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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, including the following discussion and analysis, contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended. All statements that are not statements of historical fact are forward-looking statements. 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 discussion and analysis and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, trends affecting the Company's financial condition or results of operations and the outcome of contingencies such as litigation and investigations. Readers 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 important factors that could cause actual results to differ materially from those in the forward-looking statements is set forth under the heading "Risk Factors" in Part II, Item 1A in this Quarterly Report on Form 10-Q. The Company 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 the Company with the Securities and Exchange Commission (the "SEC"). This section should be read together with the unaudited Consolidated and Combined 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, 2013 as filed with the SEC on September 20, 2013 (the "2013 Form 10-K"). INTRODUCTION News Corporation (together with its subsidiaries, "News Corporation" or the "Company") is a global diversified media and information services company comprised of businesses across a range of media, including: news and information services, cable network programming in Australia, digital real estate services, book publishing, digital education and pay-TV distribution in Australia. The Separation and Distribution On June 28, 2013 (the "Distribution Date"), the Company completed the separation of its businesses (the "Separation") from Twenty-First Century Fox, Inc. ("21st Century Fox"). As of the effective time of the Separation, all of the outstanding shares of the Company were distributed to 21st Century Fox stockholders based on a distribution ratio of one share of Company Class A or Class B Common Stock for every four shares of 21st Century Fox Class A or Class B Common Stock, respectively, held of record as of June 21, 2013 (the "Record Date"). Following the Separation, the Company's Class A and Class B Common Stock began trading independently on The NASDAQ Global Select Market ("NASDAQ"), and CHESS Depository Interests representing the Company's Class A and Class B Common Stock began trading on the Australian Securities Exchange ("ASX"). In connection with the Separation, the Company entered into the Separation and Distribution Agreement (the "Separation and Distribution Agreement") and certain other related agreements which govern the Company's relationship with 21st Century Fox following the Separation. (See Note 9 to the unaudited Consolidated and Combined Financial Statements of News Corporation for further information). Subsequent to the Distribution Date, the Company's financial statements as of June 30, 2013 and as of and for the three and six months ended December 31, 2013 are presented on a consolidated basis, as the Company became a separate consolidated group on June 28, 2013. The Company's consolidated statements of operations for the three and six months ended December 31, 2013 reflect the Company's operations as a stand-alone company. The Company's consolidated balance sheets as of June 30, 2013 and December 31, 2013 consist of the Company's consolidated balances, subsequent to the Separation. Prior to the Separation, the Company's combined financial statements were prepared on a stand-alone basis derived from the consolidated financial statements and accounting records of 21st Century Fox. The Company's financial statements for the three and six months ended December 31, 2012 were prepared on a combined basis and presented as carve-out financial statements, as the Company was not a separate consolidated group prior to the Distribution Date. These statements reflect the combined historical results of operations and cash flows of 21st Century Fox's publishing businesses, its education division and other Australian assets. 32 -------------------------------------------------------------------------------- Table of Contents Prior to the Separation, the Company's combined statements of operations included allocations of general corporate expenses for certain support functions that were provided on a centralized basis by 21st Century Fox and not recorded at the business unit level, such as expenses related to finance, human resources, information technology, facilities, and legal, among others. These expenses were allocated to the Company on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of combined revenues, operating income, headcount or other measures of the Company. Management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocating general corporate expenses from 21st Century Fox, are reasonable. Nevertheless, the combined financial statements may not include all of the actual expenses that would have been incurred by the Company and may not reflect the Company's combined results of operations and cash flows had it been a stand-alone company during the periods presented. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. The consolidated and combined financial statements will be referred to as the "Financial Statements" herein. The consolidated and combined statements of operations will be referred to as the "Statements of Operations" herein. The consolidated balance sheets will be referred to as the "Balance Sheets" herein. The Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). For purposes of the Company's Financial Statements for periods prior to the Separation, income tax expense was recorded as if the Company filed tax returns on a stand-alone basis separate from 21st Century Fox. This separate return methodology applies the accounting guidance for income taxes to the stand-alone financial statements as if the Company was a stand-alone enterprise for the periods prior to the Distribution Date. Therefore, cash tax payments for periods prior to the Separation may not be reflective of the Company's actual tax balances. Prior to the Separation, the Company's operating results were included in 21st Century Fox's consolidated U.S. federal and state income tax returns. The calculation of the Company's income taxes involves considerable judgment and the use of both estimates and allocations. Management's discussion and analysis of financial condition and results of operations is intended to help provide an understanding of News Corporation's 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 2014 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, 2013 and 2012. This analysis is presented on both a consolidated or combined basis 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, 2013 and 2012 as well as a discussion of the Company's financial arrangements and outstanding commitments, both firm and contingent, that existed as of December 31, 2013. 33 -------------------------------------------------------------------------------- Table of Contents OVERVIEW OF THE COMPANY'S BUSINESSES The Company manages and reports its businesses in the following five segments: • News and Information Services-The News and Information Services segment includes the global product offerings of The Wall Street Journal and Barron's publications, The Wall Street Journal Digital Network ("WSJDN"), and the Company's suite of information services, including DJX, Dow Jones Newswires and Factiva. In addition to WSJ.com and Barrons.com, WSJDN includes MarketWatch, WSJ.D and related services. The Company also owns, among other publications, The Australian, The Daily Telegraph, Herald Sun and The Courier Mail in Australia, The Times, The Sunday Times, The Sun and The Sun on Sunday in the U.K. and the New York Post in the U.S. This segment also includes the integrated marketing services business, News America Marketing ("NAM"), a leading provider of free-standing coupon inserts, in-store marketing products and digital marketing solutions. NAM's customers include many of the largest consumer packaged goods advertisers in the U.S. and Canada. • Cable Network Programming-The Cable Network Programming segment consists of FOX SPORTS Australia, the leading sports programming provider in Australia with seven standard definition television channels, high definition versions of five of these channels, an interactive viewing application, several IPTV channels and broadcast rights to live sporting events in Australia including: National Rugby League, the domestic football league, English Premier League, international cricket as well as the National Football League ("NFL"). Prior to the November 2012 acquisition of the portion of FOX SPORTS Australia that it did not own, the Company accounted for its investment in FOX SPORTS Australia under the equity method of accounting. The Company now owns 100% of FOX SPORTS Australia and its results are included within this segment. • Digital Real Estate Services-The Company owns 61.6% of REA Group Limited ("REA Group"), a publicly traded company listed on the ASX (ASX: REA) that is a leading digital advertising business specializing in real estate services. REA Group operates Australia's largest residential property website, realestate.com.au, as well as Australia's leading commercial property website, realcommercial.com.au. REA Group also operates a market-leading Italian property site, casa.it, and other property sites and apps in Europe and Hong Kong. • Book Publishing-The Book Publishing segment consists of HarperCollins which is one of the largest English-language consumer publishers in the world, with particular strengths in general fiction, nonfiction, children's and religious publishing, and an industry leader in digital publishing. HarperCollins includes over 60 branded publishing imprints including Avon, Harper, HarperCollins Children's Publishers, William Morrow and Christian publishers Zondervan and Thomas Nelson, and publishes works by well-known authors such as J.R.R. Tolkien, Paulo Coelho, Rick Warren and Agatha Christie and popular titles such as The Hobbit, Goodnight Moon and To Kill a Mockingbird. • Other-The Other segment consists primarily of Amplify, the corporate Strategy and Creative Group, general corporate overhead expenses and costs related to the U.K. Newspaper Matters. Amplify focuses on three areas of business: data and analytics; digital curriculum; and distribution platforms for education. The Company's corporate Strategy and Creative Group was formed to identify new products and services across its businesses to increase revenues and profitability and to target and assess potential acquisitions and investments. News and Information Services Revenue at the News and Information Services segment is derived from the sale of advertising space, circulation and subscriptions, as well as licensing. Adverse changes in general market conditions for advertising may continue to 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 and commissions. Selling, general and administrative expenses include promotional expenses, salaries, employee benefits, rent and other routine overhead. 