UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2018
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-35769
NEWS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 46-2950970 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1211 Avenue of the Americas, New York, New York | 10036 | |
(Address of principal executive offices) | (Zip Code) |
(212) 416-3400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 1, 2019, 385,325,489 shares of Class A Common Stock and 199,630,240 shares of Class B Common Stock were outstanding.
NEWS CORPORATION
FORM 10-Q
Page | ||||
Part I. Financial Information |
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Item 1. Financial Statements |
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Consolidated Balance Sheets as of December 31, 2018 (unaudited) and June 30, 2018 (audited) |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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64 |
PART I
ITEM 1. FINANCIAL STATEMENTS
NEWS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; millions, except per share amounts)
For the three months ended |
For the six months ended |
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December 31, | December 31, | |||||||||||||||||||
Notes | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||
Revenues: |
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Circulation and subscription |
$ | 1,029 | $ | 637 | $ | 2,063 | $ | 1,288 | ||||||||||||
Advertising |
718 | 717 | 1,382 | 1,399 | ||||||||||||||||
Consumer |
478 | 453 | 878 | 839 | ||||||||||||||||
Real estate |
248 | 222 | 475 | 425 | ||||||||||||||||
Other |
154 | 151 | 353 | 287 | ||||||||||||||||
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Total Revenues |
2 | 2,627 | 2,180 | 5,151 | 4,238 | |||||||||||||||
Operating expenses |
(1,484 | ) | (1,139 | ) | (2,824 | ) | (2,288 | ) | ||||||||||||
Selling, general and administrative |
(773 | ) | (713 | ) | (1,599 | ) | (1,374 | ) | ||||||||||||
Depreciation and amortization |
(163 | ) | (100 | ) | (326 | ) | (197 | ) | ||||||||||||
Impairment and restructuring charges |
4 | (19 | ) | (12 | ) | (37 | ) | (27 | ) | |||||||||||
Equity losses of affiliates |
5 | (6 | ) | (18 | ) | (9 | ) | (28 | ) | |||||||||||
Interest (expense) income, net |
(15 | ) | 1 | (31 | ) | 7 | ||||||||||||||
Other, net |
14 | 7 | (30 | ) | 27 | (21 | ) | |||||||||||||
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Income before income tax expense |
174 | 169 | 352 | 310 | ||||||||||||||||
Income tax expense |
12 | (55 | ) | (235 | ) | (105 | ) | (289 | ) | |||||||||||
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Net income (loss) |
119 | (66 | ) | 247 | 21 | |||||||||||||||
Less: Net income attributable to noncontrolling interests |
(24 | ) | (17 | ) | (51 | ) | (36 | ) | ||||||||||||
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Net income (loss) attributable to News Corporation stockholders |
$ | 95 | $ | (83 | ) | $ | 196 | $ | (15 | ) | ||||||||||
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Net income (loss) available to News Corporation stockholders per share: |
10 | |||||||||||||||||||
Basic |
$ | 0.16 | $ | (0.14 | ) | $ | 0.34 | $ | (0.03 | ) | ||||||||||
Diluted |
$ | 0.16 | $ | (0.14 | ) | $ | 0.33 | $ | (0.03 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
NEWS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited; millions)
For the three months ended |
For the six months ended |
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December 31, | December 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income (loss) |
$ | 119 | $ | (66 | ) | $ | 247 | $ | 21 | |||||||
Other comprehensive (loss) income: |
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Foreign currency translation adjustments |
(147 | ) | | (257 | ) | 134 | ||||||||||
Net change in the fair value of cash flow hedges(a) |
5 | | 7 | | ||||||||||||
Unrealized holding gains on securities, net(b) |
| 18 | | 5 | ||||||||||||
Benefit plan adjustments, net(c) |
8 | 1 | 13 | (5 | ) | |||||||||||
Share of other comprehensive income from equity affiliates, net(d) |
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Other comprehensive (loss) income |
(134 | ) | 19 | (237 | ) | 135 | ||||||||||
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Comprehensive (loss) income |
(15 | ) | (47 | ) | 10 | 156 | ||||||||||
Less: Net income attributable to noncontrolling interests |
(24 | ) | (17 | ) | (51 | ) | (36 | ) | ||||||||
Less: Other comprehensive loss (income) attributable to noncontrolling interests |
28 | 1 | 56 | (3 | ) | |||||||||||
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Comprehensive (loss) income attributable to News Corporation stockholders |
$ | (11 | ) | $ | (63 | ) | $ | 15 | $ | 117 | ||||||
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(a) | Net of income tax expense of nil and $1 million for the three and six months ended December 31, 2018, respectively. |
(b) | Net of income tax expense of $8 million and $2 million for the three and six months ended December 31, 2017, respectively. |
(c) | Net of income tax expense of $2 million and nil for the three months ended December 31, 2018 and 2017, respectively, and income tax expense (benefit) of $3 million and ($2) million for the six months ended December 31, 2018 and 2017, respectively. |
(d) | Net of income tax expense of nil for the three and six months ended December 31, 2018 and 2017, respectively. |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
NEWS CORPORATION
(Millions, except share and per share amounts)
As of | As of | |||||||||||
Notes | December 31, 2018 | June 30, 2018 | ||||||||||
(unaudited) | (audited) | |||||||||||
Assets: |
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Current assets: |
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Cash and cash equivalents |
$ | 1,618 | $ | 2,034 | ||||||||
Receivables, net |
14 | 1,853 | 1,612 | |||||||||
Inventory, net |
400 | 376 | ||||||||||
Other current assets |
558 | 372 | ||||||||||
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Total current assets |
4,429 | 4,394 | ||||||||||
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Non-current assets: |
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Investments |
5 | 345 | 393 | |||||||||
Property, plant and equipment, net |
2,517 | 2,560 | ||||||||||
Intangible assets, net |
2,571 | 2,671 | ||||||||||
Goodwill |
5,225 | 5,218 | ||||||||||
Deferred income tax assets |
12 | 228 | 279 | |||||||||
Other non-current assets |
14 | 912 | 831 | |||||||||
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Total assets |
$ | 16,227 | $ | 16,346 | ||||||||
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Liabilities and Equity: |
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Current liabilities: |
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Accounts payable |
$ | 625 | $ | 605 | ||||||||
Accrued expenses |
1,243 | 1,340 | ||||||||||
Deferred revenue |
2 | 430 | 516 | |||||||||
Current borrowings |
6 | 744 | 462 | |||||||||
Other current liabilities |
14 | 670 | 372 | |||||||||
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Total current liabilities |
3,712 | 3,295 | ||||||||||
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Non-current liabilities: |
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Borrowings |
6 | 936 | 1,490 | |||||||||
Retirement benefit obligations |
237 | 245 | ||||||||||
Deferred income tax liabilities |
12 | 384 | 389 | |||||||||
Other non-current liabilities |
524 | 430 | ||||||||||
Commitments and contingencies |
11 | |||||||||||
Redeemable preferred stock |
7 | | 20 | |||||||||
Class A common stock(a) |
4 | 4 | ||||||||||
Class B common stock(b) |
2 | 2 | ||||||||||
Additional paid-in capital |
12,271 | 12,322 | ||||||||||
Accumulated deficit |
(1,937 | ) | (2,163 | ) | ||||||||
Accumulated other comprehensive loss |
(1,076 | ) | (874 | ) | ||||||||
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Total News Corporation stockholders equity |
9,264 | 9,291 | ||||||||||
Noncontrolling interests |
1,170 | 1,186 | ||||||||||
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Total equity |
8 | 10,434 | 10,477 | |||||||||
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Total liabilities and equity |
$ | 16,227 | $ | 16,346 | ||||||||
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(a) | Class A common stock, $0.01 par value per share (Class A Common Stock), 1,500,000,000 shares authorized, 385,259,814 and 383,385,353 shares issued and outstanding, net of 27,368,413 treasury shares at par at December 31, 2018 and June 30, 2018, respectively. |
(b) | Class B common stock, $0.01 par value per share (Class B Common Stock), 750,000,000 shares authorized, 199,630,240 shares issued and outstanding, net of 78,430,424 treasury shares at par at December 31, 2018 and June 30, 2018, respectively. |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
NEWS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; millions)
For the six months ended | ||||||||||||
December 31, | ||||||||||||
Notes | 2018 | 2017 | ||||||||||
Operating activities: |
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Net income |
$ | 247 | $ | 21 | ||||||||
Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation and amortization |
326 | 197 | ||||||||||
Equity losses of affiliates |
5 | 9 | 28 | |||||||||
Cash distributions received from affiliates |
27 | 1 | ||||||||||
Other, net |
14 | (27 | ) | 21 | ||||||||
Deferred income taxes and taxes payable |
12 | 40 | 200 | |||||||||
Change in operating assets and liabilities, net of acquisitions: |
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Receivables and other assets |
(140 | ) | (73 | ) | ||||||||
Inventories, net |
(43 | ) | (8 | ) | ||||||||
Accounts payable and other liabilities |
(81 | ) | (183 | ) | ||||||||
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Net cash provided by operating activities |
358 | 204 | ||||||||||
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Investing activities: |
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Capital expenditures |
(264 | ) | (128 | ) | ||||||||
Acquisitions, net of cash acquired |
(185 | ) | (53 | ) | ||||||||
Investments in equity affiliates and other |
(13 | ) | (33 | ) | ||||||||
Proceeds from property, plant and equipment and other asset dispositions |
37 | 15 | ||||||||||
Other, net |
16 | 23 | ||||||||||
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Net cash used in investing activities |
(409 | ) | (176 | ) | ||||||||
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Financing activities: |
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Borrowings |
6 | 263 | | |||||||||
Repayment of borrowings |
6 | (470 | ) | (93 | ) | |||||||
Dividends paid |
(81 | ) | (80 | ) | ||||||||
Other, net |
(45 | ) | (29 | ) | ||||||||
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Net cash used in financing activities |
(333 | ) | (202 | ) | ||||||||
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Net decrease in cash and cash equivalents |
(384 | ) | (174 | ) | ||||||||
Cash and cash equivalents, beginning of period |
2,034 | 2,016 | ||||||||||
Exchange movement on opening cash balance |
(32 | ) | 14 | |||||||||
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Cash and cash equivalents, end of period |
$ | 1,618 | $ | 1,856 | ||||||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
News Corporation (together with its subsidiaries, News Corporation, News Corp, the Company, we, or us) is a global diversified media and information services company comprised of businesses across a range of media, including: news and information services, subscription video services in Australia, book publishing and digital real estate services.
In April 2018, News Corp and Telstra Corporation Limited (Telstra) combined their respective 50% interests in Foxtel and News Corps 100% interest in FOX SPORTS Australia into a new company, which the Company refers to as new Foxtel (the Transaction). Following the completion of the Transaction, News Corp owns a 65% interest in the combined business, with Telstra owning the remaining 35%. Consequently, the Company began consolidating Foxtel in the fourth quarter of fiscal 2018. See Note 3Acquisitions, Disposals and Other Transactions; Note 5Investments; Note 6Borrowings; and Note 9Financial Instruments and Fair Value Measurements.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company, which are referred to herein as the Consolidated Financial Statements, have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these Consolidated Financial Statements. Operating results for the interim period presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019. The preparation of the Companys Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the Consolidated Financial Statements and accompanying disclosures. Actual results could differ from those estimates.
Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method. In accordance with ASU 2016-01, investments in which the Company is not able to exercise significant influence over the investee are measured at fair value, if the fair value is readily determinable. If an investments fair value is not readily determinable, the Company will measure the investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
The consolidated statements of operations are referred to herein as the Statements of Operations. The consolidated balance sheets are referred to herein as the Balance Sheets. The consolidated statements of cash flows are referred to herein as the Statements of Cash Flows.
The accompanying Consolidated Financial Statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2018 as filed with the Securities and Exchange Commission (the SEC) on August 15, 2018 (the 2018 Form 10-K).
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current year presentation. Specifically, in the first quarter of fiscal 2019, the Company reclassified Conference Sponsorship revenues at its Dow Jones reporting unit and Merchandising revenues at News America Marketing from Other revenues to Advertising revenues as the Company believes that the reclassification more accurately reflects the nature of those revenue streams. These revenue reclassifications totaled $15 million and $27 million for the three and six months ended December 31, 2017, respectively, and $57 million for the fiscal year ended June 30, 2018.
The Companys fiscal year ends on the Sunday closest to June 30. Fiscal 2019 and fiscal 2018 include 52 weeks. All references to the three and six months ended December 31, 2018 and 2017 relate to the three and six months ended December 30, 2018 and December 31, 2017, respectively. For convenience purposes, the Company continues to date its consolidated financial statements as of December 31.
6
Recently Issued Accounting Pronouncements
Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amended the FASB Accounting Standards Codification by creating Topic 606, Revenue from Contracts with Customers (ASC 606). ASU 2014-09 removes inconsistencies and differences in existing revenue recognition requirements between GAAP and International Financial Reporting Standards and requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company adopted ASU 2014-09 on a modified retrospective basis as of July 1, 2018. As a result, the Company recorded a $20 million decrease to Accumulated deficit as of July 1, 2018 to reflect the cumulative impact of its adoption of ASC 606. See Note 2Revenues.
In January 2016, the FASB issued ASU 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for the Company for annual and interim reporting periods beginning July 1, 2018. The Company adopted the guidance on a cumulative-effect basis for its investments with readily determinable fair values effective July 1, 2018. In accordance with ASU 2016-01, the cumulative net unrealized gains (losses) for these investments contained within Accumulated other comprehensive loss were reclassified through Accumulated deficit as of July 1, 2018, and the Company recorded a $22 million decrease to Accumulated deficit. The Company has elected to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer; there was no financial statement impact upon adoption for these investments. See Note 5Investments and Note 14Additional Financial Information.
In March 2017, the FASB issued ASU 2017-07, CompensationRetirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). The amendments in ASU 2017-07 require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit/cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 allows for a practical expedient that permits a company to use the amounts disclosed in its pension and other postretirement benefit plans note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. ASU 2017-07 is effective for the Company for annual and interim reporting periods beginning July 1, 2018. The Company adopted ASU 2017-07 utilizing the practical expedient. The other components of net periodic benefit/cost are included in Other, net in the Statements of Operations. The adoption did not have a material impact on the Companys consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, CompensationStock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). The amendments in ASU 2018-07 expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As permitted by ASU 2018-07, the Company early-adopted this standard and the adoption did not have a material impact on the Companys consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (ASU 2018-15). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As permitted by ASU 2018-15, the Company early-adopted this standard on a prospective basis. The adoption did not have a material impact on the Companys consolidated financial statements.
7
Issued
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). The amendments in ASU 2016-02 require lessees to recognize all leases on the balance sheet by recording a right-of-use asset and a lease liability, and lessor accounting has been updated to align with the new requirements for lessees. The new standard also provides changes to the existing sale-leaseback guidance. ASU 2016-02 is effective for the Company for annual and interim reporting periods beginning July 1, 2019.
The FASB has also issued additional standards which provide additional clarification and implementation guidance on the previously issued ASU 2016-02 and have the same effective date as the original standard. The Company plans to apply this guidance on a modified retrospective basis at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings, with no restatement of prior periods. The Company is currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The amendments in ASU 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for the Company for annual and interim reporting periods beginning July 1, 2020. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). The amendments in ASU 2017-12 more closely align the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments address specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entitys hedging strategies. ASU 2017-12 is effective for the Company for annual and interim reporting periods beginning July 1, 2019. The Company is currently evaluating the impact ASU 2017-12 will have on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The amendments in ASU 2018-02 provide a reclassification from Accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. See Note 12 Income Taxes. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. ASU 2018-02 is effective for the Company for annual and interim reporting periods beginning July 1, 2019. The Company is currently evaluating the impact ASU 2018-02 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820 Fair Value Measurement. ASU 2018-13 eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods beginning July 1, 2020. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, CompensationRetirement BenefitsDefined Benefit PlansGeneral (Subtopic 715-20): Disclosure FrameworkChanges to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). The amendments in ASU 2018-14 modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 eliminates the disclosures for amounts in Accumulated other comprehensive loss expected to be recognized as a component of net periodic benefit cost and the effect of a percentage change in health care cost trend rate. ASU 2018-14 is effective for the Company for annual and interim reporting periods beginning July 1, 2021. The Company will comply with the new disclosure requirements in ASU 2018-14 beginning with its Annual Report on Form 10-K for the fiscal year ending June 30, 2019.
NOTE 2. REVENUES
On July 1, 2018, the Company adopted ASC 606 on a modified retrospective basis for all contracts which were not completed as of the adoption date. Results for reporting periods beginning after July 1, 2018 are presented under ASC 606 while prior periods have not been restated. Under ASC 606, revenue is recognized when or as the Company satisfies its respective performance obligations under each contract. The Company recorded a $20 million decrease to Accumulated deficit as of July 1, 2018 to reflect the cumulative impact of its adoption of ASC 606.
8
When implementing ASC 606, the Company applied the practical expedient to reflect the aggregate effect of all contract modifications occurring before the beginning of the earliest period presented when identifying satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
The adoption of ASC 606 primarily resulted in the following changes related to the Companys revenue recognition policies:
| Reclassification of certain payments to customers |
For certain revenue streams within the Subscription Video Services, Book Publishing and News and Information Services segments, the Company previously recorded certain marketing and sales incentive payments to customers within Operating expenses and Selling, general and administrative expenses. In accordance with ASC 606, such payments are now recorded as a reduction of revenue. For the three and six months ended December 31, 2018, revenues were $34 million and $62 million lower, respectively, as a result of this reclassification, with no impact on the Companys net income.
| Deferred installation revenues in the Subscription Video Services segment |
Under ASC 606, each customer subscription sold is accounted for as a distinct performance obligation. Installation services are not accounted for as a distinct performance obligation and are instead included within the overall services being provided. Therefore, installation revenues are deferred and recognized over the respective customer contract term. Historically, installation revenues were deferred and recognized over the estimated customer life. For the three and six months ended December 31, 2018, revenues were $7 million and $13 million higher, respectively, as a result of the adoption of ASC 606.
| Acceleration of revenue associated with REA Groups financial services business |
The Company has historically delayed the recognition of trailing commission revenue associated with REA Groups financial services business until such amounts became fixed or determinable. Under ASC 606, trailing commission revenue is recognized when the related mortgage loan is established. As a result, the Company established a commission receivable of $121 million and a broker commission payable of $94 million as of July 1, 2018. The current portion of the commission receivable and broker commission payable are classified in Receivables, net and Other current liabilities, respectively, with the non-current portion of each classified within Other non-current assets and liabilities, respectively, in the Balance Sheets. The change in accounting for trailing commission revenue did not have a material impact on the Statement of Operations.
