News Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016 (53 weeks; actual year-end July 3, 2016), compared with fiscal 2015 (52 weeks). This is an annual report, not a standalone 2015 Q4 filing. Amounts are U.S. dollars unless stated otherwise.
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 sports programming. Its five reporting segments are News and Information Services, Book Publishing, Digital Real Estate Services, Cable Network Programming, and Other. The company also holds a 50% equity-method interest in Foxtel.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $8.292 billion | $8.524 billion | Down 3% |
| Segment EBITDA (non-GAAP) | $684 million | $945 million | Down 28% |
| Income from continuing operations | $235 million | $367 million | Down 36% |
| Net income (loss) attributable to News Corp | $179 million | ($147 million) | Improved $326 million |
| Continuing-operations EPS, basic and diluted | $0.28 | $0.51 | Down |
| Operating cash flow from continuing operations | $952 million | $988 million | Down $36 million |
| Free cash flow available to News Corp (non-GAAP) | $610 million | $595 million | Up $15 million |
| Cash and cash equivalents at year-end | $1.832 billion | $1.951 billion | Down $119 million |
| Total borrowings | $372 million | None reported | New debt, primarily REA Group borrowing |
FY2016 revenue included $3.644 billion advertising (down 5%), $2.569 billion circulation and subscriptions (down 1%), and $1.578 billion consumer revenue (down 1%). Total Segment EBITDA margin was approximately 8.3%, versus 11.1% in FY2015; these are calculated from the filing’s non-GAAP Segment EBITDA and revenue figures.
Segment revenue and EBITDA were: News and Information Services, $5.338 billion and $214 million; Book Publishing, $1.646 billion and $185 million; Digital Real Estate Services, $822 million and $344 million; Cable Network Programming, $484 million and $124 million; and Other, $2 million and negative $183 million.
At June 30, total assets were $15.483 billion and total current assets and liabilities were $3.889 billion and $2.442 billion, respectively. The company reported $315 million of restricted cash for the proposed Wireless Group acquisition. Its $650 million corporate revolving facility was undrawn; the company and REA Group were in compliance with applicable debt covenants. The company declared and paid $0.20 per share in FY2016, versus no dividend in FY2015.
Material changes and unusual items
- Revenue fell $232 million, primarily from a $393 million decline in News and Information Services, including print advertising weakness, lower free-standing insert revenue, and adverse foreign currency translation. Currency movements reduced revenue by $455 million; the 53rd week added approximately $112 million.
- News and Information Services Segment EBITDA fell $389 million, including approximately $280 million of one-time NAM litigation and related settlement costs. The $122 million Zillow settlement gain partly offset those costs; the reported net settlements line was a $158 million expense.
- Digital Real Estate Services revenue grew 32%, mainly reflecting a full year of Move results and REA Group growth. Segment EBITDA rose to $344 million, materially aided by the Zillow settlement gain.
- Book Publishing Segment EBITDA declined 16%, reflecting weaker e-book sales and a smaller contribution from the Divergent series; print sales, including Go Set a Watchman, partly offset the decline. Digital sales were 19% of global consumer revenue, down from 22% in FY2015.
- News Corp classified its Digital Education business as discontinued operations and sold Amplify Insight and Amplify Learning. FY2016 discontinued-operations income was $15 million, including tax benefits, following a $445 million loss in FY2015 that included a $371 million impairment.
- Investing cash outflow was $1.124 billion, including $520 million for acquisitions; capital expenditures were $256 million. REA Group drew approximately $340 million under its facility to fund the iProperty acquisition. The proposed Wireless Group cash offer was approximately $300 million, subject to shareholder acceptances and regulatory approval; the filing also describes a proposed $30 million Australian Regional Media purchase, subject to approvals.
Outlook, risks and contingencies
Management did not provide numerical earnings guidance and stated that it does not ordinarily project future operating results. It emphasized continued investment in digital products and content monetization, while noting that actual results may differ materially from forward-looking statements.
Key disclosed risks include continued print advertising and circulation pressure, digital advertising pricing and audience shifts, competition and rapid technology changes, foreign currency exposure, sports-rights renewal costs, newsprint prices, and execution and impairment risks from acquisitions. The company said nearly $1.0 billion of goodwill in News and Information Services and Cable Network Programming reporting units was at risk for future impairment; no goodwill impairment was recorded in FY2016.
The NAM class-action settlement of approximately $250 million plus about $30 million in related claims remained subject to court approval at filing. Valassis antitrust proceedings remained unresolved, with outcomes not predictable. U.K. Newspaper Matters liabilities accrued were approximately $99 million, of which about $55 million was expected to be indemnified by 21st Century Fox. The filing also identifies evolving data-privacy regulation, including the EU GDPR, and potential liabilities under separation-related tax and indemnification agreements.
Foxtel, the 50%-owned equity affiliate, reported FY2016 revenue of $2.379 billion, EBITDA of $604 million, and debt of approximately $1.8 billion, excluding shareholder loans. News Corp’s equity earnings from Foxtel declined to $38 million from $59 million.
Most important facts for investors to verify
- Whether the $250 million NAM settlement received final court approval and whether any related costs or claims changed after filing.
- Underlying News and Information Services performance excluding the unusual settlements, foreign-exchange effects, and the extra fiscal week.
- Whether digital real-estate growth and profitability persist after separating the Zillow gain and acquisition effects.
- Cash availability: $315 million was restricted for Wireless Group, and some cash was held by REA Group or in foreign subsidiaries; confirm acquisition outcomes and funding needs.
- Progress and potential exposure in Valassis litigation, U.K. Newspaper Matters, goodwill-sensitive reporting units, and pension obligations.