34 -------------------------------------------------------------------------------- Table of Contents The News and Information Services 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 News and Information Services 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, pricing and, from time to time, various promotions. The success of these products also 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. Like other newspaper 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 overall 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 continued opportunities for the Company to make its journalism available 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 implementation of digital subscriptions. Cable Network Programming The Cable Network Programming segment consists of FOX SPORTS Australia which offers the following channels: FOX SPORTS 1, FOX SPORTS 2, FOX SPORTS 3, FOX FOOTY, FOX SPORTS NEWS, FUEL TV and SPEED. Revenue is derived from monthly affiliate fees received from cable and satellite television systems and other distribution systems based on the number of subscribers. FOX SPORTS Australia competes primarily with ESPN, the FTA channels and certain telecommunications companies in Australia. The most significant operating expenses of 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 broadcast operations. Other expenses include marketing and promotional expenses related to improving the market visibility and awareness of the channels and their programming. Additional expenses include salaries, employee benefits, rent and other routine overhead expenses. Digital Real Estate Services The Digital Real Estate Services segment sells online advertising services on its residential real estate and commercial property sites. Significant expenses associated with these sites include development costs, advertising and promotional expenses, salaries, employee benefits and other routine overhead expenses. Consumers are increasingly turning to the Internet and mobile devices for real estate information. The Digital Real Estate Services segment's success depends on its continued innovation to provide products and services that make its websites and mobile applications useful for consumers and real estate and mortgage professionals and attractive to its advertisers. Book Publishing The Book Publishing segment derives revenues from the sale of general fiction, nonfiction, children's and religious books in the U.S. and internationally. The revenues and operating results of the Book Publishing segment are significantly affected by the timing of releases and the number of its books in the marketplace. The book publishing marketplace is subject to increased periods of demand in the summer months and during the end-of-year holiday season. This marketplace continues to change due to technical innovations, electronic book devices and other factors. Each book is a separate and distinct product, and its financial success depends upon many factors, including public acceptance. 35-------------------------------------------------------------------------------- Table of Contents Major new title releases represent a significant portion of the Book Publishing segment's sales throughout the fiscal year. Print-based consumer books are generally sold on a fully returnable basis, resulting in the return of unsold books. In the domestic and international markets, the Book Publishing segment is subject to global trends and local economic conditions. Operating expenses for the Book Publishing segment include costs related to paper, printing, authors' royalties, editorial, promotional, art and design expenses. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead. The book publishing business has been affected in recent years by new electronic distribution methods and models and the Company expects that electronic books ("e-books") will represent an increasing portion of book publishing revenues in coming years. Other The Other segment primarily consists of Amplify, the corporate Strategy and Creative Group, general corporate overhead expenses and costs related to the U.K. Newspaper Matters. Amplify, the Company's digital education business concentrating on the K-12 learning market, is focused on transforming teaching and learning by creating and scaling digital innovations in three areas: • Amplify Insight, Amplify's data and analytics division, which formerly operated under the brand Wireless Generation, Inc. ("Wireless Generation"), commenced operations in 2000 and was acquired in fiscal 2011. Amplify Insight provides powerful assessment products and services to support staff and technology development, including student assessment tools and analytic technologies, intervention programs, enterprise education information systems, and professional