9
The Companys revenues and expenses for the three and six months ended December 31, 2018 and the opening balance sheet as of July 1, 2018 under both ASC 606 and the prior standard, ASC 605 are as follows:
For the three months ended December 31, 2018 | ||||||||||||
ASC 605 | Effects of Adoption | ASC 606 | ||||||||||
(in millions) | ||||||||||||
Revenue: |
||||||||||||
Circulation and subscription |
$ | 1,025 | $ | 4 | $ | 1,029 | ||||||
Advertising |
718 | | 718 | |||||||||
Consumer |
496 | (18 | ) | 478 | ||||||||
Real estate |
248 | | 248 | |||||||||
Other |
160 | (6 | ) | 154 | ||||||||
|
|
|
|
|
|
|||||||
Total Revenues |
$ | 2,647 | $ | (20 | ) | $ | 2,627 | |||||
Operating expenses and Selling, general and administrative |
$ | (2,288 | ) | $ | 31 | $ | (2,257 | ) | ||||
Net income |
$ | 111 | $ | 8 | $ | 119 | ||||||
For the six months ended December 31, 2018 | ||||||||||||
ASC 605 | Effects of Adoption | ASC 606 | ||||||||||
(in millions) | ||||||||||||
Revenue: |
||||||||||||
Circulation and subscription |
$ | 2,057 | $ | 6 | $ | 2,063 | ||||||
Advertising |
1,382 | | 1,382 | |||||||||
Consumer |
908 | (30 | ) | 878 | ||||||||
Real estate |
475 | | 475 | |||||||||
Other |
366 | (13 | ) | 353 | ||||||||
|
|
|
|
|
|
|||||||
Total Revenues |
$ | 5,188 | $ | (37 | ) | $ | 5,151 | |||||
Operating expenses and Selling, general and administrative |
$ | (4,478 | ) | $ | 55 | $ | (4,423 | ) | ||||
Net income |
$ | 234 | $ | 13 | $ | 247 | ||||||
As of July 1, 2018 | ||||||||||||
ASC 605 | Effects of Adoption | ASC 606 | ||||||||||
(in millions) | ||||||||||||
Assets: |
||||||||||||
Receivables, net |
$ | 1,612 | $ | 200 | $ | 1,812 | ||||||
Other current assets |
372 | (4 | ) | 368 | ||||||||
Deferred income tax assets |
279 | 2 | 281 | |||||||||
Other non-current assets |
831 | 92 | 923 | |||||||||
Liabilities and Equity: |
||||||||||||
Deferred revenue |
$ | 516 | $ | (6 | ) | $ | 510 | |||||
Other current liabilities |
372 | 194 | 566 | |||||||||
Deferred income tax liabilities |
389 | 11 | 400 | |||||||||
Other non-current liabilities |
430 | 71 | 501 | |||||||||
Accumulated deficit |
(2,163 | ) | 20 | (2,143 | ) |
10
Disaggregated revenue
The following table presents revenue by type and segment for the three and six months ended December 31, 2018:
For the three months ended December 31, 2018 | ||||||||||||||||||||||||
News and Information Services |
Subscription Video Services |
Book Publishing |
Digital Real Estate Services |
Other | Total Revenues |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Circulation and subscription |
$ | 526 | $ | 490 | $ | | $ | 13 | $ | | $ | 1,029 | ||||||||||||
Advertising |
632 | 55 | | 31 | | 718 | ||||||||||||||||||
Consumer |
| | 478 | | | 478 | ||||||||||||||||||
Real estate |
| | | 248 | | 248 | ||||||||||||||||||
Other |
99 | 17 | 18 | 19 | 1 | 154 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Revenues |
$ | 1,257 | $ | 562 | $ | 496 | $ | 311 | $ | 1 | $ | 2,627 | ||||||||||||
|
|
|
|
|
|
|
|
|
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|
|||||||||||||
For the six months ended December 31, 2018 | ||||||||||||||||||||||||
News and Information Services |
Subscription Video Services |
Book Publishing |
Digital Real Estate Services |
Other | Total Revenues |
|||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Circulation and subscription |
$ | 1,055 | $ | 981 | $ | | $ | 27 | $ | | $ | 2,063 | ||||||||||||
Advertising |
1,208 | 112 | | 62 | | 1,382 | ||||||||||||||||||
Consumer |
| | 878 | | | 878 | ||||||||||||||||||
Real estate |
| | | 475 | | 475 | ||||||||||||||||||
Other |
242 | 34 | 36 | 40 | 1 | 353 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Revenues |
$ | 2,505 | $ | 1,127 | $ | 914 | $ | 604 | $ | 1 | $ | 5,151 | ||||||||||||
|
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|
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|
|
Disclosures regarding the nature, timing and uncertainty of the Companys revenue streams across its segments are as follows:
Circulation and subscription revenues
Circulation and subscription revenues include single-copy newspaper, newspaper subscription and information services subscription revenues. Circulation revenues are based on the number of copies of the printed newspaper (through home-delivery subscriptions and single-copy sales) and/or digital subscriptions sold, and the associated rates charged to the customers. Single-copy revenue is recognized at a point in time on the date the newspapers are sold to distribution outlets, net of provisions for related returns.
Revenues from home delivery and digital subscriptions are recognized over the subscription term as the newspapers and/or digital subscriptions are delivered. Information services subscription revenues are recognized over time as the subscriptions are delivered. Payments from subscribers are generally due at the beginning of the month and are recorded as deferred revenue. Such amounts are recognized as revenue as the associated subscription is delivered.
Revenue generated from subscriptions to receive pay television broadcast services, broadband and home phone services for residential and commercial subscribers is recognized over time on a monthly basis as the services are provided. Payment is generally received monthly in advance of providing services, and is deferred upon receipt. Such amounts are recognized as revenue as the related services are provided.
11
Advertising revenues
Revenue from print advertising is recognized at the point in time the print advertisement is circulated. Broadcast advertising revenue is recognized over the time that the broadcast advertisement is aired. For impressions-based digital advertising, revenues are recognized as impressions are delivered over the term of the arrangement, while revenue from non-impressions-based digital advertising is recognized over the period that the advertisements are displayed. Such amounts are recognized net of agency commissions and provisions for estimated sales incentives, including rebates, rate adjustments or discounts.
Advertising revenues earned from integrated marketing services are recognized at the point in time when free-standing inserts are published. Revenues earned from in-store marketing services are partially recognized upon installation, with the remaining revenue recognized over the in-store campaign.
Billings to clients and payments received in advance of performance of services or delivery of products are recorded as deferred revenue until the services are performed or the product is delivered. Payment for advertising services is typically due shortly after the Company has satisfied its performance obligation to print, broadcast or place the advertising specified in the contract. For advertising campaigns that extend beyond one month, the Company generally invoices the advertiser in arrears based on the number of advertisements that were printed, broadcast or placed, or impressions delivered during the month.
Consumer revenues
Revenue from the sale of physical books and electronic books (e-books) is recognized at the point in time of physical receipt by the customer or electronic delivery. Such amounts are recorded net of provisions for returns and payments to customers when a distinct good or service is not received. If the Company prohibits its customer from selling a physical book until a future date, it recognizes revenue when that restriction lapses.
Revenue is recognized net of any amounts billed to customers for taxes remitted to government authorities. Payments for the sale of physical books and e-books are generally collected within one to three months of sale or delivery and are based on the number of physical books or e-books sold.
Real Estate revenues
Real estate revenues are derived from the sale of online real estate listing products and advanced client management and reporting products, as well as services to agents, brokers and developers. Revenue is typically recognized over the contractual period during which the services are provided. Payments are generally due monthly over the subscription term.
Other revenues
Other revenues are recognized when the related services are performed or the product has been delivered.
Areas of judgment
Contracts with multiple performance obligations
The Company has certain revenue contracts which contain multiple performance obligations such as print and digital advertising bundles and bundled video service subscriptions. Revenues derived from sales contracts that contain multiple products and services are allocated based on the relative standalone selling price of each performance obligation to be delivered. Standalone selling price is typically determined based on prices charged to customers for the same or similar goods or services on a standalone basis. If observable standalone prices are not available, the Company estimates standalone selling price by maximizing the use of observable inputs to most accurately reflect the price of each individual performance obligation. Revenue is recognized as each performance obligation included in the contract is satisfied.
12
Identification of a customer and gross versus net revenue recognition
In the normal course of business, the Company acts as or uses an intermediary or agent in executing transactions with third parties. When the intermediary or agent is determined to be the Companys customer, the Company records revenue based on the amount it expects to receive from the agent or intermediary.
In other circumstances, the determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as a principal in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of the arrangement. The Company serves as the principal in transactions in which it controls the goods or services prior to being transferred to the ultimate customer.
Sales returns
Certain of the Companys products, such as books and newspapers, are sold with the right of return. The Company records the estimated impact of such returns as a reduction of revenue. To estimate product sales that will be returned and the related products that are expected to be placed back into inventory, the Company analyzes historical returns, current economic trends, changes in customer demand and acceptance of the Companys products. Based on this information, the Company reserves a percentage of each dollar of product sales that provide the customer with the right of return. As a result of the adoption of ASC 606, the Company reclassified its sales returns reserve from Receivables, net to Other current liabilities.
Contract liabilities and assets
The Companys deferred revenue balance primarily relates to amounts received from customers for subscriptions paid in advance of the services being provided. The following table presents changes in the deferred revenue balance for the three and six months ended December 31, 2018:
For the three months ended December 31, 2018 |
For the six months ended December 31, 2018 |
|||||||
(in millions) | (in millions) | |||||||
Balance, beginning of period |
$ | 436 | $ | 510 | ||||
Deferral of revenue |
742 | 1,337 | ||||||
Recognition of deferred revenue(a) |
(747 | ) | (1,417 | ) | ||||
Other |
(1 | ) | | |||||
|
|
|
|
|||||
Balance, end of period |
$ | 430 | $ | 430 | ||||
|
|
|
|
(a) | For the three and six months ended December 31, 2018, the Company recognized approximately $267 million and $421 million, respectively, of revenue which was included in the opening deferred revenue balance for each of the respective periods. |
Contract assets were immaterial for disclosure as of December 31, 2018.
Practical expedients and other revenue disclosures
The Company typically expenses sales commissions incurred to obtain a customer contract as those amounts are incurred as the amortization period is twelve months or less. These costs are recorded within Selling, general and administrative in the Statements of Operations. The Company also applies the practical expedient for significant financing components when the transfer of the good or service is paid within twelve months or less, or the receipt of consideration is received within twelve months or less of the transfer of the good or service.
13
During the three and six months ended December 31, 2018, the Company recognized approximately $72 million and $152 million, respectively, in revenues related to performance obligations that were satisfied or partially satisfied in a prior reporting period. The remaining transaction price related to unsatisfied performance obligations as of December 31, 2018 was approximately $310 million, of which approximately $79 million is expected to be recognized over the remainder of fiscal 2019, approximately $119 million is expected to be recognized in fiscal 2020, $89 million is expected to be recognized in fiscal 2021, with the remainder to be recognized thereafter. These amounts do not include (i) contracts with an expected duration of one year or less, (ii) contracts for which variable consideration is determined based on the customers subsequent sale or usage and (iii) variable consideration allocated to performance obligations accounted for under the series guidance that meets the allocation objective under ASC 606.
NOTE 3. ACQUISITIONS, DISPOSALS AND OTHER TRANSACTIONS
Opcity
In October 2018, the Company acquired Opcity Inc. (Opcity), a market-leading real estate technology platform that matches qualified home buyers and sellers with real estate professionals in real time. The total transaction value was approximately $210 million, consisting of approximately $182 million in cash, net of $7 million of cash acquired, and approximately $28 million in deferred payments and restricted stock unit awards for Opcitys founders and qualifying employees, which is being recognized as compensation expense over the three years following the closing. Included in the cash amount was approximately $20 million that is being held back for approximately 18 months after closing. The acquisition broadens realtor.com®s lead generation product portfolio, allowing real estate professionals to choose between traditional lead products or a concierge-based model that provides highly vetted, transaction-ready leads. Opcity is a subsidiary of Move, and its results are included within the Digital Real Estate Services segment.
Under the acquisition method of accounting, the total consideration was first allocated to net tangible assets and identifiable intangible assets based upon their fair values as of the date of completion of the acquisition. As a result of the acquisition, the Company recorded approximately $73 million of assets, of which $49 million primarily related to the Opcity technology and data platform with a weighted average useful life of 12 years and $24 million primarily related to intangible assets resulting from previously acquired leads and customer relationships with a weighted average useful life of 9 years. In accordance with ASC 350, Intangibles Goodwill and Other (ASC 350) the excess of the total consideration over the fair values of the net tangible and intangible assets of approximately $124 million was recorded as goodwill on the transaction. The values assigned to the acquired assets and liabilities are based on estimates of fair value available as of the date of this filing and will be adjusted upon completion of final valuations of certain assets and liabilities. Any changes in these fair values could potentially result in an adjustment to the goodwill recorded for this transaction.
New Foxtel
In April 2018, News Corp and Telstra combined their respective 50% interests in Foxtel and News Corps 100% interest in FOX SPORTS Australia into a new company. Following the completion of the Transaction, News Corp owns a 65% interest in the combined business, with Telstra owning the remaining 35%. Consequently, the Company began consolidating Foxtel in the fourth quarter of fiscal 2018. The combination allows Foxtel and FOX SPORTS Australia to leverage their media platforms and content to improve services for consumers and advertisers. The results of new Foxtel are reported within the Subscription Video Services segment (formerly the Cable Network Programming segment), and new Foxtel is considered a separate reporting unit for purposes of the Companys annual goodwill impairment review.
The Transaction was accounted for in accordance with ASC 805 Business Combinations (ASC 805) which requires the Company to re-measure its previously held equity interest in Foxtel at its Transaction completion date fair value. The carrying amount of the Companys previously held equity interest in Foxtel was equal to its fair value as of the Transaction completion date, as the Company wrote its investment in Foxtel down to fair value during the third quarter of fiscal 2018. In accordance with ASC 805, as the Company did not relinquish control of its investment in FOX SPORTS Australia, the reduction in the Companys ownership interest to 65% was accounted for as a common control transaction on a carryover basis. See Note 5Investments.
14
The total aggregate purchase price associated with the Transaction at the completion date is set forth below (in millions):
Consideration transferred(a) |
$ | 331 | ||
Fair value of News Corp previously held equity interest in Foxtel |
631 | |||
Fair value of noncontrolling interest(b) |
578 | |||
|
|
|||
Fair value of net assets |
$ | 1,540 | ||
|
|
a) | Primarily represents the fair value of 35% of FOX SPORTS Australia exchanged as consideration in the Transaction and has been included in noncontrolling interest. |
b) | Primarily represents the fair value of 35% of Foxtel, which includes the impact of certain market participant synergies. |
Under the acquisition method of accounting, the aggregate purchase price, based on a valuation of 100% of Foxtel, was allocated to net tangible and intangible assets based upon their fair value as of the date of completion of the Transaction. The excess of the aggregate purchase price over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. The allocation is as follows (in millions):
Assets acquired: |
||||
Cash |
$ | 78 | ||
Current assets |
526 | |||
Property, plant and equipment |
967 | |||
Intangible assets |
868 | |||
Goodwill |
1,574 | |||
Other non-current assets |
292 | |||
|
|
|||
Total assets acquired |
$ | 4,305 | ||
|
|
|||
Liabilities assumed: |
||||
Current liabilities |
$ | 609 | ||
Long-term borrowings |
1,751 | |||
Other non-current liabilities |
405 | |||
|
|
|||
Total liabilities assumed |
2,765 | |||
|
|
|||
Net assets acquired |
$ | 1,540 | ||
|
|
As a result of the Transaction, the Company recorded net tangible assets of approximately $849 million, excluding long-term borrowings, primarily consisting of property, plant and equipment, which mainly relate to digital set top units and installations and technical equipment, as well as accounts receivable, inventory, accounts payable and accruals at their estimated fair values at the completion date of the Transaction. The Company recorded outstanding borrowings of approximately $1.8 billion as a result of the Transaction. See Note 6Borrowings.
In addition, the Company recorded approximately $0.9 billion of intangible assets of which $468 million has been allocated to subscriber relationships with a weighted-average useful life of 10 years, $277 million has been allocated to the tradenames which have an indefinite life and approximately $123 million has been allocated to advertiser relationships with a weighted-average useful life of 15 years. In accordance with ASC 350, the excess of the purchase price over the fair values of the net tangible and intangible assets of approximately $1.6 billion was recorded as goodwill on the transaction. The values assigned to the acquired assets and liabilities are based on estimates of fair value available as of the date of this filing and will be adjusted upon completion of final valuations of certain assets and liabilities. Any changes in these fair values could potentially result in an adjustment to the goodwill recorded for this transaction.
As a result of the Transaction, the Company recognized a $337 million loss in Other, net in the fourth quarter of fiscal 2018, primarily related to the Companys settlement of its pre-existing contractual arrangement between Foxtel and FOX SPORTS Australia which resulted in a $317 million write-off of its channel distribution agreement intangible asset at the time of the Transaction.
15
NOTE 4. IMPAIRMENT AND RESTRUCTURING CHARGES
Fiscal 2019
During the three and six months ended December 31, 2018, the Company recorded restructuring charges of $19 million and $37 million, respectively, of which $15 million and $32 million, respectively, related to the News and Information Services segment. The restructuring charges recorded in fiscal 2019 were for employee termination benefits.
Fiscal 2018
During the three and six months ended December 31, 2017, the Company recorded restructuring charges of $12 million and $27 million, respectively, of which $11 million and $25 million, respectively, related to the News and Information Services segment. The restructuring charges recorded in fiscal 2018 were primarily for employee termination benefits.
