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NEWS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
This document contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect," "estimate," "anticipate," "predict," "believe" and similar expressions
and variations thereof are intended to identify forward-looking statements.
These statements appear in a number of places in this document and include
statements regarding the intent, belief or current expectations of News
Corporation, its directors or its officers with respect to, among other things,
trends affecting News Corporation's financial condition or results of
operations. The readers of this document are cautioned that any forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. More information regarding these risks, uncertainties and other
factors is set forth under the heading Part II "Other Information," Item 1A
"Risk Factors" in this report. News Corporation does not ordinarily make
projections of its future operating results and undertakes no obligation (and
expressly disclaims any obligation) to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. Readers should carefully review
this document and the other documents filed by News Corporation with the
Securities and Exchange Commission ("SEC"). This section should be read together
with the unaudited consolidated financial statements of News Corporation and
related notes set forth elsewhere herein and News Corporation's Annual Report on
Form 10-K for the fiscal year ended June 30, 2012 as filed with the SEC on
August 14, 2012 and as amended on October 1, 2012 (the "2012 Form 10-K").
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations is intended to help provide an understanding of News Corporation and
its subsidiaries' (together, "News Corporation" or the "Company") financial
condition, changes in financial condition and results of operations. This
discussion is organized as follows:
• Overview of the Company's Business-This section provides a general
description of the Company's businesses, as well as developments that have
occurred to date during fiscal 2013 that the Company believes are
important in understanding its results of operations and financial
condition or to disclose known trends.
• Results of Operations-This section provides an analysis of the Company's
results of operations for the three and six months ended December 31, 2012
and 2011. This analysis is presented on both a consolidated and a segment
basis. In addition, a brief description is provided of significant
transactions and events that have an impact on the comparability of the
results being analyzed.
• Liquidity and Capital Resources-This section provides an analysis of the
Company's cash flows for the six months ended December 31, 2012 and 2011.
Included in the discussion of outstanding debt is a discussion of the
amount of financial capacity available to fund the Company's future commitments and obligations, as well as a discussion of other financing
arrangements.
OVERVIEW OF THE COMPANY'S BUSINESS
The Company is a diversified global media company, which manages and reports its
businesses in the following six segments:
• Cable Network Programming, which principally consists of the production
and licensing of programming distributed through cable television systems
and direct broadcast satellite operators primarily in the United States,
Latin America, Europe and Asia.
• Filmed Entertainment, which principally consists of the production and
acquisition of live-action and animated motion pictures for distribution
and licensing in all formats in all entertainment media worldwide, and the
production and licensing of television programming worldwide.
• Television, which principally consists of the broadcasting of network programming in the United States and the operation of 27 full power
broadcast television stations, including 9 duopolies, in the United States
(of these stations, 17 are affiliated with the FOX Broadcasting Company
("FOX") and 10 are affiliated with Master Distribution Service, Inc.
("MyNetworkTV")).
• Direct Broadcast Satellite Television, which consists of the distribution
of basic and premium programming services via satellite and broadband
directly to subscribers in Italy.
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• Publishing, which principally consists of the Company's newspapers and
information services, book publishing and integrated marketing services
businesses. The newspapers and information services business principally
consists of the publication of national newspapers in the United Kingdom,
the publication of approximately 140 newspapers in Australia, the
publication of a metropolitan newspaper and a national newspaper (with
international editions) in the United States and the provision of
information services. The book publishing business consists of the
publication of English language books throughout the world and the
integrated marketing services business consists of the publication of free-standing inserts and the provision of in-store marketing products and
services in the United States and Canada.
• Other, which principally consists of FOX SPORTS Australia, the leading sports programming provider in Australia, the Company's digital media
properties and Amplify, the Company's education technology businesses.
Television and Cable Network Programming
The Company's television operations primarily consist of FOX, MyNetworkTV and
the 27 television stations owned by the Company.
The television operations derive revenues primarily from the sale of advertising
and to a lesser extent retransmission consent revenue. Adverse changes in
general market conditions for advertising may affect revenues. The U.S.
television broadcast environment is highly competitive and the primary methods
of competition are the development and acquisition of popular programming.
Program success is measured by ratings, which are an indication of market
acceptance, with the top rated programs commanding the highest advertising
prices. FOX is a broadcast network and MyNetworkTV is a programming distribution
service, airing original and off-network programming. FOX and MyNetworkTV
compete with broadcast networks, such as ABC, CBS, NBC and The CW Television
Network, independent television stations, cable and Direct Broadcast Satellite
Television program services, as well as other media, including DVDs, Blu-rays,
video games, print and the Internet for audiences, programming and, in the case
of FOX, advertising revenues. In addition, FOX and MyNetworkTV compete with the
other broadcast networks and other programming distribution services to secure
affiliations with independently owned television stations in markets across the
United States. ABC, NBC and CBS each broadcasts a significantly greater number
of hours of programming than FOX and, accordingly, may be able to designate or
change time periods in which programming is to be broadcast with greater
flexibility than FOX. In addition, future technological developments may affect
competition within the television marketplace.
Retransmission consent rules provide a mechanism for the television stations
owned by the Company to seek and obtain payment from multi-channel video
programming distributors who carry broadcasters' signals. Retransmission consent
revenue consists of per subscriber-based compensatory fees paid to the Company
from cable and satellite distribution systems for FOX and MyNetworkTV as well as
a portion of the retransmission consent revenue the affiliates generate for
their retransmission of FOX.
The television stations owned and operated by the Company compete for
programming, audiences and advertising revenues with other television stations
and cable networks in their respective coverage areas and, in some cases, with
respect to programming, with other station groups, and in the case of
advertising revenues, with other local and national media. The competitive
position of the television stations owned by the Company is largely influenced
by the quality and strength of FOX and MyNetworkTV programming, and, in
particular, the prime-time viewership of the respective network.
The Company's U.S. cable network operations primarily consist of the Fox News
Channel ("FOX News"), FX Networks, LLC ("FX"), Regional Sports Networks
("RSNs"), the National Geographic Channels, SPEED and the Big Ten Network. The
Company's international cable networks consist of the Fox International Channels
("FIC") and STAR. FIC produces and distributes entertainment, factual, sports,
and movie channels through distribution channels in Europe, Africa, Asia and
Latin America using several brands, including Fox, Fox Crime, Fox Life and
National Geographic Channel. STAR's owned and affiliated channels are
distributed in the following countries and regions: India; Greater China;
Indonesia; the rest of South East Asia; Pakistan; the Middle East and Africa;
the United Kingdom and Europe; and North America.
Generally, the Company's cable networks, which target various demographics,
derive a majority of their revenues from monthly affiliate fees received from
cable television systems and direct broadcast satellite operators based on the
number of their subscribers. Affiliate fee revenues are net of the amortization
of cable distribution investments (capitalized fees paid to multi-channel video
programming distributors to typically facilitate the carriage of a cable
network). The Company defers the cable distribution investments and amortizes
the amounts on a straight-line basis over the contract period. Cable television
and direct broadcast satellite are currently the predominant means of
distribution of the Company's program services in the United States.
Internationally, distribution technology varies region by region.
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The Company's cable networks compete for carriage on cable television systems,
direct broadcast satellite systems and other distribution systems with other
program services. A primary focus of competition is for distribution of the
Company's cable network channels that are not already distributed by particular
cable television or direct broadcast satellite systems. For such program
services, distributors make decisions on the use of bandwidth based on various
considerations, including amounts paid by programmers for launches, subscription
fees payable by distributors and appeal to the distributors' subscribers.
