News Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2017, filed May 10, 2017. The filing is dated March 31, 2017; it states the fiscal quarter actually ended April 2, 2017. This differs from the request metadata’s “2016 Q3.” Unless stated otherwise, amounts are in millions of U.S. dollars.
Business context
News Corp is a diversified media and information services company operating in news and information, book publishing, digital real estate, and Australian cable network programming. Its digital education business is reported as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $1,978, up 5% from $1,891 | $6,059, essentially flat versus $6,066 |
| Net income (loss) attributable to News Corp stockholders | $(5), versus $(149) | $(309), versus income of $89 |
| Segment EBITDA | $215, versus $(122) | $670, versus $323 |
| Segment EBITDA margin, calculated | 10.9%, versus (6.5)% | 11.1%, versus 5.3% |
| Cash provided by operating activities from continuing operations | Not provided for the quarter | $224, versus $589 |
| Free cash flow available to News Corp, non-GAAP | Not provided for the quarter | $(19), versus $362 |
At March 31, 2017, cash and cash equivalents were $1,850; current assets were $3,762 and current liabilities were $2,461. Total borrowings were $376, comprising $103 current and $273 long-term. The company had not drawn on its $650 revolving credit facility and reported compliance with debt covenants. Total equity was $11,417.
Material changes versus prior periods
- Quarterly revenue rose primarily on News America Marketing, acquisitions, digital real estate growth, and book sales. Nine-month revenue was nearly unchanged: News and Information Services revenue fell $133, mainly from print-ad weakness and currency impacts, offset in part by digital real estate growth of $94 and other segment gains.
- Quarterly Segment EBITDA improved substantially, largely because the prior-year quarter included a $280 NAM Group settlement charge. Nine-month Segment EBITDA increased to $670, but the comparison excludes the same prior-year charge and should not be read as equivalent improvement in underlying results.
- Nine-month results included a $310 non-cash impairment, primarily for Australian newspaper fixed assets, and a $227 non-cash write-down of the Foxtel investment. Equity losses of affiliates were $276 versus earnings of $25 in the prior-year period.
- Continuing-operations operating cash flow declined $365, principally because of higher NAM settlement payments, lower affiliate distributions, and working-capital timing. Investing cash use was $49 versus $703, while financing cash use was $152 versus cash provided of $204 in the prior period.
Outlook, management commentary, risks, and unusual items
- Management expects an additional $5–$15 of restructuring charges during the remainder of fiscal 2017. The Dow Jones reorganization is expected to yield approximately $100 of annualized cost savings by the end of fiscal 2018.
- Management does not ordinarily provide operating-result projections. It said cash on hand, future operating cash flow, and capital-market access are expected to meet foreseeable liquidity needs, while noting that future financing access depends on performance, credit standing, market liquidity, and economic conditions.
- Approximately $2.4 billion of goodwill and indefinite-lived intangible assets in News and Information Services and Cable Network Programming reporting units were identified as at risk of future impairment. Further deterioration in projected cash flows or valuation assumptions could lead to additional charges. The Foxtel investment’s carrying value was reduced to $1,205; additional shortfalls in expected cash flows could require further write-downs.
- Print advertising weakness remains a significant operating risk, alongside foreign-exchange movements, changing consumer and advertiser behavior, and competition. The filing reports no material changes to the risk factors in the 2016 Form 10-K.
- Legal matters include ongoing Valassis antitrust proceedings and U.K. newspaper claims. The company accrued approximately $105 for U.K. Newspaper Matters, of which approximately $60 is expected to be indemnified by 21st Century Fox; it cannot estimate potential liability for additional claims. The NAM Group’s approximately $250 settlement was approved and paid during the period.
- REA Group’s sale of its European business generated a $120 pre-tax gain in the second quarter, partly offset by a $13 foreign-currency-related impact in the third quarter. The company acquired Wireless Group and Australian Regional Media, and REA Group invested $50 in Elara Technologies.
Important facts for investors to verify
- Whether print-advertising trends and the impairment-sensitive reporting units’ forecasts support carrying values, particularly the $2.4 billion of assets identified as at risk.
- How much of the nine-month earnings and Segment EBITDA comparison reflects the absence of the prior-year $280 settlement charge, versus recurring operating performance.
- Whether operating cash flow recovers after settlement payments and working-capital effects, and how the company’s non-GAAP free cash flow develops.
- The status and potential financial exposure of Valassis and U.K. Newspaper Matters claims, including the expected 21st Century Fox indemnification.
- The currency, cash-access, and debt-maturity implications of international operations and REA Group’s revolving borrowings.