Changes in restructuring program liabilities were as follows:
For the three months ended December 31, | ||||||||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||||||||
One time employee termination benefits |
Facility related costs |
Other costs | Total | One time employee termination benefits |
Facility related costs |
Other costs | Total | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Balance, beginning of period |
$ | 23 | $ | 2 | $ | 11 | $ | 36 | $ | 25 | $ | 5 | $ | 10 | $ | 40 | ||||||||||||||||
Additions |
19 | | | 19 | 11 | | 1 | 12 | ||||||||||||||||||||||||
Payments |
(21 | ) | | | (21 | ) | (15 | ) | (1 | ) | (1 | ) | (17 | ) | ||||||||||||||||||
Other |
(1 | ) | | | (1 | ) | 1 | | | 1 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of period |
$ | 20 | $ | 2 | $ | 11 | $ | 33 | $ | 22 | $ | 4 | $ | 10 | $ | 36 | ||||||||||||||||
|
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|
|
|||||||||||||||||
For the six months ended December 31, | ||||||||||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||||||||||
One time employee termination benefits |
Facility related costs |
Other costs | Total | One time employee termination benefits |
Facility related costs |
Other costs | Total | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Balance, beginning of period |
$ | 29 | $ | 2 | $ | 11 | $ | 42 | $ | 33 | $ | 6 | $ | 10 | $ | 49 | ||||||||||||||||
Additions |
37 | | | 37 | 26 | | 1 | 27 | ||||||||||||||||||||||||
Payments |
(44 | ) | | (1 | ) | (45 | ) | (38 | ) | (1 | ) | (1 | ) | (40 | ) | |||||||||||||||||
Other |
(2 | ) | | 1 | (1 | ) | 1 | (1 | ) | | | |||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, end of period |
$ | 20 | $ | 2 | $ | 11 | $ | 33 | $ | 22 | $ | 4 | $ | 10 | $ | 36 | ||||||||||||||||
|
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|
|
As of December 31, 2018, restructuring liabilities of approximately $23 million were included in the Balance Sheet in Other current liabilities and $10 million were included in Other non-current liabilities.
16
NOTE 5. INVESTMENTS
The Companys investments were comprised of the following:
Ownership Percentage as of December 31, 2018 |
As of December 31, 2018 |
As of June 30, 2018 |
||||||||||
(in millions) | ||||||||||||
Equity method investments(a) |
various | $ | 164 | $ | 173 | |||||||
Equity securities(b) |
various | 181 | 220 | |||||||||
|
|
|
|
|||||||||
Total Investments |
$ | 345 | $ | 393 | ||||||||
|
|
|
|
(a) | Equity method investments are primarily comprised of Elara Technologies Pte. Ltd., which operates PropTiger.com, Makaan.com. and Housing.com and new Foxtels investment in Nickelodeon Australia Joint Venture. |
(b) | Equity securities are primarily comprised of the Companys investment in HT&E Limited, which operates a portfolio of Australian radio and outdoor media assets and certain investments in China. |
The Company has equity securities with quoted prices in active markets as well as equity securities without readily determinable fair market values. Equity securities without readily determinable fair market values are valued at cost, less any impairment, plus or minus changes in fair value resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. The components comprising total gains and losses on equity securities are set forth below:
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Total (losses) gains recognized on equity securities |
$ | (44 | ) | $ | 2 | $ | (29 | ) | $ | (17 | ) | |||||
Less: Losses recognized on equity securities sold or impaired |
| (30 | ) | | (24 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Unrealized (losses) gains recognized on equity securities held at end of period |
$ | (44 | ) | $ | 32 | $ | (29 | ) | $ | 7 | ||||||
|
|
|
|
|
|
|
|
Equity Losses of Affiliates
The Companys share of the (losses) earnings of its equity affiliates was as follows:
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in millions) | (in millions) | |||||||||||||||
Foxtel(a) |
$ | | $ | 1 | $ | | $ | (4 | ) | |||||||
Other equity affiliates, net(b) |
(6 | ) | (19 | ) | (9 | ) | (24 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Equity losses of affiliates |
$ | (6 | ) | $ | (18 | ) | $ | (9 | ) | $ | (28 | ) | ||||
|
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|
|
(a) | Following completion of the Transaction in April 2018, News Corp ceased accounting for Foxtel as an equity method investment and began consolidating its results in the fourth quarter of fiscal 2018. See Note 3 Acquisitions, Disposals and Other Transactions. |
17
In accordance with ASC 350, the Company amortized $15 million and $32 million related to excess cost over the Companys proportionate share of its investments underlying net assets allocated to finite-lived intangible assets during the three and six months ended December 31, 2017. Such amortization is reflected in Equity losses of affiliates in the Statement of Operations.
(b) | Other equity affiliates, net for the three and six months ended December 31, 2018 include losses primarily from the Companys interest in Elara. During the three months ended December 31, 2017, the Company recognized $13 million in non-cash write-downs of certain equity method investments carrying values to fair value. The write-downs are reflected in Equity losses of affiliates in the Statements of Operations for the three and six months ended December 31, 2017. |
Summarized financial information for Foxtel, presented in accordance with U.S. GAAP, was as follows:
For the six months ended December 31, |
||||||||
2018(a) | 2017 | |||||||
(in millions) | ||||||||
Revenues |
$ | | $ | 1,231 | ||||
Operating income(b) |
| 120 | ||||||
Net income |
| 56 |
(a) | The Company began consolidating the results of Foxtel in the fourth quarter of fiscal 2018 as a result of the Transaction. |
(b) | Includes Depreciation and amortization of $118 million for the six months ended December 31, 2017. Operating income before depreciation and amortization was $238 million for the six months ended December 31, 2017. |
18
NOTE 6. BORROWINGS
The Companys total borrowings consist of the following:
Interest rate at December 31, 2018 |
Due date at December 31, 2018 |
As of December 31, 2018 |
As of June 30, 2018 |
|||||||||||||
(in millions) | ||||||||||||||||
Foxtel Group |
||||||||||||||||
Credit facility 2013(a) |
3.84 | % | Apr 7, 2019 | $ | 211 | $ | 222 | |||||||||
Credit facility 2014 tranche 1(a) |
3.84 | % | May 30, 2019 | 140 | 148 | |||||||||||
Credit facility 2014 tranche 2(a) |
3.94 | % | Jan 31, 2020 | 141 | 148 | |||||||||||
Credit facility 2015(a) |
3.99 | % | Jul 31, 2020 | 282 | 296 | |||||||||||
Credit facility 2016(a)(b) |
4.54 | % | Sept 11, 2021 | | 108 | |||||||||||
Working capital facility 2017(a)(b) |
4.14 | % | Jul 3, 2020 | 42 | 59 | |||||||||||
US private placement 2009 tranche 3 |
6.20 | % | Sept 24, 2019 | 75 | 75 | |||||||||||
US private placement 2012 USD portion tranche 1(c) |
3.68 | % | Jul 25, 2019 | 149 | 150 | |||||||||||
US private placement 2012 USD portion tranche 2(c) |
4.27 | % | Jul 25, 2022 | 197 | 196 | |||||||||||
US private placement 2012 USD portion tranche 3(c) |
4.42 | % | Jul 25 2024 | 147 | 146 | |||||||||||
US private placement 2012 AUD portion |
7.04 | % | Jul 25, 2022 | 78 | 83 | |||||||||||
REA Group |
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Credit facility 2016 tranche 2(d)(e) |
2.67 | % | Dec 31, 2018 | | 89 | |||||||||||
Credit facility 2016 tranche 3(d) |
3.00 | % | Dec 31, 2019 | 169 | 178 | |||||||||||
Credit facility 2018(d) |
2.83 | % | Apr 27, 2021 | 49 | 54 | |||||||||||
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Total borrowings |
1,680 | 1,952 | ||||||||||||||
Less: current portion(f) |
(744 | ) | (462 | ) | ||||||||||||
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Long-term borrowings |
$ | 936 | $ | 1,490 | ||||||||||||
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(a) | Borrowings under these facilities bear interest at a floating rate of Australian BBSY plus an applicable margin of between 1.10% and 2.70% per annum payable quarterly. |
(b) | As of December 31, 2018, the Foxtel Group has undrawn commitments of $306 million under these facilities for which it pays a commitment fee in the range of 40% to 45% of the applicable margin. |
(c) | The carrying value of the borrowings include any fair value adjustments related to the Companys fair value hedges. See Note 9 Financial Instruments and Fair Value Measurements. |
(d) | Borrowings under these facilities bear interest at a floating rate of the Australian BBSY plus a margin of between 0.85% and 1.45% depending on REA Groups net leverage ratio. As of December 31, 2018, REA Group was paying a margin of between 0.85% and 1.05%. |
(e) | During the three months ended December 31, 2018, REA Group repaid A$120 million (approximately $87 million) of the A$480 million revolving loan facility. Remaining borrowings under the facility of A$240 million (approximately $169 million) will mature in fiscal 2020. |
(f) | The Company classifies the current portion of long term debt as non-current liabilities on the Balance Sheets when it has the intent and ability to refinance the obligation on a long-term basis, in accordance with ASC 470-50 Debt. |
NOTE 7. REDEEMABLE PREFERRED STOCK
In connection with the Companys separation of its businesses (the Separation) from Twenty-First Century Fox, Inc. (21st Century Fox) on June 28, 2013 (the Distribution Date), 21st Century Fox sold 4,000 shares of cumulative redeemable preferred stock with a par value of $5,000 per share of a newly formed U.S. subsidiary of the Company. The preferred stock paid dividends at a rate of 9.5% per annum, payable quarterly, in arrears. The preferred stock was callable by the Company at any time after the fifth year and puttable at the option of the holder after 10 years. In July 2018, the Company exercised its call option and redeemed 100% of the outstanding redeemable preferred stock.
19
NOTE 8. EQUITY
The following tables summarize changes in equity for the three and six months ended December 31, 2018 and 2017:
For the three months ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Class A Common Stock |
Class B Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total News Corporation Equity |
Noncontrolling Interests |
Total Equity |
|||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2018 |
385 | $ | 4 | 200 | $ | 2 | $ | 12,257 | $ | (2,032 | ) | $ | (970 | ) | $ | 9,261 | $ | 1,169 | $ | 10,430 | ||||||||||||||||||||
Net income |
| | | | | 95 | | 95 | 24 | 119 | ||||||||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | (106 | ) | (106 | ) | (28 | ) | (134 | ) | ||||||||||||||||||||||||||
Dividends |
| | | | | | | | | | ||||||||||||||||||||||||||||||
Other |
| | | | 14 | | | 14 | 5 | 19 | ||||||||||||||||||||||||||||||
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Balance, December 31, 2018 |
385 | $ | 4 | 200 | $ | 2 | $ | 12,271 | $ | (1,937 | ) | $ | (1,076 | ) | $ | 9,264 | $ | 1,170 | $ | 10,434 | ||||||||||||||||||||
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For the three months ended December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
Class A Common Stock |
Class B Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total News Corporation Equity |
Noncontrolling Interests |
Total Equity |
|||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2017 |
383 | $ | 4 | 200 | $ | 2 | $ | 12,340 | $ | (581 | ) | $ | (852 | ) | $ | 10,913 | $ | 283 | $ | 11,196 | ||||||||||||||||||||
Net (loss) income |
| | | | | (83 | ) | | (83 | ) | 17 | (66 | ) | |||||||||||||||||||||||||||
Other comprehensive income (loss) |
| | | | | | 20 | 20 | (1 | ) | 19 | |||||||||||||||||||||||||||||
Dividends |
| | | | | | | | | | ||||||||||||||||||||||||||||||
Other |
| | | | 10 | | | 10 | (1 | ) | 9 | |||||||||||||||||||||||||||||
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Balance, December 31, 2017 |
383 | $ | 4 | 200 | $ | 2 | $ | 12,350 | $ | (664 | ) | $ | (832 | ) | $ | 10,860 | $ | 298 | $ | 11,158 | ||||||||||||||||||||
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20
For the six months ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Class A Common Stock |
Class B Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Other Comprehensive Loss |
Total News Corporation Equity |
Noncontrolling Interests |
Total Equity |
|||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2018 |
383 | $ | 4 | 200 | $ | 2 | $ | 12,322 | $ | (2,163 | ) | $ | (874 | ) | $ | 9,291 | $ | 1,186 | $ | 10,477 | ||||||||||||||||||||
Cumulative impact from adoption of new accounting standards |
32 | (22 | ) | 10 | 10 | 20 | ||||||||||||||||||||||||||||||||||
Net income |
| | | | | 196 | | 196 | 51 | 247 | ||||||||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | (181 | ) | (181 | ) | (56 | ) | (237 | ) | ||||||||||||||||||||||||||
Dividends |
| | | | (59 | ) | | | (59 | ) | (23 | ) | (82 | ) | ||||||||||||||||||||||||||
Other |
2 | | | | 8 | (2 | ) | 1 | 7 | 2 | 9 | |||||||||||||||||||||||||||||
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Balance, December 31, 2018 |
385 | $ | 4 | 200 | $ | 2 | $ | 12,271 | $ | (1,937 | ) | $ | (1,076 | ) | $ | 9,264 | $ | 1,170 | $ | 10,434 | ||||||||||||||||||||
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For the six months ended December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
Class A Common Stock |
Class B Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total News Corporation Equity |
Noncontrolling Interests |
Total Equity |
|||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2017 |
382 | $ | 4 | 200 | $ | 2 | $ | 12,395 | $ | (648 | ) | $ | (964 | ) | $ | 10,789 | $ | 284 | $ | 11,073 | ||||||||||||||||||||
Net (loss) income |
| | | | | (15 | ) | | (15 | ) | 36 | 21 | ||||||||||||||||||||||||||||
Other comprehensive income |
| | | | | | 132 | 132 | 3 | 135 | ||||||||||||||||||||||||||||||
Dividends |
| | | | (59 | ) | | | (59 | ) | (21 | ) | (80 | ) | ||||||||||||||||||||||||||
Other |
1 | | | | 14 | (1 | ) | | 13 | (4 | ) | 9 | ||||||||||||||||||||||||||||
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Balance, December 31, 2017 |
383 | $ | 4 | 200 | $ | 2 | $ | 12,350 | $ | (664 | ) | $ | (832 | ) | $ | 10,860 | $ | 298 | 11,158 | |||||||||||||||||||||
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Stock Repurchases
In May 2013, the Companys Board of Directors (the Board of Directors) authorized the Company to repurchase up to an aggregate of $500 million of its Class A Common Stock. No stock repurchases were made during the six months ended December 31, 2018. Through February 1, 2019, the Company cumulatively repurchased approximately 5.2 million shares of Class A Common Stock for an aggregate cost of approximately $71 million. The remaining authorized amount under the stock repurchase program as of February 1, 2019 was approximately $429 million. All decisions regarding any future stock repurchases are at the sole discretion of a duly appointed committee of the Board of Directors and management. The committees decisions regarding future stock repurchases will be evaluated from time to time in light of many factors, including the Companys financial condition, earnings, capital requirements and debt facility covenants, other contractual restrictions, as well as legal requirements, regulatory constraints, industry practice, market volatility and other factors that the committee may deem relevant. The stock repurchase authorization may be modified, extended, suspended or discontinued at any time by the Board of Directors and the Board of Directors cannot provide any assurances that any additional shares will be repurchased.
21
Dividends
In August 2018, the Board of Directors declared a semi-annual cash dividend of $0.10 per share for Class A Common Stock and Class B Common Stock. This dividend was paid on October 17, 2018 to stockholders of record at the close of business on September 12, 2018. In August 2017, the Board of Directors declared a semi-annual cash dividend of $0.10 per share for Class A Common Stock and Class B Common Stock. This dividend was paid on October 18, 2017 to stockholders of record at the close of business on September 13, 2017. The timing, declaration, amount and payment of future dividends to stockholders, if any, is within the discretion of the Board of Directors. The Board of Directors decisions regarding the payment of future dividends will depend on many factors, including the Companys financial condition, earnings, capital requirements and debt facility covenants, other contractual restrictions, as well as legal requirements, regulatory constraints, industry practice, market volatility and other factors that the Board of Directors deems relevant.
NOTE 9. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
In accordance with ASC 820, Fair Value Measurements (ASC 820) fair value measurements are required to be disclosed using a three-tiered fair value hierarchy which distinguishes market participant assumptions into the following categories:
| Level 1 Quoted prices in active markets for identical assets or liabilities. |
| Level 2 Observable inputs other than quoted prices included in Level 1. The Company could value assets and liabilities included in this level using dealer and broker quotations, certain pricing models, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data. |
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. For the Company, this primarily includes the use of forecasted financial information and other valuation related assumptions such as discount rates and long term growth rates in the income approach as well as the market approach which utilizes certain market and transaction multiples. |
22
Under ASC 820, certain assets and liabilities are required to be remeasured to fair value at the end of each reporting period. The following table summarizes those assets and liabilities measured at fair value on a recurring basis:
As of December 31, 2018 | As of June 30, 2018 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||
Foreign currency derivativescash flow hedges |
$ | | $ | 5 | $ | | $ | 5 | $ | | $ | 3 | $ | | $ | 3 | ||||||||||||||||
Cross currency interest rate derivativesfair value hedges |
| 26 | | 26 | | 29 | | 29 | ||||||||||||||||||||||||
Cross currency interest rate derivativeseconomic hedges |
| 12 | | 12 | | 10 | | 10 | ||||||||||||||||||||||||
Cross currency interest rate derivativescash flow hedges |
| 105 | | 105 | | 76 | | 76 | ||||||||||||||||||||||||
Equity securities(a) |
66 | | 115 | 181 | 93 | | | 93 | ||||||||||||||||||||||||
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Total assets |
$ | 66 | $ | 148 | $ | 115 | $ | 329 | $ | 93 | $ | 118 | $ | | $ | 211 | ||||||||||||||||
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Liabilities: |
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Interest rate derivativescash flow hedges |
$ | | $ | 18 | $ | | $ | 18 | $ | | $ | 20 | $ | | $ | 20 | ||||||||||||||||
Mandatorily redeemable noncontrolling interests |
| | 12 | 12 | | | 12 | 12 | ||||||||||||||||||||||||
Cross currency interest rate derivativescash flow hedges |
| 12 | | 12 | | 12 | | 12 | ||||||||||||||||||||||||
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Total liabilities |
$ | | $ | 30 | $ | 12 | $ | 42 | $ | | $ | 32 | $ | 12 | $ | 44 | ||||||||||||||||
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(a) | See Note 5 Investments. |
There have been no transfers between levels of the fair value hierarchy during the periods presented.
Equity securities
The fair values of equity securities with quoted prices in active markets are determined based on the closing price at the end of each reporting period. These securities are classified as Level 1 in the fair value hierarchy outlined above. The fair values of equity securities without readily determinable fair market values are determined based on cost, less any impairment, plus or minus changes in fair value resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. These securities are classified as Level 3 in the fair value hierarchy outlined above.