The most significant operating expenses of the Television segment and the Cable
Network Programming segment are the acquisition and production expenses related
to programming and the expenses related to operating the technical facilities of
the broadcaster or cable network. Other expenses include promotional expenses
related to improving the market visibility and awareness of the broadcaster or
cable network and its programming. Additional expenses include sales commissions
paid to the in-house advertising sales force, as well as salaries, employee
benefits, rent and other routine overhead expenses.
The Company has several multi-year sports rights agreements, including contracts
with the National Football League ("NFL") through fiscal 2022, contracts with
the National Association of Stock Car Auto Racing ("NASCAR") for certain races
and exclusive rights for certain ancillary content through calendar year 2022, a
contract with Major League Baseball ("MLB") through calendar year 2021 and other
sports rights contracts. These contracts provide the Company with the broadcast
rights to certain U.S. national sporting events during their respective terms.
The costs of these sports contracts are charged to expense based on the ratio of
each period's operating profit to estimated total operating profit for the
remaining term of the contract.
The profitability of these long-term U.S. national sports contracts is based on
the Company's best estimates as of December 31, 2012 of attributable revenues
and costs; such estimates may change in the future and such changes may be
significant. Should revenues decline from estimates applied as of December 31,
2012, additional amortization of rights may be recorded. Should revenues improve
as compared to estimated revenues, the Company may have an improved operating
profit related to the contract, which may be recognized over the remaining
contract term.
While the Company seeks to ensure compliance with federal indecency laws and
related Federal Communications Commission ("FCC") regulations, the definition of
"indecency" is subject to interpretation and there can be no assurance that the
Company will not broadcast programming that is ultimately determined by the FCC
to violate the prohibition against indecency. Such programming could subject the
Company to regulatory review or investigation, fines, adverse publicity or other
sanctions, including the loss of station licenses.
Filmed Entertainment
The Filmed Entertainment segment derives revenue from the production and
distribution of live-action and animated motion pictures and television series.
In general, motion pictures produced or acquired for distribution by the Company
are exhibited in U.S. and foreign theaters, followed by home entertainment,
including sale and rental of DVDs and Blu-rays, video-on-demand and pay-per-view
television, on-line and mobile distribution, premium subscription television,
network television and basic cable and syndicated television exploitation.
Television series initially produced for the networks and first-run syndication
are generally licensed to domestic and international markets concurrently and
subsequently released in seasonal DVD and Blu-ray box sets and made available
via digital distribution platforms. More successful series are later syndicated
in domestic markets. The length of the revenue cycle for television series will
vary depending on the number of seasons a series remains in active production
and, therefore, may cause fluctuations in operating results. License fees
received for television exhibition (including international and U.S. premium
television and basic cable television) are recorded as revenue in the period
that licensed films or programs are available for such exhibition, which may
cause substantial fluctuations in operating results.
The revenues and operating results of the Filmed Entertainment segment are
significantly affected by the timing of the Company's theatrical and home
entertainment releases, the number of its original and returning television
series that are aired by television networks and the number of its television
series in off-network syndication. Theatrical and home entertainment release
dates are determined by several factors, including timing of vacation and
holiday periods and competition in the marketplace. The distribution windows for
the release of motion pictures theatrically and in various home entertainment
products and services (including subscription rentals, rental kiosks and
Internet streaming services), have been compressing and may continue to change
in the future. A further reduction in timing between theatrical and home
entertainment releases could adversely affect the revenues and operating results
of this segment.
The Company enters into arrangements with third parties to co-produce many of
its theatrical productions. These arrangements, which are referred to as
co-financing arrangements, take various forms. The parties to these arrangements
include studio and non-studio entities, both domestic and foreign. In several of
these agreements, other parties control certain distribution rights. The Filmed
Entertainment segment records the amounts received for the sale of an economic
interest as a reduction of the cost of the film, as the
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investor assumes full risk for that portion of the film asset acquired in these
transactions. The substance of these arrangements is that the third-party
investors own an interest in the film and, therefore, receive a participation
based on the respective third-party investor's interest in the profits or losses
incurred on the film. Consistent with the requirements of Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 926
"Entertainment-Films" ("ASC 926"), the estimate of a third-party investor's
interest in profits or losses incurred on the film is determined by reference to
the ratio of actual revenue earned to date in relation to total estimated
ultimate revenues.
Operating costs incurred by the Filmed Entertainment segment include:
exploitation costs, primarily theatrical prints and advertising and home
entertainment marketing and manufacturing costs; amortization of capitalized
production, overhead and interest costs; and participations and talent
residuals. Selling, general and administrative expenses include salaries,
employee benefits, rent and other routine overhead.
The Company competes with other film studios, such as Disney, Paramount, Sony,
Universal, Warner Bros. and independent film producers in the production and
distribution of motion pictures, DVDs and Blu-rays. As a producer and
distributor of television programming, the Company competes with studios,
television production groups and independent producers and syndicators, such as
Disney, Sony, NBC Universal, Warner Bros. and Paramount Television, to sell
programming both domestically and internationally. The Company also competes to
obtain creative talent and story properties, which are essential to the success
of the Company's filmed entertainment businesses.
Direct Broadcast Satellite Television
The Direct Broadcast Satellite Television ("DBS") segment's operations consist
of SKY Italia, which provides basic and premium programming services via
satellite directly to subscribers in Italy. SKY Italia derives revenues
principally from subscriber fees. The Company believes that the quality and
variety of programming, audio and interactive programming including personal
video recorders, quality of picture including high definition channels, access
to service, customer service and price are the key elements for gaining and
maintaining market share. SKY Italia's competition includes companies that offer
video, audio, interactive programming, telephony, data and other information and
entertainment services, including broadband Internet providers, digital
terrestrial transmission ("DTT") services, wireless companies and companies that
are developing new media technologies.
SKY Italia's most significant operating expenses are those related to the
acquisition of entertainment, movie and sports programming and subscribers and
the expenses related to operating the technical facilities. Operating expenses
related to sports programming are generally recognized over the course of the
related sport season, which may cause fluctuations in the operating results of
this segment.
The continued challenging economic environment in Italy has contributed to a
reduction in consumer spending and has posed challenges for subscriber retention
and growth. If this trend continues, it could have a material effect on the
operating results of the DBS segment.
Publishing
The Company's Publishing segment consists of the Company's newspapers and
information services, book publishing and integrated marketing services
businesses and the related digital formats.
Revenue is derived from the sale of advertising space, newspapers, books and
subscriptions, as well as licensing. Adverse changes in general market
conditions for advertising may affect revenues. Circulation and subscription
revenues can be greatly affected by changes in the prices of the Company's
and/or competitors' products, as well as by promotional activities.
Operating expenses include costs related to paper, production, distribution,
editorial, commissions and royalties. Selling, general and administrative
expenses include promotional expenses, salaries, employee benefits, rent and
other routine overhead.
The Publishing segment's advertising volume, circulation, and the price of paper
are the key variables whose fluctuations can have a material effect on the
Company's operating results and cash flow. The Company has to anticipate the
level of advertising volume, circulation and paper prices in managing its
businesses to maximize operating profit during expanding and contracting
economic cycles. The Company continues to be exposed to risks associated with
paper used for printing. Paper is a basic commodity and its price is sensitive
to the balance of supply and demand. The Company's expenses are affected by the
cyclical increases and decreases in the price of paper. The Publishing segment's
products compete for readership and advertising with local and national
competitors and also compete with other media alternatives in their respective
markets. Competition for circulation and subscriptions is based on the content
of the products provided, service, pricing and, from time to time, various
promotions. The success of these products depends upon advertisers' judgments as
to the most effective use of their advertising budgets. Competition for
advertising is based upon the reach of the products, advertising rates and
advertiser results. Such judgments are based on factors such as cost,
availability of alternative media, distribution and quality of readership
demographics.
