News Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018 (52 weeks; fiscal year actually ended July 1, 2018). The filing was signed August 15, 2018. This is an FY2018 annual report, not a quarterly report for 2017 Q4.
Business context
News Corp is a diversified media and information company with five reporting segments: News and Information Services, Book Publishing, Digital Real Estate Services, Subscription Video Services, and Other. Its major markets include the U.S., Australia, and the U.K.
In April 2018, News Corp and Telstra combined their Foxtel interests with News Corp’s FOX SPORTS Australia business. News Corp owns 65% of the combined “new Foxtel” and began consolidating it in the fourth quarter. Consequently, reported FY2018 and FY2017 results are not directly comparable; the company also presents unaudited pro forma results assuming the transaction occurred in July 2016.
Financial results and liquidity
| Metric (US$ millions, except per-share data) | FY2018 | FY2017 |
|---|---|---|
| Revenue | 9,024 | 8,139 |
| Net loss attributable to News Corp stockholders | (1,514) | (738) |
| Basic and diluted loss per share | (2.60) | (1.27) |
| Cash from continuing operating activities | 757 | 499 |
| Capital expenditures | 364 | 256 |
| Free cash flow available to News Corp, non-GAAP | 249 | 113 |
| Cash and cash equivalents at year-end | 2,034 | 2,016 |
| Total borrowings at year-end | 1,952 | 379 |
Revenue rose 11%, mainly because of the Foxtel transaction, which contributed $461 million in the fourth quarter, as well as growth in digital real estate and books. Reported net loss widened substantially. Segment EBITDA, a non-GAAP measure, was $1.072 billion versus $885 million; it excludes depreciation, impairment, interest, taxes, and other items and is not a substitute for GAAP earnings or cash flow.
On a pro forma basis including Foxtel for both years, revenue increased 4% to $10.564 billion, while total Segment EBITDA declined to $1.444 billion from $1.461 billion. Pro forma net loss attributable to News Corp stockholders was $1.114 billion versus $695 million.
Year-end current assets were $4.394 billion and current liabilities were $3.295 billion. The company had an undrawn $650 million corporate revolving facility (which may be increased to $900 million) and $198 million of undrawn Foxtel Group commitments. Of the $2.034 billion cash balance, $887 million was held by foreign subsidiaries; $86 million was held by separately listed REA Group and was not readily accessible without a dividend declaration.
Material changes and unusual items
- FY2018 included a $957 million non-cash write-down of the Foxtel investment, following lower-than-expected revenue from new products and broadcast subscribers.
- The company recorded $280 million of non-cash impairment charges, primarily at News America Marketing and FOX SPORTS Australia, and $71 million of restructuring charges.
- The Foxtel transaction generated a $337 million loss, primarily from writing off a $317 million channel-distribution intangible asset. Consolidation also added approximately $1.6 billion of Foxtel debt.
- Income tax expense was $355 million despite a $1.089 billion pretax loss. It included a $237 million provisional expense related to the U.S. Tax Act; the company said its accounting for the Act remained subject to finalization.
- News and Information Services revenue grew 1%, but Segment EBITDA fell 5% to $392 million, with print advertising weakness and lower News America Marketing revenue among the pressures. Digital Real Estate Services revenue rose 22% and EBITDA rose 24%; Book Publishing revenue rose 7% and EBITDA rose 23%.
- Cash from continuing operations increased by $258 million, principally because the prior-year period included $256 million of NAM settlement payments that did not recur. Free cash flow available to News Corp rose to $249 million, after higher capital spending.
Outlook, risks, and contingencies
News Corp says it does not ordinarily provide operating projections. Management stated that cash on hand, expected operating cash flow, and available credit should meet foreseeable liquidity needs, but access to financing remains subject to market and company conditions. Approximately $462 million of borrowings mature in FY2019; the company expected to fund repayments primarily with new borrowings. Foxtel’s FY2019 capital expenditures were expected to exceed FY2018 by more than $50 million. Future dividends remain at the board’s discretion; an August 2018 dividend of $0.10 per share was declared.
- Key operating risks include structural declines in print advertising and circulation, competition from digital platforms and streaming services, audience and advertising shifts, and the ability to obtain sports and other programming rights at acceptable cost.
- Foxtel’s debt, variable interest rates, covenants, and upcoming maturities create refinancing and financial-flexibility risks. The company reported covenant compliance at June 30, 2018.
- Foreign exchange, economic conditions in Australia and the U.K., Brexit uncertainty, evolving privacy regulation including GDPR, cybersecurity, and potential asset impairments are identified risks. Approximately $170 million of goodwill was described as at risk of future impairment.
- Legal matters include Valassis antitrust litigation, for which the outcome could not be predicted, and U.K. Newspaper Matters. The company accrued approximately $52 million for the latter and recorded a related $49 million receivable from 21st Century Fox; additional claims and ultimate costs were not estimable.
- Total disclosed firm commitments and contractual obligations were $7.944 billion, including $2.316 billion for sports programming rights. Certain pension, postretirement, and tax exposures are not included in that total.
The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor excluded Foxtel’s controls from the FY2018 internal-control assessment because it was newly consolidated; Foxtel represented about 25% of year-end assets and 6% of annual revenue.
Important facts for investors to verify
- Reconcile reported results with the unaudited pro forma figures and confirm how Foxtel’s post-transaction performance, costs, and debt are developing.
- Review the drivers and assumptions behind the $957 million Foxtel write-down, other impairment charges, and the $170 million goodwill identified as at risk.
- Assess refinancing plans for FY2019 maturities, Foxtel covenant headroom, variable-rate exposure, and cash availability across subsidiaries.
- Track print advertising and circulation trends, News America Marketing performance, and pro forma Subscription Video Services EBITDA and subscriber trends.
- Check the final tax effects of the Tax Act and developments in Valassis, U.K. Newspaper Matters, and other contingencies.