A rollforward of the Companys equity securities classified as Level 3 is as follows:
For the six months ended December 31, | ||||
2018 | ||||
(in millions) | ||||
Balancebeginning of period(a) |
$ | 127 | ||
Purchases |
6 | |||
Sales |
(10 | ) | ||
Foreign exchange and other |
(8 | ) | ||
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Balanceend of period |
$ | 115 | ||
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(a) | Includes impact from the adoption of ASU 2016-01. See Note 1 Description of Business and Basis of Presentation. |
23
Mandatorily redeemable noncontrolling interests
The Company has liabilities recorded in its Balance Sheets for its mandatorily redeemable noncontrolling interests. These liabilities represent managements best estimate of the amounts expected to be paid in accordance with the contractual terms of the underlying acquisition agreements. The fair values of these liabilities are based on the contractual payout formulas included in the acquisition agreements taking into account the expected performance of the business. Any remeasurements or accretion related to the Companys mandatorily redeemable noncontrolling interests are recorded through Interest (expense) income, net in the Statements of Operations. As the fair value does not rely on observable market inputs, the Company classifies these liabilities as Level 3 in the fair value hierarchy.
A rollforward of the Companys mandatorily redeemable noncontrolling interest liabilities classified as Level 3 is as follows:
For the six months ended December 31, | ||||||||
2018 | 2017 | |||||||
(in millions) | ||||||||
Balancebeginning of period |
$ | 12 | $ | 79 | ||||
Additions |
| 12 | ||||||
Accretion |
| 2 | ||||||
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Balanceend of period |
$ | 12 | $ | 93 | ||||
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Derivative Instruments
The Company is directly and indirectly affected by risks associated with changes in certain market conditions. When deemed appropriate, the Company uses derivative instruments to mitigate the potential impact of these market risks. The primary market risks managed by the Company through the use of derivative instruments include:
| foreign currency exchange rate risk: arising primarily through Foxtel Group borrowings denominated in U.S. dollars and payments for license fees; and |
| interest rate risk: arising from fixed and floating rate Foxtel Group borrowings. |
The Company formally designates qualifying derivatives as hedge relationships (hedges) and applies hedge accounting when considered appropriate. For economic hedges where no hedge relationship has been designated, changes in fair value are included as a component of net income in each reporting period within Other, net in the Statements of Operations. The Company does not use derivative financial instruments for trading or speculative purposes.
24
Hedges are classified as current or non-current in the Balance Sheets based on their maturity dates. Refer to the table below for further details:
Fair value as of | ||||||||||
Balance Sheet Location | December 31, 2018 |
June 30, 2018 |
||||||||
(in millions) | ||||||||||
Foreign currency derivativescash flow hedges |
Other current assets | $ | 5 | $ | 3 | |||||
Cross currency interest rate derivativesfair value hedges |
Other current assets | 8 | | |||||||
Cross currency interest rate derivativeseconomic hedges |
Other current assets | 12 | | |||||||
Cross currency interest rate derivativescash flow hedges |
Other current assets | 32 | | |||||||
Cross currency interest rate derivativesfair value hedges |
Other non-current assets | 18 | 29 | |||||||
Cross currency interest rate derivativescash flow hedges |
Other non-current assets | 73 | 76 | |||||||
Cross currency interest rate derivativeseconomic hedges |
Other non-current assets | | 10 | |||||||
Interest rate derivativescash flow hedges |
Other current liabilities | (4 | ) | | ||||||
Interest rate derivativescash flow hedges |
Other non-current liabilities | (14 | ) | (20 | ) | |||||
Cross currency interest rate derivativescash flow hedges |
Other non-current liabilities | (12 | ) | (12 | ) |
Cash flow hedges
The Company utilizes a combination of foreign currency derivatives, interest rate derivatives and cross currency interest rate derivatives to mitigate currency exchange and interest rate risk in relation to payments for license fees and future interest payments.
The total notional value of foreign exchange contract derivatives designated for hedging was $51 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to foreign currency fluctuations is to June 2019.
The total notional value of interest rate swap derivatives designated as cash flow hedges was approximately A$700 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to September 2022.
The total notional value of the cross currency interest rate swaps that were designated as cash flow hedges was approximately A$400 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024.
The following tables present the impact that changes in the fair values of derivatives designated as cash flow hedges had on Accumulated other comprehensive loss and the Statement of Operations during the three and six months ended December 31, 2018. The Company did not have any such hedges in the three and six months ended December 31, 2017.
25
(Gain) loss recognized in Accumulated Other Comprehensive Loss for the three months ended December 31, |
Gain (loss) reclassified from Accumulated Other Comprehensive Loss for the three months ended December 31, |
Income statement location | ||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||
(in millions) | ||||||||||||||||||||
Derivative instruments designated as cash flow hedges: |
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Foreign currency derivativescash flow hedges |
$ | (2 | ) | $ | | $ | 1 | $ | | Operating expenses | ||||||||||
Cross currency interest rate derivativescash flow hedges |
(30 | ) | | 26 | | Interest (expense) income, net | ||||||||||||||
Interest rate derivativescash flow hedges |
1 | | (2 | ) | | Interest (expense) income, net | ||||||||||||||
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Total |
$ | (31 | ) | $ | | $ | 25 | $ | | |||||||||||
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(Gain) loss recognized in Accumulated Other Comprehensive Loss for the six months ended December 31, |
Gain (loss) reclassified from Accumulated Other Comprehensive Loss for the six months ended December 31, |
Income statement location | ||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||
(in millions) | ||||||||||||||||||||
Derivative instruments designated as cash flow hedges: |
||||||||||||||||||||
Foreign currency derivativescash flow hedges |
$ | (4 | ) | $ | | $ | 2 | $ | | Operating expenses | ||||||||||
Cross currency interest rate derivativescash flow hedges |
(16 | ) | | 12 | | Interest (expense) income, net | ||||||||||||||
Interest rate derivativescash flow hedges |
2 | | (4 | ) | | Interest (expense) income, net | ||||||||||||||
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Total |
$ | (18 | ) | $ | | $ | 10 | $ | | |||||||||||
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During the three and six months ended December 31, 2018 the amount recognized in the Statement of Operations for the ineffective portion of derivative instruments designated as cash flow hedges was approximately $1 million and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.
As of December 31, 2018, the Company estimates that approximately $5 million of net derivative gains related to its foreign currency derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.
As of December 31, 2018, the Company estimates that approximately $3 million of net derivative gains related to its interest rate swap derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.
26
As of December 31, 2018, the Company estimates that approximately $1 million of net derivative gains related to its cross currency interest rate swap derivative cash flow hedges included in Accumulated other comprehensive loss will be reclassified into the Statement of Operations within the next 12 months.
Fair value hedges
The Companys primary interest rate risk arises from its borrowings acquired as a part of the Transaction. Borrowings issued at fixed rates and in U.S. dollars expose new Foxtel to fair value interest rate risk and currency exchange rate risk. The Company manages fair value interest rate risk and currency exchange rate risk through the use of cross currency interest rate swaps under which the Company exchanges fixed interest payments equivalent to the interest payments on the U.S. dollar denominated debt for floating rate Australian dollar denominated interest payments. The changes in fair value of derivatives designated as fair value hedges and the offsetting changes in fair value of the hedged items are recognized in Other, net. As of December 31, 2018, such adjustments increased the carrying value of borrowings by approximately $2 million.
The total notional value of the fair value hedges was approximately A$100 million as of December 31, 2018. The maximum hedged term over which the Company is hedging exposure to variability in interest payments is to July 2024.
During the three and six months ended December 31, 2018, the amount recognized in the Statement of Operations on derivative instruments designated as fair value hedges related to the ineffective portion was nil and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.
Economic (non-designated) hedges
In addition to derivative instruments that are designated and qualify for hedge accounting, the Company also uses certain derivatives not designated as accounting hedges to mitigate foreign currency and interest rate risk. These are referred to as economic hedges. The changes in fair value of economic hedges are immediately recognized in the Statement of Operations. The total notional value of these cross currency interest rate derivatives was $75 million as of December 31, 2018, which relate to the U.S. private placement 2009 debt.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are remeasured at fair value on a recurring basis, the Company has certain assets, primarily goodwill, intangible assets, equity method investments and property, plant and equipment, that are not required to be remeasured to fair value at the end of each reporting period. On an ongoing basis, the Company monitors whether events occur or circumstances change that would more likely than not reduce the fair values of these assets below their carrying amounts. If the Company determines that these assets are impaired, the Company would write down these assets to fair value. These nonrecurring fair value measurements are considered to be Level 3 in the fair value hierarchy.
In the second quarter of fiscal 2018, the Company recognized non-cash write-downs of certain equity method investments of approximately $13 million. The carrying value of equity method investments decreased from $136 million to $123 million. See Note 5 Investments.
The Company did not recognize any write-downs on the carrying value of its assets during the six months ended December 31, 2018.
Other Fair Value Measurements
As of December 31, 2018, the carrying value of the Companys outstanding borrowings approximates the fair value and is classified as Level 3 in the fair value hierarchy.
27
NOTE 10. EARNINGS (LOSS) PER SHARE
The following tables set forth the computation of basic and diluted earnings (loss) per share under ASC 260, Earnings per Share:
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in millions, except per share amounts) | ||||||||||||||||
Net income (loss) |
$ | 119 | $ | (66 | ) | $ | 247 | $ | 21 | |||||||
Less: Net income attributable to noncontrolling interests |
(24 | ) | (17 | ) | (51 | ) | (36 | ) | ||||||||
Less: Redeemable preferred stock dividends(a) |
| (1 | ) | | (1 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to News Corporation stockholders |
$ | 95 | $ | (84 | ) | $ | 196 | $ | (16 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average number of shares of common stock outstandingbasic |
584.9 | 582.7 | 584.4 | 582.5 | ||||||||||||
Dilutive effect of equity awards(b) |
2.2 | | 1.9 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average number of shares of common stock outstandingdiluted |
587.1 | 582.7 | 586.3 | 582.5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) available to News Corporation stockholders per sharebasic |
$ | 0.16 | $ | (0.14 | ) | $ | 0.34 | $ | (0.03 | ) | ||||||
Net income (loss) available to News Corporation stockholders per sharediluted |
$ | 0.16 | $ | (0.14 | ) | $ | 0.33 | $ | (0.03 | ) |
(a) | In connection with the Separation, as defined in Note 7, 21st Century Fox sold 4,000 shares of cumulative redeemable preferred stock with a par value of $5,000 per share of a newly formed U.S. subsidiary of the Company. The preferred stock paid dividends at a rate of 9.5% per annum, payable quarterly, in arrears. The preferred stock was callable by the Company at any time after the fifth year and puttable at the option of the holder after 10 years. In July 2018, the Company exercised its call option and redeemed 100% of the outstanding redeemable preferred stock. |
(b) | The dilutive impact of the Companys PSUs, RSUs and stock options has been excluded from the calculation of diluted loss per share for the three and six months ended December 31, 2017 because their inclusion would have an antidilutive effect on the net loss per share. |
NOTE 11. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has commitments under certain firm contractual arrangements (firm commitments) to make future payments. These firm commitments secure the future rights to various assets and services to be used in the normal course of operations. The Companys commitments as of December 31, 2018 have not changed significantly from the disclosures included in the 2018 Form 10-K.
Contingencies
The Company routinely is involved in various legal proceedings, claims and governmental inspections or investigations, including those discussed below. The outcome of these matters and claims is subject to significant uncertainty, and the Company often cannot predict what the eventual outcome of pending matters will be or the timing of the ultimate resolution of these matters. Fees, expenses, fines, penalties, judgments or settlement costs which might be incurred by the Company in connection with the various proceedings could adversely affect its results of operations and financial condition.
The Company establishes an accrued liability for legal claims when it determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.
28
Legal fees associated with litigation and similar proceedings are expensed as incurred. Except as otherwise provided below, for the contingencies disclosed for which there is at least a reasonable possibility that a loss may be incurred, the Company was unable to estimate the amount of loss or range of loss. The Company recognizes gain contingencies when the gain becomes realized or realizable.
Valassis Communications, Inc.
On November 8, 2013, Valassis Communications, Inc. (Valassis) filed a complaint in the U.S. District Court for the Eastern District of Michigan (the District Court) against News America Incorporated, News America Marketing FSI L.L.C., News America Marketing In-Store Services L.L.C. and News Corporation (together, the NAM Group) alleging violations of federal and state antitrust laws and common law business torts. The complaint sought treble damages, injunctive relief and attorneys fees and costs. On December 19, 2013, the NAM Group filed a motion to dismiss the complaint, and on March 30, 2016, the District Court ordered that Valassiss bundling and tying claims be dismissed and that all remaining claims in the NAM Groups motion to dismiss be referred to a panel of antitrust experts (the Antitrust Expert Panel) appointed in connection with a prior action brought by Valassis against certain members of the NAM Group. The Antitrust Expert Panel was convened and, on February 8, 2017, recommended that the NAM Groups counterclaims in the action be dismissed with leave to replead three of the four counterclaims. The NAM Group filed an amended counterclaim on February 27, 2017. Valassis subsequently filed motions with the District Court seeking either to re-open the case in the District Court or to transfer the case to the U.S. District Court for the Southern District of New York (the N.Y. District Court). On September 25, 2017, the District Court granted Valassiss motions and transferred the case to the N.Y. District Court. On April 13, 2018, the NAM Group filed a motion for summary judgment dismissing the case with the N.Y. District Court. While it is not possible at this time to predict with any degree of certainty the ultimate outcome of this action, the NAM Group believes it has been compliant with applicable laws and intends to defend itself vigorously.
U.K. Newspaper Matters
Civil claims have been brought against the Company with respect to, among other things, voicemail interception and inappropriate payments to public officials at the Companys former publication, The News of the World, and at The Sun, and related matters (the U.K. Newspaper Matters). The Company has admitted liability in many civil cases and has settled a number of cases. The Company also settled a number of claims through a private compensation scheme which was closed to new claims after April 8, 2013.
In connection with the Separation, the Company and 21st Century Fox agreed in the Separation and Distribution Agreement that 21st Century Fox would indemnify the Company for payments made after the Distribution Date arising out of civil claims and investigations relating to the U.K. Newspaper Matters as well as legal and professional fees and expenses paid in connection with the previously concluded criminal matters, other than fees, expenses and costs relating to employees (i) who are not directors, officers or certain designated employees or (ii) with respect to civil matters, who are not co-defendants with the Company or 21st Century Fox. 21st Century Foxs indemnification obligations with respect to these matters will be settled on an after-tax basis.
The net expense (benefit) related to the U.K. Newspaper Matters in Selling, general and administrative was $4 million and $3 million for the three months ended December 31, 2018 and 2017, respectively, and $6 million and ($40) million for the six months ended December 31, 2018 and 2017, respectively. As of December 31, 2018, the Company has provided for its best estimate of the liability for the claims that have been filed and costs incurred, including liabilities associated with employment taxes, and has accrued approximately $50 million. The amount to be indemnified by 21st Century Fox of approximately $47 million was recorded as a receivable in Other current assets on the Balance Sheet as of December 31, 2018. The net benefit for the six months ended December 31, 2017 reflects a $46 million impact from the reversal of a portion of the Companys previously accrued liability and the corresponding receivable from 21st Century Fox as the result of an agreement reached with the relevant tax authority with respect to certain employment taxes. It is not possible to estimate the liability or corresponding receivable for any additional claims that may be filed given the information that is currently available to the Company. If more claims are filed and additional information becomes available, the Company will update the liability provision and corresponding receivable for such matters.
29
The Company is not able to predict the ultimate outcome or cost of the civil claims. It is possible that these proceedings and any adverse resolution thereof could damage its reputation, impair its ability to conduct its business and adversely affect its results of operations and financial condition.
Other
The Companys tax returns are subject to on-going review and examination by various tax authorities. Tax authorities may not agree with the treatment of items reported in the Companys tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable.
The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid; however, these liabilities may need to be adjusted as new information becomes known and as tax examinations continue to progress, or as settlements or litigations occur.
NOTE 12. INCOME TAXES
At the end of each interim period, the Company estimates the annual effective tax rate and applies that rate to its ordinary quarterly earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effects of changes in enacted tax laws or rates or tax status are recognized in the interim period in which the change occurs.
For the three months ended December 31, 2018, the Company recorded a tax charge of $55 million on pre-tax income of $174 million resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
For the six months ended December 31, 2018, the Company recorded a tax charge of $105 million on pre-tax income of $352 million resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act includes significant changes to the U.S. corporate income tax system including, among other things, lowering the U.S. statutory federal tax rate to 21%. The reduction of the U.S. corporate tax rate caused the Company to adjust its U.S. deferred tax assets and liabilities to the lower federal rate of 21% at the fiscal year ended June 30, 2018. The Tax Act also added many new provisions, including a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries (transition tax), changes to bonus depreciation, limits on deductions for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income. The Company has elected to account for the tax on GILTI and BEAT as a period cost and thus has not adjusted any net deferred tax assets of its foreign subsidiaries for the new tax. However, the Company has considered the potential impact of GILTI and BEAT on its U.S. federal net operating loss (NOL) carryforward and determined that the projected tax benefit to be received from its NOL carryforward may be reduced due to these provisions.
The changes included in the Tax Act are broad and complex. The SEC issued Staff Accounting Bulletin No. 118 (SAB 118), as amended by ASU 2018-05, which provides guidance for companies related to the Tax Act. ASU 2018-05 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Companys accounting for the tax effects of the Tax Act were completed in the second quarter of fiscal 2019. Although the Company believes the effects of the Tax Act have been appropriately recorded, it will continue to monitor, among other things, changes in interpretations of the Tax Act, any legislative action arising because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act. The Company intends to monitor and assess the impact of any future changes in legislative interpretations or standards and adjust its provision as new information becomes available. In accordance with SAB 118, the Company has made reasonable estimates related to (1) the remeasurement of its U.S. deferred tax balances for the reduction in the statutory tax rate, (2) the liability for the transition tax and (3) the partial valuation allowance recorded against its federal NOL carryforward due to the impact of the GILTI and BEAT provisions.
30
As a result, the Company recognized a net provisional income tax expense of $237 million associated with these items in the fiscal year ended June 30, 2018. In the second quarter of fiscal 2019, the Company determined that there were no material changes to the provisional amounts recorded as of June 30, 2018.
Management assesses available evidence to determine whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. Based on managements assessment of available evidence, it has been determined that it is more likely than not that certain deferred tax assets in U.S. Federal, State and foreign jurisdictions may not be realized and therefore, a valuation allowance has been established against those tax assets.
For the three months ended December 31, 2017, the Company recorded a tax charge of $235 million on pre-tax income of $169 million, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate primarily resulted from the enactment of the Tax Act, which caused an increase in income tax expense of approximately $174 million.
For the six months ended December 31, 2017, the Company recorded a tax charge of $289 million on pre-tax income of $310 million, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate primarily resulted from the enactment of the Tax Act, which caused an increase in income tax expense of approximately $174 million.