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Like other newspaper publishing groups, the Company faces challenges to its
traditional print business model from new media formats and shifting consumer
preferences. The Company is also exposed to the impact of long-term structural
movements in advertising spending in particular, the move in classified
advertising from print to digital. These new media formats could impact the
Company's performance, positively or negatively.
As a multi-platform news provider, the Company recognizes the importance of
maximizing revenues from new media, both in terms of paid-for content and in new
advertising models, and continues to invest in its digital products. The
development of technologies such as smartphones, tablets and similar devices and
their related applications provides opportunities for the Company to make
available its journalism to a new audience of readers, introduce new or
different pricing schemes, develop its products to continue to attract
advertisers and/or affect the relationship between publisher and consumer. The
Company continues to develop and implement strategies to exploit its content in
new media channels, including the introduction of paywalls around its newspaper
websites.
Other
The Other segment consists primarily of:
FOX SPORTS Australia
FOX SPORTS Australia is Australia's leading sports programmer based on total
subscribers. FOX SPORTS Australia is focused on live national and international
sports events and is distributed via long-term carriage agreements with various
pay-TV providers (mainly Foxtel) in Australia. FOX SPORTS Australia provides
featured original and licensed premium sports content tailored to the Australian
market. FOX SPORTS Australia's channels provide premium compelling live
broadcasts, including almost every game of the highly popular Australian
Football League.
Prior to November 2012, the Company owned a 50% interest in FOX SPORTS
Australia, which the Company accounted for as an equity investment. In November
2012, the Company acquired Consolidated Media Holdings Limited ("CMH"), a media
investment company that owned the remaining 50% interest in FOX SPORTS
Australia. As a result of the CMH acquisition, the Company's ownership interest
in FOX SPORTS Australia increased to 100% and, accordingly, the results of FOX
SPORTS Australia are included in the Company's combined results of operations
beginning in November 2012.
Digital Media Group
The Company sells advertising, sponsorships and subscription services on the
Company's various digital media properties, including REA Group Limited ("REA"),
the Australian online real estate advertising service. Significant expenses
associated with the Company's digital media properties include development
costs, advertising and promotional expenses, salaries, employee benefits and
other routine overhead.
Education Group
Amplify, the Company's digital education business, focuses on three areas of
business: analytics and assessment, digital content and curriculum and mobile
distribution systems designed for education. Significant expenses associated
with the Company's digital education business include salaries, employee
benefits and other routine overhead.
Other Business Developments
In July 2011, the Company announced that it would close its publication, The
News of the World, after allegations of phone hacking and payments to public
officials. As a result of management's approval of the shutdown of The News of
the World, the Company has reorganized portions of the U.K. newspaper business
and has recorded restructuring charges in fiscal 2013 and 2012 primarily for
termination benefits and certain organizational restructuring at the U.K.
newspapers. The Company is subject to several ongoing investigations by U.K. and
U.S. regulators and governmental authorities, including investigations into
whether similar conduct may have occurred at the Company's subsidiaries outside
of the U.K. The Company is cooperating with these investigations. In addition,
the Company has admitted liability in a number of civil cases related to the
phone hacking allegations and has settled a number of cases. The Company created
an independently-chaired Management & Standards Committee (the "MSC"), which
operates independently from NI Group Limited ("News International") and has full
authority to ensure cooperation with all relevant
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investigations and inquiries into The News of the World matters and all other
related issues across News International. The MSC conducts its own internal
investigation where appropriate. The MSC has an independent Chairman, Lord
Grabiner QC, and reports directly to Gerson Zweifach, Senior Executive Vice
President and Group General Counsel of the Company. Mr. Zweifach reports to the
independent members of the Board of Directors (the "Board") through their
representative Viet Dinh, an independent director and Chairman of the Company's
Nominating and Corporate Governance Committee. The independent directors of the
Board have retained independent outside counsel and are actively engaged in
these matters. The MSC conducted an internal investigation of the three other
titles at News International and engaged independent outside counsel to advise
it on these investigations and all other matters it handles. News International
has instituted governance reforms and issued certain enhanced policies to its
employees. The Company has also engaged independent outside counsel to assist it
in responding to U.S. governmental inquiries.
On June 28, 2012, the Company announced its intent to pursue the separation of
its business into two separate independent public companies, one of which will
hold the Company's global media and entertainment businesses and the other, New
Newscorp LLC ("New News Corporation"), which will hold the businesses comprising
the Company's newspapers, information services and integrated marketing
services, digital real estate services, book publishing, digital education and
sports programming and pay-TV distribution in Australia. On December 4, 2012,
the Company's board of directors authorized management to proceed with the
proposed distribution, subject to the satisfaction or waiver of certain
conditions and the board of directors' ongoing consideration of the transaction
and its final approval, which may not be granted.
To effect the distribution, the Company will first undertake an internal
reorganization. Following the internal reorganization, the Company will
distribute all of the shares of New News Corporation's common stock to its
stockholders on a pro rata basis. After the distribution, the Company will not
own any equity interest in New News Corporation, and New News Corporation will
operate independently from the Company.
On December 21, 2012, New News Corporation filed an initial Form 10 registration
statement and News Corporation filed a preliminary proxy statement with the
Securities and Exchange Commission in connection with the separation. The
Company's stockholders will not be required to vote to approve the distribution.
However, in order to effectuate the distribution in the manner discussed in the
Form 10 registration statement, the Company will be required to amend its
Restated Certificate of Incorporation, and the Company will hold a Special
Meeting in connection therewith. The Company has also applied for certain
regulatory approvals and tax rulings required to enable the separation to be
completed as described. There can be no assurances given that the separation of
the Company's businesses as described will occur.
In July 2012, the Company acquired Thomas Nelson, Inc. ("Thomas Nelson"), one of
the leading Christian book publishers in the U.S., for approximately $200
million in cash.
In July 2012, the Company sold its 49% investment in NDS Group Limited ("NDS")
to Cisco Systems Inc. for approximately $1.9 billion in total consideration.
In November 2012, the Company acquired a controlling 51% ownership stake in
Eredivisie Media & Marketing CV ("EMM") for approximately $350 million of which
$325 million was cash and $25 million was contingent consideration. EMM is a
media company that holds the collective media and sponsorship rights of the
Dutch Premier League. The remaining 49% of EMM is owned by the Dutch Premier
League and the global TV production company Endemol.
In November 2012, the Company acquired the remaining 50% interest in Fox Star
Sports Asia (formerly ESPN STAR Sports) that it did not already own for
approximately $220 million, net of cash acquired. Fox Star Sports Asia is a
leading sports broadcaster in Asia and the Company now, through its wholly owned
subsidiaries, owns 100% of Fox Star Sports Asia.
In November 2012, the Company acquired CMH, a media investment company that
operates in Australia, for approximately $2.2 billion which consisted of $2
billion in cash and assumed debt of approximately $235 million. CMH had a 25%
interest in Foxtel and a 50% interest in FOX SPORTS Australia. The remaining 50%
of Foxtel is owned by Telstra Corporation Limited, one of Australia's leading
telecommunications companies. The acquisition doubled the Company's stakes in
FOX SPORTS Australia and Foxtel to 100% and 50%, respectively. Accordingly, the
results of FOX SPORTS Australia are included in the Company's combined results
of operations beginning in November 2012. Prior to November 2012, the Company
accounted for its investment in FOX SPORTS Australia under the equity method of
accounting. The Company's investment in Foxtel is accounted for under the equity
method of accounting.
In December 2012, the Company acquired a 49% equity interest in the Yankees
Entertainment and Sports Network ("YES"), a RSN, for approximately $584 million
and simultaneous with the closing of this transaction the Company paid
approximately $250 million of upfront costs on behalf of YES. Under the purchase
agreement, the Company may acquire an additional stake in YES that could bring
its ownership to 80%.
