News Corporation — Form 10-Q Summary
Business context and reporting period
News Corporation is a diversified media and information services company operating in news and information, book publishing, Australian cable programming, digital real estate, digital education and other businesses. This unaudited report covers the first quarter of fiscal 2015, the three months ended September 30, 2014; comparatives are for the three months ended September 30, 2013. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2014 | Prior comparable quarter |
|---|---|---|
| Revenue | $2,150 | $2,072 |
| Segment EBITDA (non-GAAP) | $170 | $141 |
| Net income | $88 | $38 |
| Net income attributable to News Corporation stockholders | $65 | $27 |
| Basic and diluted earnings per share | $0.11 | $0.05 |
| Cash provided by operating activities | $183 | $59 |
| Capital expenditures | $114 | $67 |
| Free cash flow available to News Corporation (non-GAAP) | $73 | $(10) |
Revenue grew 4%; Segment EBITDA grew 21%. Segment EBITDA margin was approximately 7.9%, compared with 6.8%. Operating expenses were $1,314 and selling, general and administrative expenses were $666. Depreciation and amortization was $131, and impairment and restructuring charges were $4. Equity earnings of affiliates were $25, interest income, net, was $17, and other, net, was income of $48. Income before tax was $125 and income tax expense was $37. The filing does not present a separate operating-income subtotal.
At September 30, 2014, cash and cash equivalents were $2,735, total current assets $4,865, total current liabilities $2,293, total assets $16,123 and total equity $12,982. Cash was $410 below June 30, 2014. Cash flows were $183 from operations, $(529) from investing and $(26) from financing; foreign exchange reduced the opening cash balance by $38. The company had an undrawn $650 revolving credit facility, expandable to $900 subject to conditions, and reported compliance with its covenants. It had not borrowed under the facility as of the filing date. The balance sheet does not list a separate debt balance.
Comprehensive loss attributable to News Corporation stockholders was $393, primarily reflecting $474 of foreign currency translation losses. Current assets were about 2.1 times current liabilities.
Material changes versus the prior comparable period
- Revenue increased $78, mainly from Book Publishing, Digital Real Estate Services and Digital Education. News and Information Services revenue fell $44, with print advertising weakness and lower Dow Jones revenue among the reasons.
- News and Information Services Segment EBITDA decreased $28 to $105, while Book Publishing increased $12 to $55, Digital Real Estate Services increased $13 to $57, Cable Network Programming increased $3 to $32, and Digital Education’s loss narrowed by $27 to $24. Other segment expenses were $55, versus $57.
- Net income rose $50. Comparability is affected by the prior-year foreign tax refund: fiscal 2014 included a $483 tax benefit offset by a $483 expense payable to 21st Century Fox, as well as a $37 pension-related gain. In the current quarter, Other, net included a $29 gain on sale of marketable securities and $17 of dividends from cost-method investments.
- Operating cash flow increased $124, attributed by management to improved earnings and working capital, lower restructuring and U.K. Newspaper Matters payments, and higher investment dividends. Investing cash outflow included the Harlequin acquisition and investment purchases.
Outlook, commentary, risks and unusual items
- The company generally does not provide projections of future operating results. Management said cash on hand, expected operating cash flow and capital-market access should support foreseeable liquidity needs, while noting financing access depends on performance, markets and economic conditions.
- News Corp expected to invest approximately $230 million of cash in Digital Education during fiscal 2015, including about $50 million of deferred compensation related to Wireless Generation. Digital Education recorded a $24 Segment EBITDA loss in the quarter; the improvement included a $15 benefit from capitalized software development costs.
- Harlequin was acquired in August 2014 for $414 million net of cash acquired and contributed $57 million of quarterly revenue. The preliminary purchase-price allocation included publishing rights, indefinite-lived imprints and goodwill; final valuations could change the allocation.
- On September 30, 2014, the company agreed to acquire Move, Inc. for $21 per share, with expected aggregate consideration of approximately $950 million. Completion was subject to tender and customary conditions. REA Group was expected to acquire a 20% stake after closing. This was a subsequent transaction, not included in quarter-end results.
- U.K. Newspaper Matters remained subject to investigations and civil claims. The company accrued approximately $115 million for filed claims and incurred costs, of which approximately $60 million was expected to be indemnified by 21st Century Fox. Certain criminal fines or penalties are not covered, and further exposure could not be estimated.
- Other disclosed litigation includes a stockholder rights agreement challenge, HarperCollins e-book-related matters, and antitrust claims involving News America Marketing and Valassis. Outcomes and potential losses were uncertain.
- Key business risks include continued pressure on print advertising and circulation, changing media consumption and competition, foreign-currency movements, sports-rights costs, Digital Education’s execution and funding risks, potential asset impairments, litigation and regulatory exposure, and acquisition integration risks. The company reported $1.7 billion of goodwill at risk of future impairment as of June 30, 2014.
- The company did not hedge translation risk on its Australian and U.K. net assets. A one-cent change in the U.S. dollar exchange rate against either the Australian dollar or pound sterling was estimated to affect annual revenue by approximately $24 million.
Important facts for investors to verify
- Whether the growth in Book Publishing and Digital Real Estate Services can offset weakness in News and Information Services advertising and Dow Jones professional information revenues.
- How much of the reported earnings and Digital Education improvement reflects recurring operating performance versus unusual gains or software-cost capitalization.
- Final Harlequin purchase accounting, integration performance and the status, funding and terms of the proposed Move acquisition and REA Group investment.
- Cash availability and expected uses, including cash held by foreign subsidiaries and $206 million held at separately listed REA Group, which is not readily accessible without a dividend.
- Developments in U.K. Newspaper Matters and other litigation, including indemnification recoveries, potential uninsured penalties and any revisions to accrued liabilities.
- Progress in reducing Digital Education losses against the disclosed fiscal 2015 investment expectation, and any changes in impairment risk for News and Information Services and Digital Education goodwill.