The Companys tax returns are subject to on-going review and examination by various tax authorities. Tax authorities may not agree with the treatment of items reported in our tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable. The Company is currently undergoing tax examinations by the Internal Revenue Service (IRS), various U.S. state and foreign jurisdictions. During the year ended June 30, 2018, the IRS commenced an audit of the Company for the year ended June 30, 2014. The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid. However, the Company may need to accrue additional income tax expense and its liability may need to be adjusted as new information becomes known and as these tax examinations continue to progress, or as settlements or litigations occur. The Company paid gross income taxes of $75 million and $89 million during the six months ended December 31, 2018 and 2017, respectively, and received tax refunds of $10 million and nil, respectively.
NOTE 13. SEGMENT INFORMATION
The Company manages and reports its businesses in the following five segments:
| News and Information ServicesThe News and Information Services segment includes the Companys global print, digital and broadcast radio media platforms. These product offerings include the global print and digital versions of The Wall Street Journal and Barrons Group, which includes Barrons and MarketWatch, the Companys suite of professional information products, including Factiva, Dow Jones Risk & Compliance, Dow Jones Newswires and DJX, and its live journalism events. The Company also owns, among other publications, The Australian, The Daily Telegraph, Herald Sun, The Courier Mail and The Advertiser in Australia, The Times, The Sunday Times, The Sun and The Sun on Sunday in the U.K. and the New York Post in the U.S. This segment also includes News America Marketing, a leading provider of home-delivered shopper media, in-store marketing products and services and digital marketing solutions, including Checkout 51s mobile application, as well as Unruly, a global video advertising marketplace, Wireless Group, operator of talkSPORT, the leading sports radio network in the U.K., and Storyful, a social media content agency. |
31
| Subscription Video ServicesThe Companys Subscription Video Services segment provides video sports, entertainment and news services to pay-TV subscribers and other commercial licensees, primarily via cable, satellite and Internet Protocol, or IP, distribution, and consists of (i) its 65% interest in new Foxtel and (ii) Australian News Channel Pty Ltd (ANC). The remaining 35% interest in new Foxtel is held by Telstra, an Australian Securities Exchange (ASX)-listed telecommunications company. New Foxtel is the largest pay-TV provider in Australia, with over 200 channels covering sports, general entertainment, movies, documentaries, music, childrens programming and news and broadcast rights to live sporting events in Australia including: National Rugby League, Australian Football League, Cricket Australia, the domestic football league, the Australian Rugby Union and various motorsports programming. |
ANC operates the SKY NEWS network, Australias 24-hour multi-channel, multi-platform news service. ANC channels are distributed throughout Australia and New Zealand and available on Foxtel and Sky Network Television NZ. ANC also owns and operates the international Australia Channel IPTV service and offers content across a variety of digital media platforms, including mobile, podcasts and social media websites.
| Book PublishingThe Book Publishing segment consists of HarperCollins, the second largest consumer book publisher in the world, with operations in 17 countries and particular strengths in general fiction, nonfiction, childrens and religious publishing. HarperCollins owns more than 120 branded publishing imprints, including Harper, William Morrow, HarperCollins Childrens Books, Avon, Harlequin and Christian publishers Zondervan and Thomas Nelson, and publishes works by well-known authors such as Harper Lee, Chip and Joanna Gaines, Rick Warren, Sarah Young and Agatha Christie and popular titles such as The Hobbit, Goodnight Moon, To Kill a Mockingbird, Jesus Calling and Hillbilly Elegy. |
| Digital Real Estate ServicesThe Digital Real Estate Services segment consists of the Companys 61.6% interest in REA Group and 80% interest in Move. The remaining 20% interest in Move is held by REA Group. REA Group is a market-leading digital media business specializing in property and is listed on the ASX (ASX: REA). REA Group advertises property and property-related services on its websites and mobile applications across Australia and Asia, including Australias leading residential and commercial property websites, realestate.com.au and realcommercial.com.au, and property portals in Asia. In addition, REA Group provides property-related data to the financial sector and financial services through an end-to-end digital property search and financing experience and a mortgage broking offering. |
Move is a leading provider of online real estate services in the U.S. and primarily operates realtor.com®, a premier real estate information and services marketplace. Move offers real estate advertising solutions to agents and brokers, including its ConnectionsSM Plus and AdvantageSM Pro products. Move also offers a number of professional software and services products, including Top Producer®, FiveStreet® and ListHubTM.
| OtherThe Other segment consists primarily of general corporate overhead expenses, the corporate Strategy Group and costs related to the U.K. Newspaper Matters. The Companys Strategy Group identifies new products and services across its businesses to increase revenues and profitability and targets and assesses potential acquisitions, investments and dispositions. |
Segment EBITDA is defined as revenues less operating expenses and selling, general and administrative expenses. Segment EBITDA does not include: depreciation and amortization, impairment and restructuring charges, equity losses of affiliates, interest (expense) income, net, other, net, income tax (expense) benefit and net income attributable to noncontrolling interests. Segment EBITDA may not be comparable to similarly titled measures reported by other companies, since companies and investors may differ as to what items should be included in the calculation of Segment EBITDA.
Segment EBITDA is the primary measure used by the Companys chief operating decision maker to evaluate the performance of and allocate resources within the Companys businesses. Segment EBITDA provides management, investors and equity analysts with a measure to analyze the operating performance of each of the Companys business segments and its enterprise value against historical data and competitors data, although historical results may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).
32
Segment information is summarized as follows:
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in millions) | ||||||||||||||||
Revenues: |
||||||||||||||||
News and Information Services |
$ | 1,257 | $ | 1,298 | $ | 2,505 | $ | 2,539 | ||||||||
Subscription Video Services |
562 | 120 | 1,127 | 265 | ||||||||||||
Book Publishing |
496 | 469 | 914 | 870 | ||||||||||||
Digital Real Estate Services |
311 | 292 | 604 | 563 | ||||||||||||
Other |
1 | 1 | 1 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
$ | 2,627 | $ | 2,180 | $ | 5,151 | $ | 4,238 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment EBITDA: |
||||||||||||||||
News and Information Services |
$ | 120 | $ | 141 | $ | 236 | $ | 215 | ||||||||
Subscription Video Services |
84 | 33 | 197 | 60 | ||||||||||||
Book Publishing |
88 | 78 | 156 | 126 | ||||||||||||
Digital Real Estate Services |
121 | 119 | 226 | 214 | ||||||||||||
Other |
(43 | ) | (43 | ) | (87 | ) | (39 | ) | ||||||||
Depreciation and amortization |
(163 | ) | (100 | ) | (326 | ) | (197 | ) | ||||||||
Impairment and restructuring charges |
(19 | ) | (12 | ) | (37 | ) | (27 | ) | ||||||||
Equity losses of affiliates |
(6 | ) | (18 | ) | (9 | ) | (28 | ) | ||||||||
Interest (expense) income, net |
(15 | ) | 1 | (31 | ) | 7 | ||||||||||
Other, net |
7 | (30 | ) | 27 | (21 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income tax expense |
174 | 169 | 352 | 310 | ||||||||||||
Income tax expense |
(55 | ) | (235 | ) | (105 | ) | (289 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 119 | $ | (66 | ) | $ | 247 | $ | 21 | |||||||
|
|
|
|
|
|
|
|
As of December 31, 2018 |
As of June 30, 2018 |
|||||||
(in millions) | ||||||||
Total assets: |
||||||||
News and Information Services |
$ | 5,905 | $ | 6,039 | ||||
Subscription Video Services |
4,618 | 4,738 | ||||||
Book Publishing |
2,141 | 1,898 | ||||||
Digital Real Estate Services |
2,189 | 2,171 | ||||||
Other(a) |
1,029 | 1,107 | ||||||
Investments |
345 | 393 | ||||||
|
|
|
|
|||||
Total assets |
$ | 16,227 | $ | 16,346 | ||||
|
|
|
|
(a) | The Other segment primarily includes Cash and cash equivalents. |
33
As of December 31, 2018 |
As of June 30, 2018 |
|||||||
(in millions) | ||||||||
Goodwill and intangible assets, net: |
||||||||
News and Information Services |
$ | 2,737 | $ | 2,730 | ||||
Subscription Video Services |
2,684 | 2,853 | ||||||
Book Publishing |
773 | 804 | ||||||
Digital Real Estate Services |
1,602 | 1,502 | ||||||
|
|
|
|
|||||
Total Goodwill and intangible assets, net |
$ | 7,796 | $ | 7,889 | ||||
|
|
|
|
NOTE 14. ADDITIONAL FINANCIAL INFORMATION
Receivables, net
Receivables are presented net of an allowance for doubtful accounts, which is an estimate of amounts that may not be collectible. The allowance for doubtful accounts is estimated based on historical experience, receivable aging, current economic trends and specific identification of certain receivables that are at risk of not being collected.
Receivables, net consist of:
As of December 31, 2018 |
As of June 30, 2018 |
|||||||
(in millions) | ||||||||
Receivables |
$ | 1,901 | $ | 1,829 | ||||
Allowance for sales returns(a) |
| (171 | ) | |||||
Allowance for doubtful accounts |
(48 | ) | (46 | ) | ||||
|
|
|
|
|||||
Receivables, net |
$ | 1,853 | $ | 1,612 | ||||
|
|
|
|
(a) | As a result of the adoption of the new revenue recognition standard during the first quarter of fiscal 2019, the Company reclassified the allowance for sales returns from Receivables, net to Other current liabilities. See Note 2Revenues. |
Other Non-Current Assets
The following table sets forth the components of Other non-current assets:
As of December 31, 2018 |
As of June 30, 2018 |
|||||||
(in millions) | ||||||||
Royalty advances to authors |
$ | 326 | $ | 312 | ||||
Retirement benefit assets |
145 | 135 | ||||||
Inventory(a) |
144 | 143 | ||||||
Other |
297 | 241 | ||||||
|
|
|
|
|||||
Total Other non-current assets |
$ | 912 | $ | 831 | ||||
|
|
|
|
(a) Primarily consists of the non-current portion of programming rights.
34
Other Current Liabilities
The following table sets forth the components of Other current liabilities:
As of December 31, 2018 |
As of June 30, 2018 |
|||||||
(in millions) | ||||||||
Current tax payable |
$ | 18 | $ | 17 | ||||
Allowance for sales returns |
216 | | ||||||
Royalties and commissions payable |
223 | 187 | ||||||
Other |
213 | 168 | ||||||
|
|
|
|
|||||
Total Other current liabilities |
$ | 670 | $ | 372 | ||||
|
|
|
|
Other, net
The following table sets forth the components of Other, net:
For the three months ended December 31, |
For the six months ended December 31, |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in millions) | ||||||||||||||||
Dividends received from equity security investments |
$ | 22 | $ | | $ | 23 | $ | | ||||||||
Remeasurement of equity securities(a) |
(44 | ) | | (29 | ) | | ||||||||||
Write-down of available-for-sale securities(b) |
| (30 | ) | | (30 | ) | ||||||||||
Gain on sale of Australian property |
12 | | 12 | | ||||||||||||
Other, net |
17 | | 21 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other, net |
$ | 7 | $ | (30 | ) | $ | 27 | $ | (21 | ) | ||||||
|
|
|
|
|
|
|
|
(a) | As a result of the adoption of ASU 2016-01 during the first quarter of fiscal 2019, the Company has included the impact from the remeasurement of equity securities in Other, net in the Statement of Operations for the three and six months ended December 31, 2018. During the three and six months ended December 31, 2017, the impact from the remeasurement of equity securities was included in Accumulated other comprehensive loss in the Balance Sheets. |
(b) | For the three and six months ended December 31, 2017, the write-downs of available-for-sale securities were reclassified out of accumulated other comprehensive loss and included in Other, net in the Statement of Operations. |
Supplemental Cash Flow Information
The following table sets forth the Companys cash paid for taxes and interest:
For the six months ended December 31, |
||||||||
2018 | 2017 | |||||||
(in millions) | ||||||||
Cash paid for interest |
$ | 45 | $ | 6 | ||||
Cash paid for taxes |
75 | 89 |
NOTE 15. SUBSEQUENT EVENTS
In February 2019, the Board of Directors declared a semi-annual cash dividend of $0.10 per share for Class A Common Stock and Class B Common Stock. This dividend is payable on April 17, 2019 to stockholders of record as of March 13, 2019.
35
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document, including the following discussion and analysis contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the Securities Act of 1933, as amended. All statements that are not statements of historical fact are forward-looking statements. The words expect, estimate, anticipate, predict, believe and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this discussion and analysis and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, trends affecting the Companys financial condition or results of operations and the outcome of contingencies such as litigation and investigations. Readers are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. More information regarding these risks, uncertainties and other important factors that could cause actual results to differ materially from those in the forward-looking statements is set forth under the heading Risk Factors in Part I, Item 1A in News Corporations Annual Report on Form 10-K for the fiscal year ended June 30, 2018 as filed with the Securities and Exchange Commission (the SEC) on August 15, 2018 (the 2018 Form 10-K), and as may be updated in this and other subsequent Quarterly Reports on Form 10-Q. The Company does not ordinarily make projections of its future operating results and undertakes no obligation (and expressly disclaims any obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Readers should carefully review this document and the other documents filed by the Company with the SEC. This section should be read together with the unaudited consolidated financial statements of News Corporation and related notes set forth elsewhere herein and the audited consolidated financial statements of News Corporation and related notes set forth in the 2018 Form 10-K.
INTRODUCTION
News Corporation (together with its subsidiaries, News Corporation, News Corp, the Company, we, or us) is a global diversified media and information services company comprised of businesses across a range of media, including: news and information services, subscription video services in Australia, book publishing and digital real estate services.
In April 2018, News Corp and Telstra Corporation Limited (Telstra) combined their respective 50% interests in Foxtel and News Corps 100% interest in FOX SPORTS Australia into a new company, which the Company refers to as new Foxtel (the Transaction). Following the completion of the Transaction, News Corp owns a 65% interest in the combined business, with Telstra owning the remaining 35%. Consequently, the Company began consolidating Foxtel in the fourth quarter of fiscal 2018. (See Note 3Acquisitions, Disposals and Other Transactions in the accompanying Consolidated Financial Statements). The results of the combined business are reported within the Subscription Video Services segment (formerly the Cable Network Programming segment). To enhance the comparability of the financial information provided to users, the Company has supplementally included pro forma financial information for the three and six months ended December 31, 2017 reflecting the Transaction within its discussion and analysis below.
The unaudited consolidated financial statements are referred to herein as the Consolidated Financial Statements. The consolidated statements of operations are referred to herein as the Statements of Operations. The consolidated balance sheets are referred to herein as the Balance Sheets. The consolidated statements of cash flows are referred to herein as the Statements of Cash Flows. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP).
Managements discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Companys financial condition, changes in financial condition and results of operations. This discussion is organized as follows:
| Overview of the Companys Businesses - This section provides a general description of the Companys businesses, as well as developments that occurred to date during fiscal 2019 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends. |
| Results of Operations - This section provides an analysis of the Companys results of operations for the three and six months ended December 31, 2018 and 2017. This analysis is presented on both a consolidated basis and a segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed. |
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To enhance the comparability of the financial information provided to users, the Company has supplementally included pro forma financial information for the three and six months ended December 31, 2017 reflecting the Transaction within its discussion and analysis below. |
| Liquidity and Capital Resources - This section provides an analysis of the Companys cash flows for the six months ended December 31, 2018 and 2017, as well as a discussion of the Companys financial arrangements and outstanding commitments, both firm and contingent, that existed as of December 31, 2018. |
OVERVIEW OF THE COMPANYS BUSINESSES
The Company manages and reports its businesses in the following five segments:
| News and Information Services The News and Information Services segment includes the Companys global print, digital and broadcast radio media platforms. These product offerings include the global print and digital versions of The Wall Street Journal and Barrons Group, which includes Barrons and MarketWatch, the Companys suite of professional information products, including Factiva, Dow Jones Risk & Compliance, Dow Jones Newswires and DJX, and its live journalism events. The Company also owns, among other publications, The Australian, The Daily Telegraph, Herald Sun, The Courier Mail and The Advertiser in Australia, The Times, The Sunday Times, The Sun and The Sun on Sunday in the U.K. and the New York Post in the U.S. This segment also includes News America Marketing, a leading provider of home-delivered shopper media, in-store marketing products and services and digital marketing solutions, including Checkout 51s mobile application, as well as Unruly, a global video advertising marketplace, Wireless Group, operator of talkSPORT, the leading sports radio network in the U.K., and Storyful, a social media content agency. |
| Subscription Video ServicesThe Companys Subscription Video Services segment provides video sports, entertainment and news services to pay-TV subscribers and other commercial licensees, primarily via cable, satellite and Internet Protocol, or IP, distribution, and consists of (i) its 65% interest in new Foxtel and (ii) Australian News Channel Pty Ltd (ANC). The remaining 35% interest in new Foxtel is held by Telstra, an Australian Securities Exchange (ASX)-listed telecommunications company. New Foxtel is the largest pay-TV provider in Australia, with over 200 channels covering sports, general entertainment, movies, documentaries, music, childrens programming and news and broadcast rights to live sporting events in Australia including: National Rugby League, Australian Football League, Cricket Australia, the domestic football league, the Australian Rugby Union and various motorsports programming. |
ANC operates the SKY NEWS network, Australias 24-hour multi-channel, multi-platform news service. ANC channels are distributed throughout Australia and New Zealand and available on Foxtel and Sky Network Television NZ. ANC also owns and operates the international Australia Channel IPTV service and offers content across a variety of digital media platforms, including mobile, podcasts and social media websites.
| Book PublishingThe Book Publishing segment consists of HarperCollins, the second largest consumer book publisher in the world, with operations in 17 countries and particular strengths in general fiction, nonfiction, childrens and religious publishing. HarperCollins owns more than 120 branded publishing imprints, including Harper, William Morrow, HarperCollins Childrens Books, Avon, Harlequin and Christian publishers Zondervan and Thomas Nelson, and publishes works by well-known authors such as Harper Lee, Chip and Joanna Gaines, Rick Warren, Sarah Young and Agatha Christie and popular titles such as The Hobbit, Goodnight Moon, To Kill a Mockingbird, Jesus Calling and Hillbilly Elegy. |
| Digital Real Estate ServicesThe Digital Real Estate Services segment consists of the Companys 61.6% interest in REA Group and 80% interest in Move. The remaining 20% interest in Move is held by REA Group. REA Group is a market-leading digital media business specializing in property and is listed on the ASX (ASX: REA). REA Group advertises property and property-related services on its websites and mobile applications across Australia and Asia, including Australias leading residential and commercial property websites, realestate.com.au and realcommercial.com.au, and property portals in Asia. In addition, REA Group provides property-related data to the financial sector and financial services through an end-to-end digital property search and financing experience and a mortgage broking offering. |
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Move is a leading provider of online real estate services in the U.S. and primarily operates realtor.com®, a premier real estate information and services marketplace. Move offers real estate advertising solutions to agents and brokers, including its ConnectionsSM Plus and AdvantageSM Pro products. Move also offers a number of professional software and services products, including Top Producer®, FiveStreet® and ListHubTM.
| OtherThe Other segment consists primarily of general corporate overhead expenses, the corporate Strategy Group and costs related to the U.K. Newspaper Matters (as defined in Note 11 to the Consolidated Financial Statements). The Companys Strategy Group identifies new products and services across its businesses to increase revenues and profitability and targets and assesses potential acquisitions, investments and dispositions. |
Other Business Developments
In October 2018, the Company acquired Opcity, Inc. (Opcity), a market-leading real estate technology platform that matches qualified home buyers and sellers with real estate professionals in real time. The total transaction value was approximately $210 million, consisting of approximately $182 million in cash, net of $7 million of cash acquired, and approximately $28 million in deferred payments and restricted stock unit awards for Opcitys founders and qualifying employees, which is being recognized as compensation expense over the three years following the closing. Included in the cash amount was approximately $20 million that is being held back for approximately 18 months after closing. Opcity is a subsidiary of Move, and its results are included within the Digital Real Estate Services segment.