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In December 2012, the Company also acquired SportsTime Ohio, a RSN serving the
Cleveland, Ohio market, for an estimated total purchase price of approximately
$270 million, of which $130 million was paid in cash. The balance of the
purchase price represents the fair value of deferred payments and payments that
are contingent upon achievement of certain performance objectives.
In January 2013, the Company reached an agreement with Sky Deutschland and its
new bank syndicate to support both a new financing structure and the issuance of
€438 million (approximately $585 million) of new equity, which includes the
outstanding €144 million (approximately $195 million) of equity under the
capital measures announced by Sky Deutschland in February 2012. Sky Deutschland
finalized the equity offering in early February 2013 and the Company acquired,
through a combination of a private placement and a rights offering,
approximately 92 million additional shares of Sky Deutschland increasing its
ownership to approximately 55%. The aggregate cost of the shares acquired by the
Company was approximately €410 million (approximately $550 million). As a result
of these transactions, the results of Sky Deutschland will be included in the
Company's consolidated results of operations in the third quarter of fiscal
2013. In addition, the Company has committed to guarantee Sky Deutschland's new
€300 million (approximately $400 million) five-year bank credit facility, which
will replace Sky Deutschland's existing bank debt facilities (to be repaid in
full). Additionally, the Company will act as guarantor to the German Football
League for Sky Deutschland's Bundesliga broadcasting license for the 2013/14 to
2016/17 seasons in an amount up to 50% of the license fee per season. The
Company has also agreed to extend the maturity of existing shareholder loans.
RESULTS OF OPERATIONS
Results of Operations-For the three and six months ended December 31, 2012
versus the three and six months ended December 31, 2011
The following table sets forth the Company's operating results for the three and
six months ended December 31, 2012 as compared to the three and six months ended
December 31, 2011.
For the three months ended For the six months ended
December 31, December 31,
2012 2011 % Change 2012 2011 % Change
(in millions, except %)
Revenues $ 9,425 $ 8,975 5 % $ 17,561 $ 16,934 4 %
Operating expenses (5,869 ) (5,583 ) 5 % (10,717 ) (10,336 ) 4 %
Selling, general and
administrative (1,666 ) (1,614 ) 3 % (3,276 ) (3,141 ) 4 %
Depreciation and amortization (310 ) (281 ) 10 % (610 ) (575 ) 6 %
Impairment and restructuring
charges (65 ) (36 ) 81 % (217 ) (127 ) 71 %
Equity earnings of affiliates 174 142 23 % 364 263 38 %
Interest expense, net (266 ) (257 ) 4 % (533 ) (515 ) 3 %
Interest income 37 29 28 % 68 65 5 %
Other, net 1,400 125 * * 2,775 (5 ) * *
Income before income tax
expense 2,860 1,500 91 % 5,415 2,563 * *
Income tax expense (402 ) (373 ) 8 % (661 ) (650 ) 2 %
Net income 2,458 1,127 * * 4,754 1,913 * *
Less: Net income attributable
to noncontrolling interests (77 ) (70 ) 10 % (140 ) (118 ) 19 %
Net income attributable to
News Corporation stockholders $ 2,381 $ 1,057 * * $ 4,614 $ 1,795 * *
** not meaningful
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Overview-The Company's revenues increased 5% and 4% for the three and six months
ended December 31, 2012, respectively, as compared to the corresponding periods
of fiscal 2012, primarily due to higher net affiliate and advertising revenues
at the Cable Network Programming segment, partially offset by decreased revenues
at the DBS segment resulting from unfavorable foreign exchange fluctuations.
Operating expenses increased 5% and 4% for the three and six months ended
December 31, 2012, respectively, as compared to the corresponding periods of
fiscal 2012, primarily due to the inclusion of expenses resulting from the
consolidations of Fox Pan American Sports ("FPAS"), FOX SPORTS Australia and Fox
Star Sports Asia and the acquisition of Thomas Nelson (the "Acquisitions") and
higher sports programming costs at the Cable Network Programming and DBS
segments. These increases were partially offset by decreased operating expenses
at the Filmed Entertainment segment resulting from lower production amortization
costs.
Selling, general and administrative expenses increased 3% and 4% for the three
and six months ended December 31, 2012, respectively, as compared to the
corresponding periods of fiscal 2012, primarily due to the Acquisitions, costs
related to the proposed separation of the Company's publishing and media and
entertainment businesses into two distinct publicly traded companies
("Separation" costs) of $23 million and $28 million, respectively, and higher
product development costs at Amplify. Also contributing to the increases for the
six months ended December 31, 2012 was an increase of approximately $20 million
in legal and professional fees related to The News of the World investigations
and litigation and costs for related civil settlements as compared to the
corresponding period of fiscal 2012.
Depreciation and amortization increased 10% and 6% for the three and six months
ended December 31, 2012, respectively, as compared to the corresponding periods
of fiscal 2012, primarily due to the Acquisitions and higher expenses at the
Publishing segment.
Impairment and restructuring charges-At the end of fiscal 2012, the Company
identified certain businesses as held for sale. During the six months ended
December 31, 2012, the Company recorded a non-cash impairment charge of $35
million related to its assets held for sale to reduce the carrying value of
these assets to estimated fair value less cost to sell.
During the three and six months ended December 31, 2012, the Company recorded
restructuring charges of approximately $65 million and $182 million,
respectively, of which $63 million and $175 million, respectively, related to
the newspaper businesses. The restructuring charges primarily relate to the
reorganization of the Australian newspaper businesses which was announced at the
end of fiscal 2012 and the continued reorganization of the U.K. newspaper
business. The restructuring charges recorded are primarily for termination
benefits in Australia and contract termination payments in the U.K.
During the three and six months ended December 31, 2011, the Company recorded
restructuring charges of $36 million and $127 million, respectively, of which
$32 million and $120 million, respectively, related to the newspaper businesses.
The Company reorganized portions of the newspaper businesses and recorded
restructuring charges primarily for termination benefits as a result of the
shutdown of The News of the World and certain organizational restructurings at
other newspapers.
Equity earnings of affiliates-Equity earnings of affiliates increased $32
million and $101 million for the three and six months ended December 31, 2012,
respectively, as compared to the corresponding periods of fiscal 2012, primarily
due to gains on the sale of a portion of the Company's British Sky Broadcasting
Group plc ("BSkyB") investment in accordance with its share repurchase program
of $131 million and $206 million, respectively, and improved results from BSkyB.
These increases were partially offset by lower contributions from Hulu LLC
("Hulu"), resulting from the redemption of Providence Equity Partners' equity
interest and by the sale of the Company's investment in NDS in July 2012.
For the three months For the six months
ended December 31, ended December 31,
2012 2011 % Change 2012 2011 % Change
(in millions, except %)
DBS equity affiliates $ 266 $ 132 * * $ 479 $ 255 88 %
Cable channel equity affiliates (22 ) (1 ) * * (18 ) (1 ) * *
Other equity affiliates (70 ) 11 * * (97 ) 9 * *
Total Equity earnings of affiliates $ 174 $ 142 23 % $ 364 $ 263 38 %
** not meaningful
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Interest expense, net-Interest expense, net increased $9 million and $18 million
for the three and six months ended December 31, 2012, respectively, as compared
to the corresponding periods of fiscal 2012, primarily due to the issuance of
$1.0 billion of 3.00% Senior Notes due 2022 in September 2012.