development and consulting services. • Amplify Learning, Amplify's nascent digital curriculum business, is developing new content in English Language Arts, Science and Math, including software that will combine interactive, game-like experiences with rigorous analytics, all driven by adaptive technologies that respond to individual students' needs as they evolve. Amplify Learning's curriculum will incorporate the new Common Core State Standards that are expected to be implemented in 45 states beginning with the 2014-2015 school year. • Amplify Access, Amplify's distribution platform business, is developing new distribution and delivery mechanisms. This consists of an open tablet-based distribution platform that will offer software features to facilitate classroom instructions, curated curricular and extracurricular content, sophisticated analytic capabilities, and a tablet, through a subscription-based bundle optimized for the K-12 market to facilitate personalized instruction and enable anywhere, anytime learning. Significant expenses associated with the Company's digital education business include salaries, employee benefits and other routine overhead. The Company's corporate Strategy and Creative group was formed to identify new products and services across the Company's businesses to increase revenues and profitability and to target and assess potential acquisitions and investments. Other Business Developments In September 2013, the Company sold the Dow Jones Local Media Group, which operated eight daily and 15 weekly newspapers in seven states. In December 2013, the Company acquired Storyful Limited ("Storyful"), a social news agency, for approximately $25 million, of which $19 million was in cash, with the remainder primarily related to an earn-out that is contingent upon the achievement of certain performance objectives. The Storyful acquisition complements the Company's existing video capabilities, including the creation and distribution of original and on-demand programming such as WSJ Live and BallBall. 36 -------------------------------------------------------------------------------- Table of Contents The Company recently entered into new multi-year supply agreements for newsprint and ink, which are expected to yield cost savings over the lives of the agreements. Under the agreements, the Company expects that the new contracts will yield an EBITDA improvement from cost savings of approximately $30 million over the remainder of fiscal 2014 and in fiscal 2015, combined. RESULTS OF OPERATIONS Results of Operations-For the three and six months ended December 31, 2013 versus the three and six months ended December 31, 2012 The following table sets forth the Company's operating results for the three and six months ended December 31, 2013 as compared to the three and six months ended December 31, 2012. For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Revenues: Advertising $ 1,080 $ 1,163 $ (83 ) (7 )% $ 2,038 $ 2,204 $ (166 ) (8 )% Circulation and Subscription 661 654 7 1 % 1,340 1,262 78 6 % Consumer 377 346 31 9 % 688 672 16 2 % Other 120 158 (38 ) (24 )% 244 316 (72 ) (23 )% Total Revenues 2,238 2,321 (83 ) (4 )% 4,310 4,454 (144 ) (3 )% Operating expenses (1,274 ) (1,352 ) 78 (6 )% (2,569 ) (2,686 ) 117 (4 )% Selling, general and administrative (637 ) (669 ) 32 (5 )% (1,273 ) (1,379 ) 106 (8 )% Depreciation and amortization (138 ) (129 ) (9 ) 7 % (279 ) (254 ) (25 ) 10 % Impairment and restructuring charges (36 ) (62 ) 26 (42 )% (63 ) (177 ) 114 (64 )% Equity earnings of affiliates 17 28 (11 ) (39 )% 30 54 (24 ) (44 )% Interest, net 16 18 (2 ) (11 )% 33 29 4 14 % Other, net (231 ) 1,252 (1,483 ) * * (672 ) 1,255 (1,927 ) * * (Loss) income before income tax benefit (45 ) 1,407 (1,452 ) * * (483 ) 1,296 (1,779 ) * * Income tax benefit 211 4 207 * * 687 32 655 * * Net income 166 1,411 (1,245 ) (88 )% 204 1,328 (1,124 ) (85 )% Less: Net income attributable to noncontrolling interests (15 ) (12 ) (3 ) 25 % (26 ) (21 ) (5 ) 24 % Net income attributable to News Corporation $ 151 $ 1,399 $ (1,248 ) (89 )% $ 178 $ 1,307 $ (1,129 ) (86 )% ** not meaningful Revenues-Revenues decreased 4% and 3% for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The revenue decreases were mainly due to lower revenues at the News and Information Services segment of $160 million and $331 million for the three and six months ended December 31, 2013, respectively, resulting from lower revenues at the Australian newspapers, reflecting the continued challenging economic environment; the impact of foreign currency fluctuations; and lower revenues at Dow Jones, primarily from the disposal of the Dow Jones Local Media Group, lower Institutional product revenues and lower other revenues. The revenue decreases for the three and six months ended December 31, 2013 were also due to revenue decreases at the Other segment of $10 million and $17 million, respectively. The revenue decrease for the six months ended December 31, 2013 was also due to lower revenues at the Book Publishing segment of $10 million. The revenue decreases for the three and six months ended December 31, 2013 were partially offset by increased revenues at the Cable Network 37-------------------------------------------------------------------------------- Table of Contents Programming segment of $57 million and $189 