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RESULTS OF OPERATIONS
Results of OperationsFor the three and six months ended December 31, 2018 versus the three and six months ended December 31, 2017 (as reported)
The following table sets forth the Companys operating results for the three and six months ended December 31, 2018 as compared to the three and six months ended December 31, 2017.
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | % Change |
2018 | 2017 | Change | % Change |
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(in millions, except %) | Better/(Worse) | Better/(Worse) | ||||||||||||||||||||||||||||||
Revenues: |
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Circulation and subscription |
$ | 1,029 | $ | 637 | $ | 392 | 62% | $ | 2,063 | $ | 1,288 | $ | 775 | 60% | ||||||||||||||||||
Advertising |
718 | 717 | 1 | | 1,382 | 1,399 | (17 | ) | (1)% | |||||||||||||||||||||||
Consumer |
478 | 453 | 25 | 6% | 878 | 839 | 39 | 5% | ||||||||||||||||||||||||
Real estate |
248 | 222 | 26 | 12% | 475 | 425 | 50 | 12% | ||||||||||||||||||||||||
Other |
154 | 151 | 3 | 2% | 353 | 287 | 66 | 23% | ||||||||||||||||||||||||
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Total Revenues |
2,627 | 2,180 | 447 | 21% | 5,151 | 4,238 | 913 | 22% | ||||||||||||||||||||||||
Operating expenses |
(1,484 | ) | (1,139 | ) | (345 | ) | (30)% | (2,824 | ) | (2,288 | ) | (536 | ) | (23)% | ||||||||||||||||||
Selling, general and administrative |
(773 | ) | (713 | ) | (60 | ) | (8)% | (1,599 | ) | (1,374 | ) | (225 | ) | (16)% | ||||||||||||||||||
Depreciation and amortization |
(163 | ) | (100 | ) | (63 | ) | (63)% | (326 | ) | (197 | ) | (129 | ) | (65)% | ||||||||||||||||||
Impairment and restructuring charges |
(19 | ) | (12 | ) | (7 | ) | (58)% | (37 | ) | (27 | ) | (10 | ) | (37)% | ||||||||||||||||||
Equity losses of affiliates |
(6 | ) | (18 | ) | 12 | 67% | (9 | ) | (28 | ) | 19 | 68% | ||||||||||||||||||||
Interest (expense) income, net |
(15 | ) | 1 | (16 | ) | ** | (31 | ) | 7 | (38 | ) | ** | ||||||||||||||||||||
Other, net |
7 | (30 | ) | 37 | ** | 27 | (21 | ) | 48 | ** | ||||||||||||||||||||||
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Income before income tax expense |
174 | 169 | 5 | 3% | 352 | 310 | 42 | 14% | ||||||||||||||||||||||||
Income tax expense |
(55 | ) | (235 | ) | 180 | 77% | (105 | ) | (289 | ) | 184 | 64% | ||||||||||||||||||||
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Net income (loss) |
119 | (66 | ) | 185 | ** | 247 | 21 | 226 | ** | |||||||||||||||||||||||
Less: Net income attributable to noncontrolling interests |
(24 | ) | (17 | ) | (7 | ) | (41)% | (51 | ) | (36 | ) | (15 | ) | (42)% | ||||||||||||||||||
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Net income (loss) attributable to News Corporation stockholders |
$ | 95 | $ | (83 | ) | $ | 178 | ** | $ | 196 | $ | (15 | ) | $ | 211 | ** | ||||||||||||||||
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** not meaningful
Revenues Revenues increased $447 million, or 21%, and $913 million, or 22%, for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018.
The Revenue increase for the three months ended December 31, 2018 was primarily due to higher revenues at the Subscription Video Services segment of $442 million resulting in large part from the Transaction, which contributed $446 million to the increase. The Revenue increase was also attributable to higher revenues of $27 million and $19 million at the Book Publishing and Digital Real Estate Services segments, respectively. These increases were partially offset by lower revenues at the News and Information Services segment of $41 million, primarily due to weakness in the print advertising market. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Revenue decrease of $67 million for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
The Revenue increase for the six months ended December 31, 2018 was primarily due to higher revenues at the Subscription Video Services segment of $862 million resulting in large part from the Transaction, which contributed $871 million to the increase. The Revenue increase was also attributable to higher revenues of $44 million and $41 million at the Book Publishing and Digital Real Estate Services segments, respectively, partially offset by lower revenues at the News and Information Services segment of $34 million, primarily due to weakness in the print advertising market. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Revenue decrease of $116 million for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
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The Company calculates the impact of foreign currency fluctuations for businesses reporting in currencies other than the U.S. dollar by multiplying the results for each quarter in the current period by the difference between the average exchange rate for that quarter and the average exchange rate in effect during the corresponding quarter of the prior year and totaling the impact for all quarters in the current period.
Operating expenses Operating expenses increased $345 million, or 30%, and $536 million, or 23%, for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018.
The increase in Operating expenses for the three months ended December 31, 2018 was mainly due to higher operating expenses at the Subscription Video Services segment of $336 million primarily resulting from the Transaction. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in an Operating expense decrease of $33 million for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
The increase in Operating expenses for the six months ended December 31, 2018 was mainly due to higher operating expenses at the Subscription Video Services segment of $553 million primarily resulting from the Transaction. The increase was partially offset by lower operating expenses at the News and Information Services segment of $36 million for the six months ended December 31, 2018, primarily at News Corp Australia, due to the $25 million positive impact of foreign currency fluctuations, lower newsprint, production and distribution costs and cost savings initiatives. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in an Operating expense decrease of $50 million for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
Selling, general and administrativeSelling, general and administrative expenses increased $60 million, or 8%, and $225 million, or 16%, for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018.
The increase in Selling, general and administrative expenses for the three months ended December 31, 2018 was primarily due to higher expenses of $55 million at the Subscription Video Services segment, primarily as a result of the Transaction. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Selling, general and administrative expense decrease of $21 million for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
The increase in Selling, general and administrative expenses for the six months ended December 31, 2018 was primarily due to higher expenses of $172 million at the Subscription Video Services segment, primarily as a result of the Transaction, and the absence of the $46 million impact from the reversal of a portion of the previously accrued liability for the U.K. Newspaper Matters and the corresponding receivable from 21st Century Fox as the result of an agreement reached with the relevant tax authority with respect to certain employment taxes in the first quarter of fiscal 2018. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Selling, general and administrative expense decrease of $42 million for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
Depreciation and amortization Depreciation and amortization expense increased $63 million, or 63%, and $129 million, or 65%, for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018. The increase for the three and six months ended December 31, 2018 was primarily as a result of an additional $68 million and $136 million, respectively, of depreciation and amortization expense due to the Transaction.
Impairment and restructuring charges During the three and six months ended December 31, 2018, the Company recorded restructuring charges of $19 million and $37 million, respectively. During the three and six months ended December 31, 2017, the Company recorded restructuring charges of $12 million and $27 million, respectively.
See Note 4Impairment and Restructuring Charges in the accompanying Consolidated Financial Statements.
The Company continually evaluates whether current factors or indicators require the performance of an interim impairment assessment of goodwill, long-lived assets and investments. The valuation of goodwill and long-lived assets requires assumptions and estimates of many factors, including revenue and market growth, operating cash flows, market multiples and discount rates. In the quarter ended December 31, 2018, the Company revised its future outlook for a reporting unit within the Subscription Video Services segment primarily due to declines in Australian broadcast subscribers during the first half of fiscal 2019.
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As a result, the Company determined that this reporting unit has goodwill and an indefinite-lived tradename that are considered to be at risk for future impairment because the fair value of the reporting unit exceeded its carrying value by approximately 6% as of December 31, 2018. Significant unobservable inputs utilized in the income approach valuation method for this reporting unit and the indefinite-lived tradename were discount rates (ranging from 10.0%-11.0%), long-term growth rates (2.0%) and royalty rates (1.5%). Significant unobservable inputs utilized in the market approach valuation method were EBITDA multiples from guideline public companies operating in similar industries and a control premium of 10%. For the current period analysis performed, a 75 basis point increase in the discount rate or a 100 basis point decrease in the long-term growth rate would have resulted in the reporting unit failing the interim impairment analysis. Any change in assumptions related to the valuation of the indefinite-lived tradename would have resulted in an impairment of such asset.
Including the reporting unit within the News and Information Services segment disclosed in the 2018 Form 10-K, the Company has reporting units with goodwill and an indefinite-lived tradename of approximately $2.3 billion at December 31, 2018 that are at risk for future impairment, of which $2.1 billion related to the Subscription Video Services segment and $0.2 billion related to the News and Information Services segment.
Equity losses of affiliates Equity losses of affiliates improved $12 million and $19 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018. The decrease in losses for the three months ended December 31, 2018 was primarily due to the absence of $13 million in non-cash write-downs of certain equity method investments recognized in the second quarter of fiscal 2018. The decrease in losses for the six months ended December 31, 2018 was primarily due to the absence of the non-cash write-downs as discussed above, and the consolidation of the results of Foxtel in the fourth quarter of fiscal 2018.
For the three months ended December 31, |
For the six months ended December 31, |
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2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | |||||||||||||||||||||||||
(in millions, except %) | Better/(Worse) | Better/(Worse) | ||||||||||||||||||||||||||||||
Foxtel(a) |
$ | | $ | 1 | $ | (1 | ) | ** | $ | | $ | (4 | ) | $ | 4 | ** | ||||||||||||||||
Other equity affiliates, net(b) |
(6 | ) | (19 | ) | 13 | 68% | (9 | ) | (24 | ) | 15 | 63% | ||||||||||||||||||||
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Total Equity losses of affiliates |
$ | (6 | ) | $ | (18 | ) | $ | 12 | 67% | $ | (9 | ) | $ | (28 | ) | $ | 19 | 68% | ||||||||||||||
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** not meaningful
(a) | Following completion of the Transaction in April 2018, News Corp ceased accounting for Foxtel as an equity method investment and began consolidating its results in the fourth quarter of fiscal 2018. See Note 3Acquisitions, Disposals and Other Transactions and Note 5Investments in the accompanying Consolidated Financial Statements. |
In accordance with ASC 350, IntangiblesGoodwill and Other, the Company amortized $15 million and $32 million related to excess cost over the Companys proportionate share of its investments underlying net assets allocated to finite-lived intangible assets during the three and six months ended December 31, 2017, respectively. Such amortization is reflected in Equity losses of affiliates in the Statement of Operations.
(b) | Other equity affiliates, net for the three and six months ended December 31, 2018 include losses primarily from the Companys interest in Elara. During the three months ended December 31, 2017, the Company recognized $13 million in non-cash write-downs of certain equity method investments carrying values to fair value. The write-downs are reflected in Equity losses of affiliates in the Statements of Operations for the three and six months ended December 31, 2017. |
Interest (expense) income, net Interest (expense) income, net was ($15) million and ($31) million for the three and six months ended December 31, 2018, respectively, as compared to $1 million and $7 million in the corresponding periods of fiscal 2018. The increase in interest expense during the three and six months ended December 31, 2018 was primarily due to higher interest expense as a result of the Transaction. As a result of the Transaction, the Company consolidated outstanding debt of approximately $1.8 billion. See Note 6Borrowings in the accompanying Consolidated Financial Statements.
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Other, net Other, net improved by $37 million and $48 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018. See Note 14Additional Financial Information in the accompanying Consolidated Financial Statements.
Income tax expense For the three months ended December 31, 2018, the Company recorded a tax charge of $55 million on pre-tax income of $174 million, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
For the six months ended December 31, 2018, the Company recorded a tax charge of $105 million on pre-tax income of $352 million, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
For the three months ended December 31, 2017, the Company recorded a tax charge of $235 million on pre-tax income of $169 million, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate primarily resulted from the enactment of the Tax Act, which caused an increase in income tax expense of approximately $174 million.
For the six months ended December 31, 2017, the Company recorded a tax charge of $289 million on pre-tax income of $310 million, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate primarily resulted from the enactment of the Tax Act, which caused an increase in income tax expense of approximately $174 million.
Management assesses available evidence to determine whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. Based on managements assessment of available evidence, it has been determined that it is more likely than not that certain deferred tax assets in U.S. Federal, State and foreign jurisdictions may not be realized and therefore, a valuation allowance has been established against those tax assets.
Net income (loss) Net income improved by $185 million and $226 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018 primarily due to the absence of the $174 million negative impact of the Tax Act recognized in the second quarter of fiscal 2018, higher Total Segment EBITDA and higher Other, net, partially offset by higher Depreciation and amortization and Interest expense.
Net income attributable to noncontrolling interestsNet income attributable to noncontrolling interests increased by $7 million and $15 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018 primarily due to the non-controlling interest in new Foxtel and higher results at REA Group.
Segment Analysis
Segment EBITDA is defined as revenues less operating expenses and selling, general and administrative expenses. Segment EBITDA does not include: depreciation and amortization, impairment and restructuring charges, equity losses of affiliates, interest (expense) income, net, other, net, income tax (expense) benefit and net income attributable to noncontrolling interests. Segment EBITDA may not be comparable to similarly titled measures reported by other companies, since companies and investors may differ as to what items should be included in the calculation of Segment EBITDA.
Segment EBITDA is the primary measure used by the Companys chief operating decision maker to evaluate the performance of and allocate resources within the Companys businesses. Segment EBITDA provides management, investors and equity analysts with a measure to analyze the operating performance of each of the Companys business segments and its enterprise value against historical data and competitors data, although historical results may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).
Total Segment EBITDA is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income (loss), cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment and restructuring charges, which are significant components in assessing the Companys financial performance. The Company believes that the presentation of Total Segment EBITDA provides useful information regarding the
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Companys operations and other factors that affect the Companys reported results. Specifically, the Company believes that by excluding certain one-time or non-cash items such as impairment and restructuring charges and depreciation and amortization, as well as potential distortions between periods caused by factors such as financing and capital structures and changes in tax positions or regimes, the Company provides users of its consolidated financial statements with insight into both its core operations as well as the factors that affect reported results between periods but which the Company believes are not representative of its core business. As a result, users of the Companys consolidated financial statements are better able to evaluate changes in the core operating results of the Company across different periods. The following table reconciles Net income (loss) to Total Segment EBITDA for the three and six months ended December 31, 2018 and 2017:
For the three months ended December 31, |
For the six months ended December 31, |
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2018 | 2017 | 2018 | 2017 | |||||||||||||
(in millions, except %) | ||||||||||||||||
Net income (loss) |
$ | 119 | $ | (66 | ) | $ | 247 | $ | 21 | |||||||
Add: |
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Income tax expense |
55 | 235 | 105 | 289 | ||||||||||||
Other, net |
(7 | ) | 30 | (27 | ) | 21 | ||||||||||
Interest expense (income), net |
15 | (1 | ) | 31 | (7 | ) | ||||||||||
Equity losses of affiliates |
6 | 18 | 9 | 28 | ||||||||||||
Impairment and restructuring charges |
19 | 12 | 37 | 27 | ||||||||||||
Depreciation and amortization |
163 | 100 | 326 | 197 | ||||||||||||
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Total Segment EBITDA |
$ | 370 | $ | 328 | $ | 728 | $ | 576 | ||||||||
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The following tables set forth the Companys Revenues and Segment EBITDA for the three and six months ended December 31, 2018 and 2017:
For the three months ended December 31, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
(in millions) | Revenues | Segment EBITDA |
Revenues | Segment EBITDA |
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News and Information Services |
$ | 1,257 | $ | 120 | $ | 1,298 | $ | 141 | ||||||||
Subscription Video Services |
562 | 84 | 120 | 33 | ||||||||||||
Book Publishing |
496 | 88 | 469 | 78 | ||||||||||||
Digital Real Estate Services |
311 | 121 | 292 | 119 | ||||||||||||
Other |
1 | (43 | ) | 1 | (43 | ) | ||||||||||
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Total |
$ | 2,627 | $ | 370 | $ | 2,180 | $ | 328 | ||||||||
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For the six months ended December 31, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
(in millions) | Revenues | Segment EBITDA |
Revenues | Segment EBITDA |
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News and Information Services |
$ | 2,505 | $ | 236 | $ | 2,539 | $ | 215 | ||||||||
Subscription Video Services |
1,127 | 197 | 265 | 60 | ||||||||||||
Book Publishing |
914 | 156 | 870 | 126 | ||||||||||||
Digital Real Estate Services |
604 | 226 | 563 | 214 | ||||||||||||
Other |
1 | (87 | ) | 1 | (39 | ) | ||||||||||
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Total |
$ | 5,151 | $ | 728 | $ | 4,238 | $ | 576 | ||||||||
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News and Information Services (48% and 60% of the Companys consolidated revenues in the six months ended December 31, 2018 and 2017, respectively)
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | |||||||||||||||||||||||||
(in millions, except %) | Better/(Worse) | Better/(Worse) | ||||||||||||||||||||||||||||||
Revenues: |
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Circulation and subscription |
$ | 526 | $ | 521 | $ | 5 | 1% | $ | 1,055 | $ | 1,042 | $ | 13 | 1% | ||||||||||||||||||
Advertising |
632 | 667 | (35 | ) | (5)% | 1,208 | 1,287 | (79 | ) | (6)% | ||||||||||||||||||||||
Other |
99 | 110 | (11 | ) | (10)% | 242 | 210 | 32 | 15% | |||||||||||||||||||||||
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|
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Total Revenues |
1,257 | 1,298 | (41 | ) | (3)% | 2,505 | 2,539 | (34 | ) | (1)% | ||||||||||||||||||||||
Operating expenses |
(713 | ) | (726 | ) | 13 | 2% | (1,422 | ) | (1,458 | ) | 36 | 2% | ||||||||||||||||||||
Selling, general and administrative |
(424 | ) | (431 | ) | 7 | 2% | (847 | ) | (866 | ) | 19 | 2% | ||||||||||||||||||||
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Segment EBITDA |
$ | 120 | $ | 141 | $ | (21 | ) | (15)% | $ | 236 | $ | 215 | $ | 21 | 10% | |||||||||||||||||
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Revenues at the News and Information Services segment decreased $41 million, or 3%, for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. The revenue decrease was primarily due to lower Advertising revenues of $35 million mainly due to weakness in the print advertising market, the $18 million negative impact of foreign currency fluctuations and lower revenues at News America Marketing of $14 million. These decreases were partially offset by digital advertising growth, primarily in Australia and at Dow Jones. Other revenues for the three months ended December 31, 2018 decreased $11 million as compared to the corresponding period of fiscal 2018, primarily due to lower brand partnership revenues and the absence of revenues from Sun Bets as a result of News UKs exit from the partnership in the first quarter of fiscal 2019. Circulation and subscription revenues for the three months ended December 31, 2018 increased $5 million as compared to the corresponding period of fiscal 2018 primarily due to digital subscriber growth, primarily at The Wall Street Journal, cover and subscription price increases and the impact of the adoption of the new revenue recognition standard, primarily in Australia. These increases were partially offset by lower single-copy sales in the U.K., primarily at The Sun, and in Australia and the $12 million negative impact of foreign currency fluctuations. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $34 million for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
Segment EBITDA at the News and Information Services segment decreased $21 million, or 15%, for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. The decrease was mainly due to lower contribution from News UK of $22 million, primarily resulting from the lower revenues noted above and higher newsprint and digital reinvestment costs, partially offset by higher contribution from News Corp Australia of $6 million and from Dow Jones of $5 million.