Other, net-
For the three months ended For the six months ended
December 31, December 31,
2012 2011 2012 2011
(in millions) (in millions)
Gain on CMH transaction(a) $ 1,245 $ - $ 1,245 $ -
Gain on Fox Star Sports Asia
transaction(a) 174 - 174 -
Change in fair value of Sky
Deutschland convertible
securities(b) 51 (7 ) 58 (89 )
Gain on sale of investment in
NDS(b) - - 1,446 -
Gain on FPAS transaction(a) - 158 - 158
BSkyB termination fee(b) - - - (63 )
Other (70 ) (26 ) (148 ) (11 )
Total Other, net $ 1,400 $ 125 $ 2,775 $ (5 )
(a) See Note 2-Acquisitions, Disposals and Other Transactions to the
accompanying unaudited consolidated financial statements.
(b) See Note 6-Investments to the accompanying unaudited consolidated financial
statements.
Income tax expense-The effective income tax rates for the three and six months
ended December 31, 2012 was 14% and 12%, respectively, which were lower than the
statutory rate of 35%, primarily due to the non-taxable gains related to the
consolidation of FOX SPORTS Australia and Fox Star Sports Asia in the three
months ended December 31, 2012. Also contributing to the difference for the six
months ended December 31, 2012 was the utilization of foreign tax credits in
connection with the NDS sale and permanent differences.
The effective income tax rate for the three and six months ended December 31,
2011 was 25% which was lower than the statutory rate of 35%, primarily due to
the non-taxable gain related to the consolidation of FPAS, the recognition of
tax benefits from the disposition of certain businesses, and permanent
differences.
Net income-Net income increased for the three and six months ended December 31,
2012 as compared to the corresponding periods of fiscal 2012, primarily due to
the gain on the CMH transaction. The increase in net income for the six months
ended December 31, 2012 was also due to the gain on the sale of the Company's
investment in NDS.
Net income attributable to noncontrolling interests-Net income attributable to
noncontrolling interests increased for the three and six months ended
December 31, 2012 as compared to the corresponding periods of fiscal 2012,
primarily due to the issuances of additional noncontrolling interests at the
Company's cable businesses.
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Segment Analysis
The following table sets forth the Company's revenues and segment operating
income (loss) for the three and six months ended December 31, 2012 as compared
to the three and six months ended December 31, 2011.
For the three months ended For the six months ended
December 31, December 31,
2012 2011 % Change 2012 2011 % Change
(in millions, except %)
Revenues:
Cable Network Programming $ 2,559 $ 2,161 18 % $ 5,008 $ 4,281 17 %
Filmed Entertainment 2,067 2,063 * * 3,812 3,841 (1 )%
Television 1,532 1,520 1 % 2,491 2,443 2 %
Direct Broadcast Satellite Television 890 947 (6 )% 1,707 1,869 (9 )%
Publishing 2,149 2,130 1 % 4,167 4,199 (1 )%
Other 228 154 48 % 376 301 25 %
Total Revenues $ 9,425 $ 8,975 5 % $ 17,561 $ 16,934 4 %
Segment operating income (loss):
Cable Network Programming $ 945 $ 882 7 % $ 1,898 $ 1,657 15 %
Filmed Entertainment 383 393 (3 )% 783 740 6 %
Television 224 189 19 % 380 322 18 %
Direct Broadcast Satellite Television (20 ) 6 * * 3 125 (98 )%
Publishing 234 218 7 % 291 328 (11 )%
Other (186 ) (191 ) (3 )% (397 ) (290 ) 37 %
Total Segment operating income $ 1,580 $ 1,497
6 % $ 2,958 $ 2,882 3 %
** not meaningful
Management believes that total segment operating income is an appropriate
measure for evaluating the operating performance of the Company's business
segments because it is the primary measure used by the Company's chief operating
decision maker to evaluate the performance and allocate resources within the
Company's businesses. Total segment operating income provides management,
investors and equity analysts a measure to analyze operating performance of each
of the Company's business segments and its enterprise value against historical
data and competitors' data, although historical results may not be indicative of
future results (as operating performance is highly contingent on many factors,
including customer tastes and preferences). The following table reconciles total
segment operating income to income before income tax expense.
For the three months ended For the six months ended
December 31, December 31,
2012 2011 2012 2011
(inmillions)
Total segment operating income $ 1,580 $ 1,497
$ 2,958 $ 2,882
Impairment and restructuring charges (65 ) (36 ) (217 ) (127 )
Equity earnings of affiliates 174 142 364 263
Interest expense, net (266 ) (257 ) (533 ) (515 )
Interest income 37 29 68 65
Other, net 1,400 125 2,775 (5 )
Income from continuing operations
before income tax expense $ 2,860 $ 1,500 $ 5,415 $ 2,563
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Cable Network Programming (28% and 25% of the Company's consolidated revenues in
the first six months of fiscal 2013 and 2012, respectively)
For the three and six months ended December 31, 2012, revenues at the Cable
Network Programming segment increased $398 million, or 18%, and $727 million, or
17%, respectively, as compared to the corresponding periods of fiscal 2012,
primarily due to higher net affiliate and advertising revenues, partially offset
by unfavorable foreign exchange fluctuations at FIC and STAR. The strengthening
of the U.S. dollar against local currencies resulted in revenue decreases of
approximately $29 million and $95 million for the three and six months ended
December 31, 2012, respectively, as compared to the corresponding periods of
fiscal 2012.
For the three and six months ended December 31, 2012, domestic net affiliate
revenues increased 13% and 15%, respectively, as compared to the corresponding
periods of fiscal 2012, primarily due to higher average rates per subscriber at
the RSNs, Fox News and FX and the launch of Fox Sports San Diego. The increases
in domestic net affiliate revenues were partially offset by higher allowances at
the RSNs as a result of the 2012-13 NHL lockout as compared to the allowances
related to the NBA lockout during the 2011-12 NBA season. Domestic advertising
revenue increased 8% for both the three and six months ended December 31, 2012,
as compared to the corresponding periods of fiscal 2012 primarily due to higher
pricing and ratings at FX and higher NBA and MLB advertising revenues at the
RSNs. Advertising revenues lost due to the NHL lockout were more than offset by
additional NBA telecasts in the current periods as compared to the corresponding
prior year periods that included the impact of the 2011-12 NBA season lockout.
International net affiliate revenues increased 42% and 34%, respectively, for
the three and six months ended December 31, 2012, as compared to the
corresponding periods of fiscal 2012, primarily due to the consolidations of
FPAS and Fox Star Sports Asia and growth in Latin America. For the three and six
months ended December 31, 2012, international advertising revenue increased 29%
and 15%, respectively, as compared to the corresponding periods of fiscal 2012,
primarily due to higher advertising revenues due to the consolidations of FPAS
and Fox Star Sports Asia and growth at STAR and FIC. The higher advertising
revenues at STAR were primarily due to the strengthening of the advertising
markets and the impact of new contracts to broadcast cricket matches in India.
The higher advertising revenues at FIC resulted primarily from improved
advertising markets in Latin America.
For the three and six months ended December 31, 2012, operating income at the
Cable Network Programming segment increased $63 million, or 7%, and $241
million, or 15%, respectively, as compared to the corresponding periods of
fiscal 2012, primarily due to the revenue increases noted above, partially
offset by $335 million and $486 million increases in expenses, respectively.
Approximately 70% of the increases in expenses for both the three and six months
ended December 31, 2012 were due to higher sports programming costs and the
inclusion of expenses from FPAS and Fox Star Sports Asia. The increase in sports
programming costs was primarily due to higher rights costs for the new cricket
contracts at Star India, mixed martial arts matches and U.S. college football
games. Also contributing to the sports programming cost increases were
additional NBA costs in the current periods as compared to the prior year
periods that included the impact of the NBA lockout. The increases in sports
programming costs were partially offset by reduced NHL rights costs resulting
from the NHL lockout in the current year. The strengthening of the U.S. dollar
against local currencies resulted in operating profit decreases of approximately
$14 million and $41 million for the three and six months ended December 31,
2012, respectively, as compared to the corresponding periods of fiscal 2012.
