report at the end of the
fiscal year?
7. What was the change in accounts receivable and how did it affect net cash provided
by operating activities for the current year?
8. Compute the company's gross profit percentage for the most recent two years. Has
it risen or fallen? Explain the meaning of the change.
Although Viacom is a solid company and had a downward twist this first quarter of 2018,
it is a solid company and if you are looking for a long-term investment, it should be seriously
considered. The entertainment business will not go away and Viacom has been in the business
for a long time. It is noted that their adjusted operating income decreased 4% to 717 million and
their filmed entertainment, international and theatrical revenues all declines, the company will
take the steps needed to maintain their market share. Accordingly, it is recommended to proceed
with investment, but cautiously.
References
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Noto, Anthony (2018) – Viacom https://www.bizjournals.com/newyork/news/2018/02/08/viacom-revenue-slumps-but-on-trackfor-growth.html
Viacom, Inc. Retrieved from: https://www.gurufocus.com/term/turnover/NAS:VIAB/AssetTurnover/Viacom-Inc
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