News Corporation — Form 10-Q summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2014 (the filing says fiscal 2014; this is not 2013 Q3). Amounts are in U.S. dollars and millions unless noted. The company separated from 21st Century Fox on June 28, 2013, so 2013 comparative results are carve-out combined results, while 2014 reflects a standalone company; comparisons are therefore not fully like-for-like.
Business context and financial results
News Corp operates news and information businesses, Australian cable sports programming, digital real estate services, book publishing and digital education. Its five reportable segments are News and Information Services, Cable Network Programming, Digital Real Estate Services, Book Publishing and Other.
| Metric | Three months ended Mar. 31, 2014 | Prior year | Nine months ended Mar. 31, 2014 | Prior year |
|---|---|---|---|---|
| Revenue | $2,078 | $2,180 | $6,388 | $6,634 |
| Segment EBITDA (non-GAAP) | $175 | $169 | $643 | $558 |
| Segment EBITDA margin | 8.4% | 7.8% | 10.1% | 8.4% |
| Net income attributable to News Corp stockholders | $48 | $323 | $226 | $1,630 |
| Diluted earnings per share | $0.08 | $0.56 | $0.39 | $2.82 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $803 | $420 |
For the nine months, cash from investing activities was an outflow of $186 (prior-year outflow $1,692); capital expenditures were $244 (prior $227). The company’s defined free cash flow available to News Corporation, a non-GAAP measure, was $496 versus $134. Cash and cash equivalents were $3,207 at March 31, 2014, versus $2,381 at June 30, 2013. Total current assets were $5,370 and current liabilities $2,498. The company had no borrowings under its $650 revolving credit facility as of the filing date and reported compliance with its covenants. Total debt outstanding is not clearly stated in the supplied filing text.
Material changes and drivers
- Revenue declined 5% for the quarter and 4% for the nine-month period. News and Information Services revenue fell 9% in both periods, primarily from weaker print advertising, adverse Australian currency movements, and lower Dow Jones revenues, including the sale of Local Media Group.
- Segment EBITDA rose 4% for the quarter and 15% year to date, despite lower revenue, reflecting lower expenses and improved results in several segments. News and Information Services EBITDA declined 12% for the quarter and 9% year to date.
- Book Publishing EBITDA increased to $53 from $29 for the quarter and to $164 from $120 year to date, supported by the Divergent series, digital sales and operating efficiencies. E-books were 26% of segment revenue in the quarter, versus 21% a year earlier.
- Digital Real Estate Services EBITDA increased 29% for the quarter and 25% year to date. Cable Network Programming’s nine-month revenue and EBITDA increased substantially, mainly because FOX SPORTS Australia was consolidated following the November 2012 acquisition; its standalone results were affected by currency and higher sports-rights costs.
- Quarterly net income fell 85%; nine-month net income fell 86%. Comparisons are heavily affected by prior-year gains: the 2013 nine-month period included a $1,258 gain on the CMH transaction and a $321 gain on the sale of SKY Network Television. The 2014 nine-month results included a $721 tax benefit paired with a $721 expense payable to 21st Century Fox, so the two items had no net statement-of-operations impact.
Outlook, unusual items and risks
- No formal earnings guidance was provided; management says it does not ordinarily project future operating results. It expects approximately $6 of restructuring charges for the remainder of fiscal 2014.
- Management expects newsprint and ink supply agreements to generate about $30 of EBITDA improvement over the second half of fiscal 2014 and fiscal 2015 combined. London and New York office relocations are expected to cause incremental dual-rent and facility costs of approximately $30–$35 in the second half of fiscal 2014, with a similar amount in the first half of fiscal 2015. A new London lease runs to fiscal 2044, with an early termination option in fiscal 2039, and average annual rent of about $35.
- Amplify remains an investment-stage digital education business. Its cumulative pretax loss was approximately $424 through March 31, 2014; management warned fiscal 2014 losses would exceed fiscal 2013 as product development continues.
- Key operating risks include structural declines in print advertising and circulation, digital disruption, Australian and U.K. foreign-exchange exposure, newsprint costs, and renewal costs or loss of Australian sports rights. The company does not hedge translation exposure.
- U.K. Newspaper Matters remain a material contingency. At March 31, the company accrued $112 of liabilities and recorded a $91 receivable for expected 21st Century Fox indemnification. The filing says potential additional losses cannot be estimated; criminal fines or penalties may not be indemnified.
- Other legal matters include unresolved Canadian e-book antitrust claims, U.S. antitrust litigation involving News America Marketing, and Valassis litigation. The company says outcomes cannot be predicted. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- After quarter-end, News Corp agreed to acquire Harlequin for approximately C$455 (about US$415), subject to approvals, with closing anticipated by the end of calendar 2014 Q3. It also announced the Rubicon Project IPO sale, generating a $6 gain.
Important facts for investors to verify
- Reconcile the sharp year-over-year net income decline for nonrecurring gains in 2013 and confirm the offsetting treatment of the 2014 foreign tax refund and payable to 21st Century Fox.
- Assess underlying trends in News and Information Services, especially print advertising, Dow Jones institutional products, digital subscriptions and the effect of foreign exchange.
- Monitor Amplify’s losses and funding needs, as well as the expected benefits and costs of the office moves and newsprint agreements.
- Track the U.K. Newspaper Matters, indemnification collections and any uninsured exposure, together with the NAM and HarperCollins legal proceedings.
- Confirm liquidity available to the parent: $865 of cash was held by foreign subsidiaries, including $263 held at separately listed REA Group and not readily accessible without a dividend. Also monitor Harlequin’s final purchase price, financing and closing conditions.
- Interpret 2013 comparisons cautiously because the company was not yet standalone; Segment EBITDA and free cash flow available to News Corporation are non-GAAP measures.