Filmed Entertainment (22% and 23% of the Company's consolidated revenues in the
first six months of fiscal 2013 and 2012, respectively)
For the three months ended December 31, 2012, revenues at the Filmed
Entertainment segment increased $4 million as compared to the corresponding
period of fiscal 2012, primarily due to higher worldwide theatrical revenues,
partially offset by lower television production revenues. The increase in
worldwide theatrical revenues was a result of the success of Taken 2 and Life of
Pi. The decrease in television production revenues was due to a decrease in the
number of shows delivered internationally and lower syndication and digital
distribution revenues. For the six months ended December 31, 2012, revenues at
the Filmed Entertainment segment decreased $29 million as compared to the
corresponding period of fiscal 2012, primarily due to the television production
revenue decreases noted above and lower home entertainment revenues due to the
success of Rio, X-Men: First Class and Rise of the Planet of the Apes in the
corresponding period of fiscal 2012 and lower licensing revenues from Avatar.
These decreases were partially offset by increased revenue from the theatrical
and home entertainment success of Ice Age: Continental Drift and the theatrical
success of Taken 2 and Life of Pi and higher digital distribution revenues in
the six months ended December 31, 2012.
For the three months ended December 31, 2012, the Filmed Entertainment segment's
operating income decreased $10 million, or 3%, as compared to the corresponding
period of fiscal 2012, primarily due to higher releasing costs, partially offset
by the revenue increases noted above. For the six months ended December 31,
2012, the Filmed Entertainment segment's operating income increased $43 million,
or 6%, as compared to the corresponding period of fiscal 2012, primarily due to
lower production amortization costs partially offset by the revenue decreases
noted above.
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Television (14% of the Company's consolidated revenues in the first six months
of fiscal 2013 and 2012)
For the three and six months ended December 31, 2012, revenues at the Television
segment increased $12 million and $48 million, respectively, as compared to the
corresponding periods of fiscal 2012, primarily due to higher retransmission
consent revenues. Advertising revenues for the three and six months ended
December 31, 2012 decreased as a result of lower primetime ratings and lower MLB
revenues due to the broadcast of three fewer World Series games in the current
year. These decreases were partially offset by higher political advertising
revenues at the Company's television stations due to the 2012 election. The
absence of the Emmy® Awards, which was broadcast on FOX in fiscal 2012, and the
broadcast of the Summer Olympics on a different network also impacted
advertising revenues for the six months ended December 31, 2012.
For the three and six months ended December 31, 2012, operating income at the
Television Segment increased $35 million, or 19%, and $58 million, or 18%,
respectively, as compared to the corresponding period of fiscal 2012, primarily
due to the revenue increases noted above and lower programming costs.
Direct Broadcast Satellite Television (10% and 11% of the Company's consolidated
revenues in the first six months of fiscal 2013 and 2012, respectively)
For the three and six months ended December 31, 2012, SKY Italia's revenues
decreased $57 million and $162 million, respectively, as compared to the
corresponding periods of fiscal 2012, primarily due to the strengthening of the
U.S. dollar against the Euro which resulted in decreases in revenues of
approximately $35 million and $142 million, respectively. For the six months
ended December 31, 2012, higher subscription revenues partially offset these
revenue decreases.
SKY Italia had a net decrease of approximately 28,000 subscribers during the
second quarter of fiscal 2013, which reduced SKY Italia's total subscriber base
to 4.8 million at December 31, 2012, reflecting the continued challenging
economic environment in Italy. The total churn for the three months ended
December 31, 2012 was approximately 161,000 subscribers on an average subscriber
base of 4.8 million, as compared to churn of approximately 153,000 subscribers
on an average subscriber base of 5 million in the corresponding period of fiscal
2012. Subscriber churn for the period represents the number of SKY Italia
subscribers whose service was disconnected during the period.
Average revenue per subscriber ("ARPU") of approximately €42 in the three and
six months ended December 31, 2012, increased from approximately €41 in the
corresponding periods of fiscal 2012, primarily due to a price increase. SKY
Italia calculates ARPU by dividing total subscriber-related revenues for the
period by the average subscribers for the period and dividing that amount by the
number of months in the period. Subscriber-related revenues are comprised of
total subscription revenue, pay-per-view revenue and equipment rental revenue
for the period. Average subscribers are calculated for the respective periods by
adding the beginning and ending subscribers for the period and dividing by two.
Subscriber acquisition costs per subscriber ("SAC") of approximately €460 in the
second quarter of fiscal 2013 increased from approximately €430 in the
corresponding period of fiscal 2012, primarily due to higher marketing costs on
a per subscriber basis, although total marketing expense was flat as compared to
the corresponding prior period. SAC is calculated by dividing total subscriber
acquisition costs for a period by the number of gross SKY Italia subscribers
added during the period. Subscriber acquisition costs include the cost of the
commissions paid to retailers and other distributors, the cost of equipment sold
directly by SKY Italia to subscribers and the costs related to installation and
acquisition advertising net of any upfront activation fee. SKY Italia excludes
the value of equipment capitalized under SKY Italia's equipment lease program,
as well as payments and the value of returned equipment related to disconnected
lease program subscribers from subscriber acquisition costs.
For the three and six months ended December 31, 2012, SKY Italia's operating
results decreased $26 million and $122 million, respectively, as compared to the
corresponding periods of fiscal 2012. On a local currency basis, expenses were
higher by approximately 1% and 6% for the three and six months ended
December 31, 2012, respectively, as compared to the corresponding period of
fiscal 2012, primarily due to higher sports programming costs resulting from
expanded UEFA League coverage. Also contributing to the expense increase for the
six months ended December 31, 2012 was the inclusion of $70 million in rights
cost associated with the broadcast of the Summer Olympics. During the three and
six months ended December 31, 2012, the strengthening of the U.S. dollar against
the Euro did not have a material impact on operating results.
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Publishing (24% and 25% of the Company's consolidated revenues in the first six
months of fiscal 2013 and 2012, respectively)
For the three months ended December 31, 2012, revenues at the Publishing segment
increased $19 million as compared to the corresponding period of fiscal 2012,
primarily due to higher revenues at the U.K. newspapers and at the book
publishing business. The increase at the U.K. newspapers was primarily due to
the launch of the Sunday edition of The Sun in February 2012 and third party
printing contracts and the increase at the book publishing business was
primarily due to the inclusion of revenues from Thomas Nelson which was acquired
in July 2012. These increases were partially offset by lower newspaper
advertising revenues primarily reflecting the continued challenging economic
environment in Australia.
For the six months ended December 31, 2012, revenues at the Publishing segment
decreased $32 million as compared to the corresponding period of fiscal 2012,
primarily due to lower advertising revenues. This decrease was partially offset
by higher revenues at the U.K. newspapers, primarily due to the launch of the
Sunday edition of The Sun in February 2012 and third party printing contracts,
and from the inclusion of revenues from Thomas Nelson.
The weakening of the U.S. dollar against local currencies resulted in revenue
increases of approximately $25 million and $9 million for the three and six
months ended December 31, 2012, respectively, as compared to the corresponding
periods of fiscal 2012.
For the three months ended December 31, 2012, operating income at the Publishing
segment increased $16 million, or 7%, as compared to the corresponding period of
fiscal 2012, primarily due to the revenue increases noted above and cost savings
initiatives partially offset by the inclusion of expenses from the acquisition
of Thomas Nelson and higher depreciation and amortization expense. For the six
months ended December 31, 2012, operating income at the Publishing segment
decreased $37 million, or 11%, as compared to the corresponding period of fiscal
2012, primarily due to the revenue decreases noted above and the inclusion of
expenses from the acquisition of Thomas Nelson, higher depreciation and
amortization expense partially offset by cost savings initiatives.
