Business context and reporting period
News Corporation’s unaudited Form 10-Q covers the three months ended September 30, 2013 (fiscal 2014 first quarter). The company had separated from 21st Century Fox on June 28, 2013. The current quarter reflects stand-alone consolidated operations; the prior-year quarter is a carve-out combined presentation, including allocated corporate costs, so comparisons are not fully like-for-like.
Businesses span news and information services, Australian cable sports programming, digital real estate, book publishing, and digital education. Amounts below are in millions of U.S. dollars unless noted.
Financial results and position
| Metric | Q1 FY2014 | Q1 FY2013 | Change / note |
|---|---|---|---|
| Revenue | $2,072 | $2,133 | Down $61, or 3% |
| Segment EBITDA | $141 | $89 | Up $52, or 58%; non-GAAP |
| Net income (loss) | $38 | $(83) | Improved $121 |
| Net income (loss) attributable to News Corp stockholders | $27 | $(92) | Basic and diluted EPS: $0.05 vs. $(0.16) |
| Operating cash flow | $59 | $(87) | Improved $146 |
| Investing cash flow | $27 | $(294) | Included $96 proceeds from dispositions |
| Financing cash flow | $205 | $244 | Primarily net transfers from 21st Century Fox |
| Free cash flow available to News Corp | $(10) | $(155) | Non-GAAP; improved $145 |
Segment EBITDA margin was approximately 6.8% of revenue, versus 4.2% in the prior-year period. It excludes depreciation and amortization, restructuring and impairment charges, and other items; it is not a measure of cash available for use.
Revenue mix: advertising $958 (down 8%); circulation and subscription $679 (up 12%); consumer $311 (down 5%); other $124 (down 22%). Operating expenses were $1,295, SG&A $636, depreciation and amortization $141, and restructuring charges $27. The $476 income tax benefit included a $483 net benefit related to a foreign tax refund claim; Other, net included a corresponding $483 expense payable to 21st Century Fox. Thus, the tax item largely offset in pre-tax results.
At September 30, cash and cash equivalents were $2,688, total current assets $5,230, and current liabilities $2,645. Total assets were $16,343 and equity $12,939. The balance sheet does not show a separate borrowings balance. In October, the company established a $650 five-year revolving credit facility, expandable to $900; it had not borrowed under it as of the filing. Cash increased $307 from June 30, including a $217 net financing transfer from 21st Century Fox and $16 of exchange movement.
Material changes versus the prior comparable period
- Total revenue declined mainly because News and Information Services revenue fell $171, including weaker Australian newspaper advertising, currency impacts, lower Dow Jones institutional revenue, and the sale of Dow Jones Local Media Group. Book Publishing revenue fell $24.
- FOX SPORTS Australia, acquired into full consolidation in November 2012, contributed $132 revenue and $29 Segment EBITDA; it was not included as a consolidated segment in the prior-year comparison.
- News and Information Services Segment EBITDA rose $7 to $133 despite lower revenue, reflecting cost reductions and lower expenses. Digital Real Estate Services Segment EBITDA increased $9 to $44; Book Publishing rose $3 to $43. Other segment EBITDA improved $4 but remained a loss of $108.
- Lower restructuring charges ($27 versus $115) and lower U.K. Newspaper Matters costs helped improve reported earnings. The prior-period figures also included allocated 21st Century Fox corporate expenses, whereas the current quarter reflects stand-alone costs.
- In September, the company sold Dow Jones Local Media Group; no significant gain or loss was recognized. The sale generated most of the quarter’s $96 disposition proceeds.
Outlook, commentary, risks and unusual items
- Management does not ordinarily provide projections of future operating results. It expects approximately $35 of additional restructuring charges for the remainder of fiscal 2014, principally newspaper employee termination benefits.
- Management said cash on hand and expected operating cash flows should meet foreseeable liquidity needs, with capital-market access as an additional potential source. Access and terms depend on credit ratings, market liquidity, and economic conditions.
- The foreign tax authority declined to appeal a favorable ruling; News Corp received a $555 refund including interest in October 2013. The company recorded a $483 tax benefit, net of applicable taxes, and a $483 payable to 21st Century Fox under the tax-sharing agreement. A further refund of nil to $200 plus interest may be received, but would also be payable to 21st Century Fox.
- U.K. Newspaper Matters: the company accrued $78 for filed claims and incurred costs; $53 was expected to be indemnified by 21st Century Fox. Certain criminal fines or penalties are not covered, and the ultimate outcome and cost cannot be predicted. Q1 gross legal fees and settlement costs were about $40, with $23, net of tax, indemnified.
- Amplify remains an investment and execution risk: the filing reports cumulative pre-tax losses of about $322 since its 2010 acquisition through September 30, 2013, including $57 in the quarter, and expects losses to be higher in fiscal 2014 as product development continues.
- Key business risks include structural declines in print advertising and circulation, economic softness in Australia, foreign-exchange exposure, newsprint costs, competition and changing media consumption, sports-rights costs, and unresolved litigation and investigations. The company does not hedge translation exposure to the Australian dollar and British pound.
- Other unusual item: a $37 third-party pension contribution related to a prior-period business sale was recognized as a gain. Retirement benefit obligations also fell about $41 due to retiree medical plan changes, recorded in other comprehensive income.
- The company authorized up to $500 of Class A share repurchases but had made none through November 4, 2013. Disclosure controls were reported effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess comparability: the current stand-alone quarter is compared with a pre-separation carve-out period, and FOX SPORTS Australia is newly consolidated.
- Separate recurring operating performance from the $483 tax benefit and matching payable, the $37 pension-related gain, and changes in restructuring and legal costs.
- Track whether weaker advertising and Australian newspaper trends persist, and whether subscription growth and cost actions can offset them.
- Monitor Amplify’s development spending and path to profitability, as well as sports-rights costs and Foxtel-related investment returns.
- Review liquidity and cash generation excluding affiliate transfers and asset-sale proceeds; note that $230 of reported cash was held at REA Group and was not readily accessible without a dividend.
- Follow U.K. Newspaper Matters, HarperCollins and News America Marketing litigation, indemnification recoveries, and any uninsured fines or settlements.
- Check facility use and compliance with its leverage and interest-coverage covenants, and any further tax-refund developments and related remittances to 21st Century Fox.