Revenues at the News and Information Services segment decreased $34 million, or 1%, for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. The revenue decrease was primarily due to lower Advertising revenues of $79 million mainly due to weakness in the print advertising market, the $33 million negative impact of foreign currency fluctuations and lower revenues at News America Marketing of $27 million, partially offset by digital advertising growth, primarily in Australia and at Dow Jones. Other revenues for the six months ended December 31, 2018 increased $32 million as compared to the corresponding period of fiscal 2018 primarily due to the $45 million net benefit related to News UKs exit from the partnership for Sun Bets in the first quarter of fiscal 2019. Circulation and subscription revenues increased $13 million as compared to the corresponding period of fiscal 2018 mainly due to cover and subscription price increases and digital subscriber growth, primarily at The Wall Street Journal and in Australia, and the impact of the adoption of the new revenue recognition standard, primarily in Australia. These increases were partially offset by lower single-copy sales in the U.K., primarily at The Sun, and in Australia and the $22 million negative impact of foreign currency fluctuations. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $62 million for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
Segment EBITDA at the News and Information Services segment increased $21 million, or 10%, for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. The increase was mainly due to higher contribution from Dow Jones of $15 million, primarily related to the higher revenues discussed above, and from News Corp Australia of $15 million, primarily due to lower newsprint, production and distribution costs and cost savings initiatives.
44
Dow Jones
Revenues were $417 million for the three months ended December 31, 2018, an increase of $16 million, or 4%, as compared to revenues of $401 million in the corresponding period of fiscal 2018. Circulation and subscription revenues increased $15 million, primarily due to the $11 million impact from digital subscriber growth and digital subscription price increases at The Wall Street Journal, as well as $5 million of higher professional information business revenues led by Risk & Compliance. Advertising revenues were flat, as digital advertising growth offset weakness in the print advertising market.
Revenues were $779 million for the six months ended December 31, 2018, an increase of $28 million, or 4%, as compared to revenues of $751 million in the corresponding period of fiscal 2018. Circulation and subscription revenues increased $30 million, primarily due to the $24 million impact from digital subscriber growth and digital subscription price increases at The Wall Street Journal, as well as $9 million of higher professional information business revenues led by Risk & Compliance. Advertising revenues were relatively flat, as digital advertising growth offset weakness in the print advertising market.
News Corp Australia
Revenues at the Australian newspapers were $309 million for the three months ended December 31, 2018, a decrease of $15 million, or 5%, compared to revenues of $324 million in the corresponding period of fiscal 2018. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $22 million, or 7%, for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. Advertising revenues decreased $14 million, primarily due to the $13 million negative impact of foreign currency fluctuations and the $12 million impact of weakness in the print advertising market, partially offset by a $7 million increase due to digital advertising growth. Circulation and subscription revenues decreased $4 million primarily due to the $7 million negative impact of foreign currency fluctuations and print volume declines, partially offset by the impact of the adoption of the new revenue recognition standard, subscription price increases and digital subscriber growth.
Revenues at the Australian newspapers were $618 million for the six months ended December 31, 2018, a decrease of $38 million, or 6%, compared to revenues of $656 million in the corresponding period of fiscal 2018. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $47 million, or 7%, for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. Advertising revenues decreased $35 million, primarily due to the $27 million impact of weakness in the print advertising market and the $27 million negative impact of foreign currency fluctuations, partially offset by the $14 million increase due to digital advertising growth. Circulation and subscription revenues decreased $7 million primarily due to the $15 million negative impact of foreign currency fluctuations and print volume declines, partially offset by the impact of the adoption of the new revenue recognition standard, subscription price increases and digital subscriber growth.
News UK
Revenues were $254 million for the three months ended December 31, 2018, a decrease of $27 million, or 10%, as compared to revenues of $281 million in the corresponding period of fiscal 2018. The decrease was due in large part to lower Other revenues of $14 million, mainly due to lower brand partnership revenues and the absence of revenues from Sun Bets resulting from the exit of the partnership in the first quarter of fiscal 2019. Advertising revenues decreased $7 million, primarily due to weakness in the print advertising market. Circulation and subscription revenues decreased $6 million, primarily due to single-copy volume declines, mainly at The Sun, partially offset by the impact of cover price increases across mastheads. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $8 million for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
Revenues were $540 million for the six months ended December 31, 2018, an increase of $4 million, or 1%, as compared to revenues of $536 million in the corresponding period of fiscal 2018. The increase was due to higher Other revenues of $29 million, mainly due to the $45 million net benefit related to the exit from the partnership for Sun Bets in the first quarter of fiscal 2019. The increase was partially offset by lower Advertising revenues of $14 million, primarily due to weakness in the print advertising market. Circulation and subscription revenues decreased $11 million, primarily due to single-copy volume declines, mainly at The Sun, partially offset by the impact of cover price increases across mastheads. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $9 million for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
45
News America Marketing
Revenues at News America Marketing were $198 million for the three months ended December 31, 2018, a decrease of $14 million, or 7%, as compared to revenues of $212 million in the corresponding period of fiscal 2018. The decrease was primarily related to $7 million of lower in-store revenues, primarily due to lower customer spending, and $7 million of lower home delivered revenues, which include free-standing insert products, mainly due to lower volume.
Revenues at News America Marketing were $419 million for the six months ended December 31, 2018, a decrease of $27 million, or 6%, as compared to revenues of $446 million in the corresponding period of fiscal 2018. The decrease was primarily related to $25 million of lower home delivered revenues, which include free-standing insert products, mainly due to lower volume.
Subscription Video Services (22% and 6% of the Companys consolidated revenues in the six months ended December 31, 2018 and 2017, respectively)
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | |||||||||||||||||||||||||
(in millions, except %) | Better/(Worse) | Better/(Worse) | ||||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Circulation and subscription |
$ | 490 | $ | 102 | $ | 388 | ** | $ | 981 | $ | 218 | $ | 763 | ** | ||||||||||||||||||
Advertising |
55 | 16 | 39 | ** | 112 | 42 | 70 | ** | ||||||||||||||||||||||||
Other |
17 | 2 | 15 | ** | 34 | 5 | 29 | ** | ||||||||||||||||||||||||
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Total Revenues |
562 | 120 | 442 | ** | 1,127 | 265 | 862 | ** | ||||||||||||||||||||||||
Operating expenses |
(411 | ) | (75 | ) | (336 | ) | ** | (735 | ) | (182 | ) | (553 | ) | ** | ||||||||||||||||||
Selling, general and administrative |
(67 | ) | (12 | ) | (55 | ) | ** | (195 | ) | (23 | ) | (172 | ) | ** | ||||||||||||||||||
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Segment EBITDA |
$ | 84 | $ | 33 | $ | 51 | ** | $ | 197 | $ | 60 | $ | 137 | ** | ||||||||||||||||||
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** not meaningful
For the three months ended December 31, 2018, revenues at the Subscription Video Services segment increased $442 million and Segment EBITDA increased $51 million as compared to the corresponding period of fiscal 2018. The revenue and Segment EBITDA increases for the three months ended December 31, 2018 were primarily due to the Transaction, which contributed $446 million of revenue and $54 million of Segment EBITDA during the three months ended December 31, 2018. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $13 million for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. See Results of OperationsFor the three and six months ended December 31, 2018 (as reported) versus the three and six months ended December 31, 2017 (pro forma) below for additional details.
For the six months ended December 31, 2018, revenues at the Subscription Video Services segment increased $862 million and Segment EBITDA increased $137 million as compared to the corresponding period of fiscal 2018. The revenue and Segment EBITDA increases for the six months ended December 31, 2018 were primarily due to the Transaction, which contributed $871 million of revenue and $140 million of Segment EBITDA during the six months ended December 31, 2018. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a revenue decrease of $17 million for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018. See Results of OperationsFor the three and six months ended December 31, 2018 (as reported) versus the three and six months ended December 31, 2017 (pro forma) below for additional details.
46
Book Publishing (18% and 21% of the Companys consolidated revenues in the six months ended December 31, 2018 and 2017, respectively)
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | |||||||||||||||||||||||||
(in millions, except %) | Better/(Worse) | Better/(Worse) | ||||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Consumer |
$ | 478 | $ | 453 | $ | 25 | 6% | $ | 878 | $ | 839 | $ | 39 | 5% | ||||||||||||||||||
Other |
18 | 16 | 2 | 13% | 36 | 31 | 5 | 16% | ||||||||||||||||||||||||
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|||||||||||||||||
Total Revenues |
496 | 469 | 27 | 6% | 914 | 870 | 44 | 5% | ||||||||||||||||||||||||
Operating expenses |
(322 | ) | (306 | ) | (16 | ) | (5)% | (597 | ) | (583 | ) | (14 | ) | (2)% | ||||||||||||||||||
Selling, general and administrative |
(86 | ) | (85 | ) | (1 | ) | (1)% | (161 | ) | (161 | ) | | | |||||||||||||||||||
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Segment EBITDA |
$ | 88 | $ | 78 | $ | 10 | 13% | $ | 156 | $ | 126 | $ | 30 | 24% | ||||||||||||||||||
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For the three months ended December 31, 2018, revenues at the Book Publishing segment increased $27 million, or 6%, as compared to the corresponding period of fiscal 2018. The increase was primarily due to strong sales in the general books category, primarily Homebody: A Guide to Creating Spaces You Never Want to Leave by Joanna Gaines and The Next Person You Meet in Heaven by Mitch Albom, and the continued success of Girl Wash Your Face by Rachel Hollis in the Christian publishing category. These increases were partially offset by the $18 million impact of the adoption of the new revenue recognition standard and the $7 million negative impact of foreign currency fluctuations. Digital sales represented approximately 17% of Consumer revenues during the three months ended December 31, 2018. Digital sales increased approximately 12% as compared to the corresponding period of fiscal 2018 primarily due to growth in downloadable audio books.
For the three months ended December 31, 2018, Segment EBITDA at the Book Publishing segment increased $10 million, or 13%, as compared to the corresponding period of fiscal 2018. The increase was primarily due to the higher revenues discussed above.
For the six months ended December 31, 2018, revenues at the Book Publishing segment increased $44 million, or 5%, as compared to the corresponding period of fiscal 2018. The increase was primarily due to strong frontlist and backlist sales in the general books category, including Homebody: A Guide to Creating Spaces You Never Want to Leave by Joanna Gaines and The Subtle Art Of Not Giving A F*ck by Mark Manson, as well as the continued success of Girl Wash Your Face by Rachel Hollis in the Christian publishing category and The Hate U Give by Angie Thomas in the childrens books category. These increases were partially offset by the $30 million impact of the adoption of the new revenue recognition standard and the $10 million negative impact of foreign currency fluctuations. Digital sales represented approximately 19% of Consumer revenues during the six months ended December 31, 2018. Digital sales increased approximately 12% as compared to the corresponding period of fiscal 2018 primarily due to growth in downloadable audio books.
For the six months ended December 31, 2018, Segment EBITDA at the Book Publishing segment increased $30 million, or 24%, as compared to the corresponding period of fiscal 2018. The increase was primarily due to the higher revenues discussed above and the mix of titles.
47
Digital Real Estate Services (12% and 13% of the Companys consolidated revenues in the six months ended December 31, 2018 and 2017, respectively)
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | |||||||||||||||||||||||||
(in millions, except %) | Better/(Worse) | Better/(Worse) | ||||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||||||
Circulation and subscription |
$ | 13 | $ | 14 | $ | (1 | ) | (7)% | $ | 27 | $ | 28 | $ | (1 | ) | (4)% | ||||||||||||||||
Advertising |
31 | 34 | (3 | ) | (9)% | 62 | 70 | (8 | ) | (11)% | ||||||||||||||||||||||
Real estate |
248 | 222 | 26 | 12% | 475 | 425 | 50 | 12% | ||||||||||||||||||||||||
Other |
19 | 22 | (3 | ) | (14)% | 40 | 40 | | | |||||||||||||||||||||||
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|
|||||||||||||||||
Total Revenues |
311 | 292 | 19 | 7% | 604 | 563 | 41 | 7% | ||||||||||||||||||||||||
Operating expenses |
(42 | ) | (32 | ) | (10 | ) | (31)% | (77 | ) | (65 | ) | (12 | ) | (18)% | ||||||||||||||||||
Selling, general and administrative |
(148 | ) | (141 | ) | (7 | ) | (5)% | (301 | ) | (284 | ) | (17 | ) | (6)% | ||||||||||||||||||
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Segment EBITDA |
$ | 121 | $ | 119 | $ | 2 | 2% | $ | 226 | $ | 214 | $ | 12 | 6% | ||||||||||||||||||
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For the three months ended December 31, 2018, revenues at the Digital Real Estate Services segment increased $19 million, or 7%, as compared to the corresponding period of fiscal 2018. Revenues at Move increased $12 million, or 11%, to $122 million for the three months ended December 31, 2018 from $110 million in the corresponding period of fiscal 2018 primarily due to an $8 million increase in ConnectionsSM Plus product revenues driven by growth in leads and customers and higher yield and the acquisition of Opcity. At REA Group, revenues increased $11 million, or 6%, to $189 million for the three months ended December 31, 2018 from $178 million in the corresponding period of fiscal 2018. The higher revenues were primarily due to an increase in Australian residential depth revenue driven by favorable product mix and price increases, partially offset by the $13 million negative impact of foreign currency fluctuations and softness in listing volumes which are expected to continue in the near term.
For the three months ended December 31, 2018, Segment EBITDA at the Digital Real Estate Services segment increased $2 million, or 2%, as compared to the corresponding period of fiscal 2018. The increase in Segment EBITDA was primarily the result of the higher revenues noted above, partially offset by a decrease of $7 million at Move associated with the acquisition of Opcity. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Segment EBITDA decrease of $8 million for the three months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
For the six months ended December 31, 2018, revenues at the Digital Real Estate Services segment increased $41 million, or 7%, as compared to the corresponding period of fiscal 2018. At REA Group, revenues increased $26 million, or 8%, to $362 million for the six months ended December 31, 2018 from $336 million in the corresponding period of fiscal 2018. The higher revenues were primarily due to an increase in Australian residential depth revenue driven by favorable product mix and price increases as well as the acquisitions of Smartline and Hometrack Australia, partially offset by the $27 million negative impact of foreign currency fluctuations. Revenues at Move increased $23 million, or 11%, to $240 million for the six months ended December 31, 2018 from $217 million in the corresponding period of fiscal 2018 primarily due to an increase in ConnectionsSM Plus product revenues driven by growth in leads and customers and higher yield and the acquisition of Opcity.
For the six months ended December 31, 2018, Segment EBITDA at the Digital Real Estate Services segment increased $12 million, or 6%, as compared to the corresponding period of fiscal 2018. The increase in Segment EBITDA was primarily the result of the higher revenues noted above which were partially offset by $15 million in higher costs associated with higher revenues, the $7 million decrease at Move associated with the acquisition of Opcity and $7 million of higher marketing costs, primarily at Move, to drive audience growth. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Segment EBITDA decrease of $16 million for the six months ended December 31, 2018 as compared to the corresponding period of fiscal 2018.
48
Results of OperationsFor the three and six months ended December 31, 2018 (as reported) versus the three and six months ended December 31, 2017 (pro forma)
The following supplemental unaudited pro forma information for the three and six months ended December 31, 2017 reflects the Companys results of operations as if the Transaction had occurred on July 1, 2016. The Company believes that the presentation of this supplemental information enhances comparability across the reporting periods. The information was prepared in accordance with Article 11 of Regulation S-X and is based on historical results of operations of News Corp and Foxtel, adjusted for the effect of Transaction-related accounting adjustments, as described below. Pro forma adjustments were based on available information and assumptions regarding impacts that are directly attributable to the Transaction, are factually supportable, and are expected to have a continuing impact on the combined results. In addition, the pro forma information is provided for supplemental and informational purposes only, and is not necessarily indicative of what the Companys results of operations would have been, or the Companys future results of operations, had the Transaction actually occurred on the date indicated. As only the financial results for the Subscription Video Services segment were adjusted due to the presentation of this pro forma supplemental information, the Company is only providing a supplemental analysis for this segment below, under Segment Analysis (pro forma). The unaudited pro forma information should be read in conjunction with other sections of this Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report.