Other (2% of the Company's consolidated revenues in the first six months of
fiscal 2013 and 2012)
For the three and six months ended December 31, 2012, revenues at the Other
segment increased $74 million, or 48%, and $75 million, or 25%, respectively, as
compared to the corresponding periods of fiscal 2012, primarily due to the
consolidation of FOX SPORTS Australia, higher online advertising revenues at REA
and higher revenues at Amplify. These increases in revenues were partially
offset by the absence of revenues from News Outdoor which was sold in fiscal
2012.
For the three months ended December 31, 2012, operating losses at the Other
segment decreased $5 million as compared to the corresponding period of fiscal
2012 primarily due to lower legal and professional fees related to The News of
the World investigations and litigation and costs for related civil settlements
and the revenue increases noted above, partially offset by the Separation costs
and higher product development costs at Amplify. Operating losses for the six
months ended December 31, 2012 increased $107 million, or 37%, as compared to
the corresponding period of fiscal 2012, primarily due to higher product
development costs at Amplify, the Separation costs and higher legal and
professional fees related to The News of the World investigations and litigation
and costs for related civil settlements as compared to the corresponding period
of fiscal 2012. The increase in operating losses for the six months ended
December 31, 2012 was partially offset by the revenue increases noted above.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
The Company's principal source of liquidity is internally generated funds. The
Company also has a five-year unused $2 billion revolving credit facility, which
expires in May 2017, and has access to various film co-production alternatives
to supplement its cash flows. In addition, the Company has access to the
worldwide capital markets, subject to market conditions. As of December 31,
2012, the Company was in compliance with all of the covenants under the
revolving credit facility, and it does not anticipate any violation of such
covenants. The Company's internally generated funds are highly dependent upon
the state of the advertising markets and public acceptance of its film and
television products.
The principal uses of cash that affect the Company's liquidity position include
the following: investments in the production and distribution of new feature
films and television programs; the acquisition of and payments under programming
rights for entertainment and sports programming; paper purchases; operational
expenditures including employee costs; capital expenditures; interest expenses;
income tax payments; investments in associated entities; dividends;
acquisitions; debt repayments; and stock repurchases. The capitalization of the
global publishing company that would be created through the proposed separation
of the Company's publishing and media and entertainment businesses into two
distinct publicly traded companies may affect the Company's liquidity position.
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In addition to the acquisitions, sales and possible acquisitions disclosed
elsewhere, the Company has evaluated, and expects to continue to evaluate,
possible acquisitions and dispositions of certain businesses. Such transactions
may be material and may involve cash, the Company's securities or the assumption
of additional indebtedness.
Sources and Uses of Cash
Net cash provided by operating activities for the six months ended December 31,
2012 and 2011 was as follows (in millions):
For the six months ended December 31, 2012 2011
Net cash provided by operating activities $ 971 $ 596
The increase in net cash provided by operating activities during the six months
ended December 31, 2012 as compared to the corresponding period of fiscal 2012
primarily reflects higher receipts at the Cable Network Programming segment due
to higher affiliate receipts, lower sports rights payments at the DBS segment,
higher advertising receipts at the Television segment and lower income taxes
paid. These increases were partially offset by lower advertising receipts at the
Publishing segment and higher production spending at the Filmed Entertainment
segment.
Net cash used in investing activities for the six months ended December 31, 2012
and 2011 was as follows (in millions):
For the six months ended December 31, 2012 2011
Net cash used in investing activities $ (1,996 ) $ (847 )
The increase in net cash used in investing activities during the six months
ended December 31, 2012 as compared to the corresponding period of fiscal 2012
was primarily due to cash utilized for the Acquisitions and net equity
investments partially offset by the net cash proceeds received from the sale of
NDS.
Net cash used in financing activities for the six months ended December 31, 2012
and 2011 was as follows (in millions):
For the six months ended December 31, 2012 2011
Net cash used in financing activities $ (840 ) $ (2,799 )
The decrease in net cash used in financing activities during the six months
ended December 31, 2012 as compared to the corresponding period of fiscal 2012
was primarily due to lower share repurchases in the current period and higher
net borrowings.
The Company currently has approximately $4.0 billion remaining of the $10.0
billion stock repurchase program. The Company may repurchase the remaining
amount under the stock repurchase program in fiscal 2013 and expects to fund
this through a combination of cash generated by operations and cash on hand.
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Debt Instruments
The following table summarizes borrowings and repayment of borrowings for the
six months ended December 31, 2012 and 2011.
For the six months
ended December 31,
2012 2011
(in millions)
Borrowings:
Notes due September 2022(a) 987 -
Total borrowings $ 987 $ -
Repayment of borrowings:
Bank loans(a) - (32 )
All other(b) (235 ) -
Total repayment of borrowings $ (235 ) $ (32 )
(a) See Note 9-Borrowings to the accompanying unaudited consolidated financial
statements for further discussion.
(b) Debt acquired in the CMH transaction. See Note 2-Acquisitions, Disposals and
Other Transactions to the accompanying unaudited consolidated financial
statements for further discussion.
Ratings of the Public Debt
The table below summarizes the Company's credit ratings as of December 31, 2012.
Rating Agency Senior Debt Outlook
Moody's Baa1 Stable
S&P BBB+ Stable
Revolving Credit Agreement
In May 2012, NAI entered into a credit agreement (the "Credit Agreement"), among
NAI as Borrower, the Company as Parent Guarantor, the lenders named therein, the
initial issuing banks named therein, JPMorgan Chase Bank, N.A. ("JPMorgan
Chase") and Citibank, N.A. as Co-Administrative Agents, JPMorgan Chase as
Designated Agent and Bank of America, N.A. as Syndication Agent. The Credit
Agreement provides a $2 billion unsecured revolving credit facility with a
sub-limit of $400 million (or its equivalent in Euros) available for the
issuance of letters of credit and a maturity date of May 2017. Under the Credit
Agreement, the Company may request an increase in the amount of the credit
facility up to a maximum amount of $2.5 billion and the Company may request that
the maturity date be extended for up to two additional one-year
periods. Borrowings are issuable in U.S. dollars only, while letters of credit
are issuable in U.S. dollars or Euros. The significant terms of the agreement
include the requirement that the Company maintain specific leverage ratios and
limitations on secured indebtedness. Fees under the Credit Agreement will be
based on the Company's long-term senior unsecured non-credit enhanced debt
ratings. Given the current debt ratings, NAI pays a facility fee of 0.125% and
an initial drawn cost of LIBOR plus 1.125%.
Commitments
The Company has commitments under certain firm contractual arrangements ("firm
commitments") to make future payments. These firm commitments secure the future
rights to various assets and services to be used in the normal course of
operations. The total firm commitments and future debt payments as of
December 31, 2012 and June 30, 2012 were $76,907 million and $63,644 million,
respectively. The increase from June 30, 2012 was primarily due to the
businesses acquired during the six months ended December 31, 2012, the renewal
of rights for MLB and NASCAR and the issuance of 3.00% Senior Notes due 2022.
Guarantees
The Company also has certain contractual arrangements in relation to certain
investees that would require the Company to make payments or provide funding if
certain circumstances occur ("contingent guarantees"). The Company does not
expect that these
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contingent guarantees will result in any material amounts being paid by the
Company in the foreseeable future. The total contingent guarantees decreased 6%
as of December 31, 2012 as compared to June 30, 2012 due to the acquisition
of 50% of Fox Star Sports Asia that the Company did not own partially offset by
an additional guarantee issued to Hulu as noted below.
