News Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014 (52 weeks ended June 29, 2014); filed August 14, 2014. This is an annual report, not a standalone 2013 fourth-quarter filing. News Corp completed its separation from 21st Century Fox on June 28, 2013, so FY2014 reflects standalone operations, while prior-period results include carve-out reporting and allocated parent-company costs.
Business context
News Corp is a diversified media and information company operating in the U.S., Australia and the U.K. Its six reporting segments are News and Information Services, Cable Network Programming, Digital Real Estate Services, Book Publishing, Digital Education and Other. It also owns 50% of Australian pay-TV provider Foxtel, accounted for as an equity investment.
Key financial metrics
| Metric (US$ millions, except per-share data) | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | 8,574 | 8,891 | (4%) |
| Segment EBITDA | 770 | 688 | 12% |
| Net income attributable to News Corp | 239 | 506 | (53%) |
| Basic and diluted EPS | $0.41 | $0.87 | — |
| Operating cash flow | 854 | 501 | Up $353 |
| Capital expenditures | 379 | 332 | Up $47 |
| Free cash flow available to News Corp (non-GAAP) | 365 | 72 | Up $293 |
| Cash and cash equivalents at year-end | 3,145 | 2,381 | Up $764 |
Segment EBITDA margin was approximately 9.0% of revenue, compared with 7.7% in FY2013. This non-GAAP measure excludes depreciation and amortization, impairment and restructuring charges, equity earnings, interest, other items and taxes; it is not a substitute for GAAP earnings or cash flow.
At June 30, 2014, total assets were $16.489 billion and current assets were $5.270 billion versus current liabilities of $2.264 billion. The filing reports an unsecured $650 million revolving facility, undrawn at filing, with no corporate borrowings reported. The company was compliant with facility covenants. Foxtel, the 50%-owned affiliate, had $2.0 billion of debt outstanding, excluding shareholder loans.
Material changes versus FY2013
- Revenue fell $317 million, principally from lower advertising and foreign-exchange effects in News and Information Services. Advertising revenue declined 8% overall and 10% in that segment.
- News and Information Services revenue declined 9% and Segment EBITDA fell 16%, reflecting Australian newspaper advertising weakness, lower Dow Jones revenue and the disposal of the Dow Jones Local Media Group.
- Growth in Cable Network Programming revenue and EBITDA largely reflected consolidation of FOX SPORTS Australia following the CMH acquisition. Digital Real Estate Services revenue rose 18% and EBITDA 27%; Book Publishing revenue rose 5% and EBITDA 39%, aided by the Divergent series and e-book growth.
- Digital Education revenue declined 14%; its Segment EBITDA loss widened to $193 million from $141 million as product and curriculum investment increased. Other’s EBITDA loss narrowed to $241 million, mainly due to lower U.K. Newspaper Matters costs.
- Net income fell despite higher Segment EBITDA, largely because FY2013 included a $1.263 billion CMH remeasurement gain, a $321 million gain on the sale of the SKY Network Television investment and tax benefits associated with impairment charges. FY2014 included $94 million of impairment and restructuring charges, versus $1.737 billion in FY2013.
Outlook, risks and unusual items
- Management does not ordinarily provide projections of future operating results. FY2015 capital expenditures were expected to be broadly similar to FY2014; approximately $60 million of digital curriculum development costs were expected to be capitalized.
- Management cited continued structural pressure on print advertising and circulation, competition from digital platforms, foreign-exchange exposure, newsprint costs, and the need to renew sports rights. Digital Education remains an early-stage investment with no assurance of profitability; cumulative Amplify investment was approximately $825 million through June 30, 2014.
- Fiscal 2014 included a $794 million foreign tax refund and interest award, producing a $721 million tax benefit; under the tax-sharing agreement, the same $721 million was recorded as an expense payable to 21st Century Fox. The filing says the two entries had no net impact on the income statement.
- U.K. Newspaper Matters: the company accrued $110 million for filed claims and incurred costs, of which approximately $66 million was expected to be indemnified by 21st Century Fox. Criminal fines or penalties may not be indemnified; the ultimate outcome and cost were not predictable.
- The company reported $1.692 billion of goodwill at risk for future impairment at News and Information Services and Digital Education units, where fair value exceeded carrying value by less than 10%. No goodwill impairment was recorded in FY2014.
- Material commitments totaled $3.768 billion, including $1.301 billion of purchase obligations, $626 million of sports programming rights and $1.832 billion of land and building operating leases. A 30-year London lease was signed; FY2015 dual-rent and related facility costs were estimated at approximately $25 million, with approximately $70 million of related capital expenditures expected.
- After year-end, HarperCollins completed its acquisition of Harlequin for approximately US$420 million, subject to adjustments. Management expected annualized revenue contribution of $320–$340 million. REA Group also acquired a 17.22% stake in iProperty Group for approximately US$100 million.
Most important facts for investors to verify
- Whether weakness in newspaper advertising and circulation persists, and whether digital subscriptions and marketing revenue can offset it.
- Amplify’s future losses, cash needs and progress toward commercial scale; also monitor the potential impairment exposure in its goodwill.
- The ultimate financial and reputational impact of U.K. Newspaper Matters and NAM antitrust litigation, including the limits and timing of 21st Century Fox indemnification.
- Cash availability: $956 million was held by foreign subsidiaries, including $239 million at REA Group that was not readily accessible to News Corp; assess repatriation, tax and dividend constraints.
- Execution and financing of the Harlequin acquisition, and whether its expected revenue contribution translates into earnings and cash flow.
- Comparability of historical results: FY2013 and FY2012 include pre-separation allocations and transactions, so reported year-over-year changes may not represent fully like-for-like standalone performance.