Pro Forma (unaudited) For the three months ended December 31, 2017 |
||||||||||||||||
(in millions, except per share amounts) | News Corp Historical (a) |
Foxtel Historical (b) |
Transaction Adjustments |
Pro Forma | ||||||||||||
Revenues: |
||||||||||||||||
Circulation and subscription |
$ | 637 | $ | 533 | $ | (87 | )(c)(d) | $ | 1,083 | |||||||
Advertising |
717 | 50 | | 767 | ||||||||||||
Consumer |
453 | | | 453 | ||||||||||||
Real estate |
222 | | | 222 | ||||||||||||
Other |
151 | 15 | | 166 | ||||||||||||
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|
|
|
|
|
|||||||||
Total Revenues |
2,180 | 598 | (87 | ) | 2,691 | |||||||||||
Operating expenses |
(1,139 | ) | (372 | ) | 91 | (c)(e) | (1,420 | ) | ||||||||
Selling, general and administrative |
(713 | ) | (110 | ) | 2 | (f) | (821 | ) | ||||||||
Depreciation and amortization |
(100 | ) | (59 | ) | (8 | )(g)(h)(i) | (167 | ) | ||||||||
Impairment and restructuring charges |
(12 | ) | | | (12 | ) | ||||||||||
Equity losses of affiliates |
(18 | ) | | (1 | )(j) | (19 | ) | |||||||||
Interest income (expense), net |
1 | (21 | ) | | (20 | ) | ||||||||||
Other, net |
(30 | ) | | | (30 | ) | ||||||||||
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|
|||||||||
Income before income tax expense |
169 | 36 | (3 | ) | 202 | |||||||||||
Income tax expense |
(235 | ) | (4 | ) | 2 | (k) | (237 | ) | ||||||||
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Net (loss) income |
(66 | ) | 32 | (1 | ) | (35 | ) | |||||||||
Less: Net income attributable to noncontrolling interests |
(17 | ) | | (20 | )(l) | (37 | ) | |||||||||
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|||||||||
Net (loss) income attributable to News Corporation |
$ | (83 | ) | $ | 32 | $ | (21 | ) | $ | (72 | ) | |||||
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Net loss available to News Corporation stockholders per share |
$ | (0.14 | ) | $ | (0.12 | ) | ||||||||||
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|
49
Pro Forma (unaudited) | ||||||||||||||||
For the six months ended December 31, 2017 | ||||||||||||||||
News Corp Historical (a) |
Foxtel Historical (b) |
Transaction Adjustments |
Pro Forma | |||||||||||||
(in millions, except per share amounts) | ||||||||||||||||
Revenues: |
||||||||||||||||
Circulation and subscription |
$ | 1,288 | $ | 1,107 | $ | (185 | )(c)(d) | $ | 2,210 | |||||||
Advertising |
1,399 | 99 | | 1,498 | ||||||||||||
Consumer |
839 | | | 839 | ||||||||||||
Real estate |
425 | | | 425 | ||||||||||||
Other |
287 | 25 | | 312 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Revenues |
4,238 | 1,231 | (185 | ) | 5,284 | |||||||||||
Operating expenses |
(2,288 | ) | (766 | ) | 193 | (c)(e) | (2,861 | ) | ||||||||
Selling, general and administrative |
(1,374 | ) | (227 | ) | 3 | (f) | (1,598 | ) | ||||||||
Depreciation and amortization |
(197 | ) | (118 | ) | (18 | )(g)(h)(i) | (333 | ) | ||||||||
Impairment and restructuring charges |
(27 | ) | (3 | ) | | (30 | ) | |||||||||
Equity (losses) earnings of affiliates |
(28 | ) | 3 | 4 | (j) | (21 | ) | |||||||||
Interest income (expense), net |
7 | (53 | ) | | (46 | ) | ||||||||||
Other, net |
(21 | ) | (1 | ) | | (22 | ) | |||||||||
|
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|
|
|
|||||||||
Income before income tax expense |
310 | 66 | (3 | ) | 373 | |||||||||||
Income tax expense |
(289 | ) | (10 | ) | 5 | (k) | (294 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
21 | 56 | 2 | 79 | ||||||||||||
Less: Net income attributable to noncontrolling interests |
(36 | ) | | (34 | )(l) | (70 | ) | |||||||||
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|
|||||||||
Net (loss) income attributable to News Corporation |
$ | (15 | ) | $ | 56 | $ | (32 | ) | $ | 9 | ||||||
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|
|
|
|||||||||
Net (loss) income available to News Corporation stockholders per share |
$ | (0.03 | ) | $ | 0.02 | |||||||||||
|
|
|
|
Notes to the unaudited pro forma statements:
(a) | Reflects the historical results of operations of News Corporation. As the acquisition of a controlling interest in Foxtel was completed on April 3, 2018, Foxtel is reflected in our historical Statements of Operations from April 3, 2018 onwards. |
(b) | Reflects the historical results of operations of Foxtel to the date of the Transaction. From April 3, 2018 onwards, Foxtel is included in the historical results of operations of News Corporation. The Statements of Operations of Foxtel are derived from its historical financial statements for the three and six months ended December 31, 2017. The Statements of Operations for the three and six months ended December 31, 2017 reflect Foxtels Statements of Operations on a U.S. GAAP basis and translated from Australian dollars to U.S. dollars, the reporting currency of the combined group, using the quarterly average rate for each period presented. Additionally, certain balances within Foxtels historical financial information were reclassified to be consistent with the Companys presentation. |
(c) | Represents the impact of eliminating transactions between Foxtel and the consolidated subsidiaries of News Corporation, which would be eliminated upon consolidation as a result of the Transaction. |
(d) | Reflects the reversal of revenue recognized in Foxtels historical Statements of Operations resulting from the fair value adjustment of Foxtels historical deferred installation revenue in the preliminary purchase price allocation for the Transaction. |
(e) | Reflects the adjustment to amortization of program inventory recognized in Foxtels historical Statements of Operations related to the fair value adjustment of Foxtels historical program inventory in the preliminary purchase price allocation. |
(f) | Reflects the removal of transaction expenses directly related to the Transaction that are included in News Corps historical Statements of Operations for the three and six months ended December 31, 2017. These costs are considered to be non-recurring in nature, and as such, have been excluded from the pro forma Statements of Operations. |
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(g) | Reflects the adjustment to amortization expense resulting from the recognition of amortizable intangible assets in the preliminary purchase price allocation. |
(h) | Reflects the adjustment to depreciation and amortization expense resulting from the fair value adjustment to Foxtels historical fixed assets in the preliminary purchase price allocation, which resulted in a step-up in the value of such assets. |
(i) | Reflects the reversal of amortization expense included in News Corps historical Statements of Operations from the Companys settlement of its pre-existing contractual arrangement between Foxtel and FOX SPORTS Australia, which resulted in a write-off of its channel distribution agreement intangible asset at the time of the Transaction. |
(j) | Represents the impact to equity losses of affiliates as a result of the Transaction, as if the Transaction occurred on July 1, 2016. Historically News Corp accounted for its investment in Foxtel under the equity method of accounting. As a result of the Transaction, Foxtel became a majority-owned subsidiary of the Company, and therefore, the impact of Foxtel on the Companys historical equity losses of affiliates was eliminated. |
(k) | In determining the tax rate to apply to our pro forma adjustments we used the Australian statutory rate of 30%, which is the jurisdiction in which the business operates. However, in certain instances, the effective tax rate applied to certain adjustments differs from the statutory rate primarily as a result of certain valuation allowances on deferred tax assets, based on the Companys historical tax profile in Australia. |
(l) | Represents the adjustment, as a result of the Transaction, to reflect the noncontrolling interest of the combined company on a pro forma basis. |
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The following table sets forth the Companys unaudited operating results for the three and six months ended December 31, 2018 and its unaudited pro forma operating results for the three and six months ended December 31, 2017.
For the three months ended December 31, | For the six months ended December 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | Change | % Change | 2018 | 2017 | Change | % Change | |||||||||||||||||||||||||
(in millions, except %) | As reported |
Pro forma |
Better/(Worse) | As reported |
Pro forma |
Better/(Worse) | ||||||||||||||||||||||||||
Revenues: |
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Circulation and subscription |
$ | 1,029 | $ | 1,083 | $ | (54 | ) | (5)% | $ | 2,063 | $ | 2,210 | $ | (147 | ) | (7)% | ||||||||||||||||
Advertising |
718 | 767 | (49 | ) | (6)% | 1,382 | 1,498 | (116 | ) | (8)% | ||||||||||||||||||||||
Consumer |
478 | 453 | 25 | 6% | 878 | 839 | 39 | 5% | ||||||||||||||||||||||||
Real estate |
248 | 222 | 26 | 12% | 475 | 425 | 50 | 12% | ||||||||||||||||||||||||
Other |
154 | 166 | (12 | ) | (7)% | 353 | 312 | 41 | 13% | |||||||||||||||||||||||
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Total Revenues |
2,627 | 2,691 | (64 | ) | (2)% | 5,151 | 5,284 | (133 | ) | (3)% | ||||||||||||||||||||||
Operating expenses |
(1,484 | ) | (1,420 | ) | (64 | ) | (5)% | (2,824 | ) | (2,861 | ) | 37 | 1% | |||||||||||||||||||
Selling, general and administrative |
(773 | ) | (821 | ) | 48 | 6% | (1,599 | ) | (1,598 | ) | (1 | ) | | |||||||||||||||||||
Depreciation and amortization |
(163 | ) | (167 | ) | 4 | 2% | (326 | ) | (333 | ) | 7 | 2% | ||||||||||||||||||||
Impairment and restructuring charges |
(19 | ) | (12 | ) | (7 | ) | (58)% | (37 | ) | (30 | ) | (7 | ) | (23)% | ||||||||||||||||||
Equity losses of affiliates |
(6 | ) | (19 | ) | 13 | 68% | (9 | ) | (21 | ) | 12 | 57% | ||||||||||||||||||||
Interest expense, net |
(15 | ) | (20 | ) | 5 | 25% | (31 | ) | (46 | ) | 15 | 33% | ||||||||||||||||||||
Other, net |
7 | (30 | ) | 37 | ** | 27 | (22 | ) | 49 | ** | ||||||||||||||||||||||
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Income before income tax expense |
174 | 202 | (28 | ) | (14)% | 352 | 373 | (21 | ) | (6)% | ||||||||||||||||||||||
Income tax expense |
(55 | ) | (237 | ) | 182 | 77% | (105 | ) | (294 | ) | 189 | 64% | ||||||||||||||||||||
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Net income (loss) |
119 | (35 | ) | 154 | ** | 247 | 79 | 168 | ** | |||||||||||||||||||||||
Less: Net income attributable to noncontrolling interests |
(24 | ) | (37 | ) | 13 | 35% | (51 | ) | (70 | ) | 19 | 27% | ||||||||||||||||||||
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Net income (loss) attributable to News Corporation |
$ | 95 | $ | (72 | ) | $ | 167 | ** | $ | 196 | $ | 9 | $ | 187 | ** | |||||||||||||||||
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** not meaningful
Revenues (pro forma) Revenues decreased $64 million, or 2%, and $133 million, or 3%, for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018.
The Revenue decrease for the three months ended December 31, 2018 was mainly attributable to a $69 million decrease in revenues at the Subscription Video Services segment primarily resulting from the $39 million negative impact of foreign currency fluctuations and lower subscription revenues due to lower broadcast subscribers and changes in the subscriber package mix, partially offset by $7 million of higher revenues from Foxtel Now as well as lower revenues at the News and Information Services segment of $41 million, primarily due to weakness in the print advertising market. The Revenue decrease was partially offset by higher revenues of $27 million and $19 million at the Book Publishing and Digital Real Estate Services segments, respectively. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Revenue decrease of $93 million for the three months ended December 31, 2018, as compared to the corresponding period of fiscal 2018.
The Revenue decrease for the six months ended December 31, 2018 was mainly attributable to a $184 million decrease in revenues at the Subscription Video Services segment primarily resulting from the $84 million negative impact of foreign currency fluctuations and lower subscription revenues due to lower broadcast subscribers and changes in the subscriber package mix and lower advertising revenues, partially offset by $16 million of higher revenues from Foxtel Now. Revenues at the News and Information Services segment decreased $34 million, primarily due to weakness in the print advertising market. The revenue decrease was partially offset by higher revenues of $44 million and $41 million at the Book Publishing and Digital Real Estate Services segments, respectively. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Revenue decrease of $183 million for the six months ended December 31, 2018, as compared to the corresponding period of fiscal 2018.
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Operating expenses (pro forma) Operating expenses increased $64 million, or 5%, and decreased $37 million, or 1%, for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018.
The increase in Operating expenses for the three months ended December 31, 2018 was mainly due to higher operating expenses of $55 million at the Subscription Video Services segment primarily resulting from higher sports programming and production costs, including approximately $26 million related to Cricket Australia, partially offset by the $28 million positive impact of foreign currency fluctuations, and higher operating expenses of $16 million and $10 million at the Book Publishing and Digital Real Estate Services segments, respectively. The operating expense increase was partially offset by lower operating expenses of $13 million at the News and Information Services segment, primarily at News Corp Australia, due to the $12 million positive impact of foreign currency fluctuations, lower newsprint, production and distribution costs and cost savings initiatives. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in an Operating expense decrease of $49 million for the three months ended December 31, 2018, as compared to the corresponding period of fiscal 2018.
The decrease in Operating expenses for the six months ended December 31, 2018 was mainly due to lower operating expenses of $36 million at the News and Information Services segment, primarily at News Corp Australia, due to the $25 million positive impact of foreign currency fluctuations, lower newsprint, production and distribution costs and cost savings initiatives as well as lower operating expenses of $20 million at the Subscription Video Services segment, primarily resulting from the $54 million positive impact of foreign currency fluctuations and lower non-sports programming and pay-per-view costs, partially offset by higher sports programming and production costs, including approximately $26 million related to Cricket Australia. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in an Operating expense decrease of $91 million for the six months ended December 31, 2018, as compared to the corresponding period of fiscal 2018.
Selling, general and administrative (pro forma) Selling, general and administrative expenses decreased $48 million, or 6%, and increased $1 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018.
The decrease in Selling, general and administrative expenses for the three months ended December 31, 2018 was primarily due to lower expenses at the Subscription Video Services segment of $53 million primarily resulting from lower customer service and installation costs and the positive impact of foreign currency fluctuations, partially offset by approximately $9 million of higher marketing costs associated with the launch of Kayo Sports. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Selling, general and administrative expense decrease of $27 million for the three months ended December 31, 2018, as compared to the corresponding period of fiscal 2018.
The increase in Selling, general and administrative expenses for the six months ended December 31, 2018 was primarily due to the absence of the $46 million impact from the reversal of a portion of the previously accrued liability for the U.K. Newspaper Matters and the corresponding receivable from 21st Century Fox as the result of an agreement reached with the relevant tax authority with respect to certain employment taxes in the first quarter of fiscal 2018 and higher expenses at the Digital Real Estate Services segment primarily resulting from higher marketing costs, primarily at Move. The increase was offset by lower expenses at the Subscription Video Services segment of $52 million primarily related to lower customer service installation costs and the positive impact of foreign currency fluctuations, partially offset by approximately $9 million of higher marketing costs associated with the launch of Kayo Sports. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a Selling, general and administrative expense decrease of $56 million for the six months ended December 31, 2018, as compared to the corresponding period of fiscal 2018.
Depreciation and amortization (pro forma) Depreciation and amortization expense decreased $4 million, or 2%, and $7 million, or 2%, for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018. The impact of foreign currency fluctuations of the U.S. dollar against local currencies resulted in a depreciation and amortization expense decrease of $8 million and $14 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018.
Impairment and restructuring charges (pro forma) During the three and six months ended December 31, 2018 the Company recorded restructuring charges of $19 million and $37 million, respectively, primarily related to employee termination benefits at the News and Information Services segment. During the three and six months ended December 31, 2017 the Company recorded restructuring charges of $12 million and $30 million, respectively, primarily related to employee termination benefits at the News and Information Services segment.
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Equity losses of affiliates (pro forma) Equity losses of affiliates decreased $13 million and $12 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018. The decrease in losses for the three and six months ended December 31, 2018 was primarily due to the absence of $13 million in non-cash write-downs of certain equity method investments recognized in the second quarter of fiscal 2018.
Interest expense, net (pro forma) Interest expense, net was $15 million and $31 million for the three and six months ended December 31, 2018, respectively, as compared to $20 million and $46 million in the corresponding periods of fiscal 2018.
The decrease in interest expense for the three months ended December 31, 2018 was primarily due to lower third party interest expense as well as higher interest income.
The decrease in interest expense for the six months ended December 31, 2018 was primarily due to lower interest expense resulting from the repayment of the Foxtel shareholder note in the first quarter of fiscal 2018, lower third party interest expense as well as higher interest income.
Other, net (pro forma) Other, net improved by $37 million and $49 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to dividends received from equity method investments in the second quarter of fiscal 2019.
Income tax expense (pro forma) For the three months ended December 31, 2018, the Company recorded a tax charge of $55 million on pre-tax income of $174 million resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
For the six months ended December 31, 2018, the Company recorded a tax charge of $105 million on pre-tax income of $352 million resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to valuation allowances being recorded against tax benefits in certain foreign jurisdictions with operating losses and the impact from foreign operations which are subject to higher tax rates.
For the three months ended December 31, 2017, the Company recorded a tax expense of $237 million on pre-tax income of $202 million resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate primarily resulted from the enactment of the Tax Act, which caused an increase in income tax expense of approximately $174 million.
For the six months ended December 31, 2017, the Company recorded a tax expense of $294 million on pre-tax income of $373 million resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate primarily resulted from the enactment of the Tax Act, which caused an increase in income tax expense of approximately $174 million.
Net income (loss) (pro forma) Net income improved by $154 million and $168 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to the absence of the $174 million negative impact of the Tax Act recognized in the second quarter of fiscal 2018 and higher Other, net, partially offset by lower Total Segment EBITDA.
Net income attributable to noncontrolling interests (pro forma) Net income attributable to noncontrolling interests decreased by $13 million and $19 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to lower performance at new Foxtel, partially offset by higher results at REA Group.
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Segment Analysis (pro forma)
The following table reconciles unaudited reported and pro forma Net income (loss) to unaudited reported and pro forma Total Segment EBITDA for the three and six months ended December 31, 2018 and 2017, respectively:
For the three months ended | For the six months ended |
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December 31, | December 31, | |||||||||||||||
2018 | 2017 | 2018 |