In October 2012, Hulu redeemed Providence Equity Partners' equity interest for
$200 million. In connection with the transaction, Hulu incurred a charge
primarily related to employee equity-based compensation. Accordingly, the
Company recorded approximately $60 million to reflect its share of the charge in
the second quarter of fiscal 2013. The Company has guaranteed $115 million of
Hulu's $338 million five-year term loan which was used by Hulu, in part, to
finance the transaction. The fair value of this guarantee was calculated using
level 3 inputs and was included in the consolidated balance sheet in other
liabilities. As of December 31, 2012 the Company owns 34% of Hulu and continues
to account for its interest in Hulu as an equity method investment.
Contingencies
Other than as disclosed in the notes to the accompanying unaudited consolidated
financial statements, the Company is party to several other purchase and sale
arrangements which become exercisable over the next ten years by the Company or
the counter-party to the agreement. None of these arrangements that become or
are exercisable in the next twelve months are material. Purchase arrangements
that are exercisable by the counter-party to the agreement, and that are outside
the sole control of the Company, are accounted for in accordance with ASC
480-10-S99-3A, "Distinguishing Liabilities from Equity." Accordingly, the fair
values of such purchase arrangements are classified in redeemable noncontrolling
interests.
As disclosed in the notes to the accompanying unaudited consolidated financial
statements, U.K. and U.S. regulators and governmental authorities are conducting
investigations after allegations of phone hacking and inappropriate payments to
public officials at our former publication, The News of the World, and other
related matters, including investigations into whether similar conduct may have
occurred at the Company's subsidiaries outside of the U.K. The Company is
cooperating with these investigations. It is possible that these proceedings
could damage our reputation and might impair our ability to conduct our
business.
The Company is not able to predict the ultimate outcome or cost associated with
these investigations. Violations of law may result in civil, administrative or
criminal fines or penalties. The Company has admitted liability in a number of
civil cases related to the phone hacking allegations and has settled a number of
cases. At December 31, 2012, the Company has provided for its best estimate of
the liability for the claims that have been filed. The Company has announced a
process under which parties can pursue claims against the Company, and
management believes that it is probable that additional claims will be filed. It
is not possible to estimate the liability for such additional claims given the
information that is currently available to the Company. If more claims are filed
and additional information becomes available, the Company will update the
liability provision for such matters. Any fees, expenses, fines, penalties,
judgments or settlements which might be incurred by the Company in connection
with the various proceedings could affect the Company's results of operations
and financial condition.
The Company's operations are subject to tax in various domestic and
international jurisdictions and as a matter of course, the Company is regularly
audited by federal, state and foreign tax authorities. The Company believes it
has appropriately accrued for the expected outcome of all pending tax matters
and does not currently anticipate that the ultimate resolution of pending tax
matters will have a material adverse effect on its consolidated financial
condition, future results of operations or liquidity.
Intangible Assets
The Company has a significant amount of intangible assets, including goodwill,
FCC licenses, and other copyright products and trademarks. Intangible assets
acquired in business combinations are recorded at their estimated fair value at
the date of acquisition. Goodwill is recorded as the difference between the cost
of acquiring an entity and the estimated fair values assigned to its tangible
and identifiable intangible net assets and is assigned to one or more reporting
units for purposes of testing for impairment. The judgments made in determining
the estimated fair value assigned to each class of intangible assets acquired,
their reporting unit, as well as their useful lives can significantly impact net
income.
The Company accounts for its business acquisitions under the purchase method of
accounting. The total cost of acquisitions is allocated to the underlying net
assets, based on their respective estimated fair values. The excess of the
purchase price over the estimated fair values of the tangible net assets
acquired is recorded as intangibles. Amounts recorded as goodwill are assigned
to one or more reporting units. Determining the fair value of assets acquired
and liabilities assumed requires management's judgment and often involves the
use of significant estimates and assumptions, including assumptions with respect
to future cash inflows and outflows, discount rates, asset lives and market
multiples, among other items. Identifying reporting units and assigning goodwill
to them requires judgment involving the aggregation of business units with
similar economic characteristics and the identification of existing business
units that benefit from the acquired goodwill. The Company allocates goodwill to
disposed businesses using the relative fair value method.
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Carrying values of goodwill and intangible assets with indefinite lives are
reviewed at least annually for possible impairment in accordance with ASC 350,
"Intangibles-Goodwill and Other." The Company's impairment review is based on,
among other methods, a discounted cash flow approach that requires significant
management judgments. The Company uses its judgment in assessing whether assets
may have become impaired between annual valuations. Indicators such as
unexpected adverse economic factors, unanticipated technological change or
competitive activities, loss of key personnel and acts by governments and
courts, may signal that an asset has become impaired.
The Company uses direct valuation methods to value identifiable intangibles for
purchase accounting and impairment testing. The direct valuation method used for
FCC licenses requires, among other inputs, the use of published industry data
that are based on subjective judgments about future advertising revenues in the
markets where the Company owns television stations. This method also involves
the use of management's judgment in estimating an appropriate discount rate
reflecting the risk of a market participant in the U.S. broadcast industry. The
resulting fair values for FCC licenses are sensitive to these long-term
assumptions and any variations to such assumptions could result in an impairment
to existing carrying values in future periods and such impairment could be
material.
The Company's goodwill impairment reviews are determined using a two-step
process. The first step of the process is to compare the fair value of a
reporting unit with its carrying amount, including goodwill. In performing the
first step, the Company determines the fair value of a reporting unit by
primarily using a discounted cash flow analysis and market-based valuation
approach methodologies. Determining fair value requires the exercise of
significant judgments, including judgments about appropriate discount rates,
long-term growth rates, relevant comparable company earnings multiples and the
amount and timing of expected future cash flows. The cash flows employed in the
analyses are based on the Company's estimated outlook and various growth rates
have been assumed for years beyond the long-term business plan period. Discount
rate assumptions are based on an assessment of the risk inherent in the future
cash flows of the respective reporting units. In assessing the reasonableness of
its determined fair values, the Company evaluates its results against other
value indicators, such as comparable public company trading values. If the fair
value of a reporting unit exceeds its carrying amount, goodwill of the reporting
unit is not impaired and the second step of the impairment review is not
necessary. If the carrying amount of a reporting unit exceeds its fair value,
the second step of the goodwill impairment review is required to be performed to
estimate the implied fair value of the reporting unit's goodwill. The implied
fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. That is, the estimated fair value
of the reporting unit is allocated to all of the assets and liabilities of that
unit (including any unrecognized intangible assets) as if the reporting unit had
been acquired in a business combination and the estimated fair value of the
reporting unit was the purchase price paid. The implied fair value of the
reporting unit's goodwill is compared with the carrying amount of that goodwill.
If the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess.
As a result of the fiscal 2012 annual impairment review performed, the Company
recorded non-cash impairment charges of approximately $2.8 billion ($2.4
billion, net of tax) during the fiscal year ended June 30, 2012. The charges
consisted of a write-down of goodwill of $1.5 billion and a write-down of
indefinite-lived intangible assets of $1.3 billion. The Publishing and Other
segments have reporting units with goodwill that continue to be at risk for
future impairment. Goodwill was $2.2 billion as of December 31, 2012 at these
reporting units where goodwill is at risk for future impairment with fair values
that exceed their carrying values by less than 10%. The Company will continue to
monitor its goodwill and intangible assets for possible future impairment.
Recent Accounting Pronouncements
See Note 1-Basis of Presentation to the accompanying unaudited consolidated
financial statements for discussion of recent accounting pronouncements.
60--------------------------------------------------------------------------------
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