million, respectively, primarily resulting from the consolidation of FOX SPORTS Australia in November 2012 and increased revenues at the Digital Real Estate segment of $16 million and $25 million, respectively. The revenue decrease for the three months ended December 31, 2013 was also partially offset by increased revenues at the Book Publishing segment of $14 million. Operating Expenses-Operating expenses decreased 6% and 4% for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The operating expense decreases for the three and six months ended December 31, 2013 were primarily due to lower operating expenses at the News and Information Services segment of $100 million and $225 million, respectively, primarily due to lower production costs resulting from reduced sales and the impact of cost containment initiatives. The operating expense decrease for the six months ended December 31, 2013 was also due to lower operating expenses at the Book Publishing segment of $20 million. The decreases in operating expenses for the three and six months ended December 31, 2013 were partially offset by increased operating expenses at the Cable Network Programming segment of $25 million and $122 million, respectively, primarily resulting from the consolidation of FOX SPORTS Australia. Selling, general and administrative expenses-Selling, general and administrative expenses decreased 5% and 8% for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The decreases in Selling, general and administrative expenses for the three and six months ended December 31, 2013 were primarily due to lower expenses at the News and Information Services segment of $23 million and $76 million, respectively, and lower expenses at the Other segment of $10 million and $31 million, respectively. The decreases at the News and Information Services segment were primarily due to the impact of cost savings initiatives and the decreases at the Other segment were primarily due to lower fees and costs related to the U.K. Newspaper Matters, partially offset by higher expenses at Amplify. Depreciation and amortization-Depreciation and amortization increased 7% and 10% for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The increases in depreciation and amortization for the three and six months ended December 31, 2013 were primarily due to increased expenses at the Cable Network Programming segment of approximately $7 million and $16 million, respectively, primarily resulting from the consolidation of FOX SPORTS Australia and higher depreciation expense at the News and Information Services segment of $4 million and $11 million, respectively, primarily due to accelerated depreciation at the U.K. newspapers for changes in the useful lives of leased facilities which the Company will be exiting in fiscal 2014. Impairment and restructuring charges-During the three and six months ended December 31, 2013, the Company recorded restructuring charges of $24 million and $51 million, respectively, of which $21 million and $44 million related to the newspaper businesses. The restructuring charges recorded in the second quarter of fiscal 2014 were primarily for employee termination benefits. During the three and six months ended December 31, 2012, the Company recorded restructuring charges of $62 million and $177 million, respectively, of which $62 million and $174 million, respectively, related to the newspaper businesses. The restructuring charges primarily related 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 in the three and six months ended December 31, 2012 were primarily for employee termination benefits in Australia and contract termination payments in the U.K. During the second quarter of fiscal 2014, the Company reached an agreement to sell one of its U.S. printing plants. The carrying value of the plant was more than the net proceeds the Company received in January 2014 by approximately $12 million which was recorded as an impairment charge in the three and six months ended December 31, 2013. Equity earnings of affiliates-Equity earnings of affiliates decreased $11 million and $24 million for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The decreases in equity earnings of affiliates were primarily due to the consolidation of FOX SPORTS Australia and the sale of the Company's investment in SKY Network Television Ltd., partially offset by the Company's increased ownership interest in Foxtel. 38 -------------------------------------------------------------------------------- Table of Contents For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Foxtel(a) $ 17 $ 8 $ 9 * * $ 30 $ 13 $ 17 * * Pay television and cable network programming equity affiliates(b) - 20 (20 ) (100 )% - 42 (42 ) (100 )% Other equity affiliates - - - * * - (1 ) 1 (100 )% Total Equity earnings of affiliates $ 17 $ 28 $ (11 ) (39 )% $ 30 $ 54 $ (24 ) (44 )% ** not meaningful (a) The Company owned 25% of Foxtel through November 2012. In November 2012, the Company increased its ownership in Foxtel to 50% as a result of the CMH acquisition. In accordance with ASC 350, the Company amortized $15 million and $31 million related to excess cost over the Company's proportionate share of its investment's underlying net assets allocated to finite-lived intangible assets during the three and six months ended December 31, 2013, respectively, and $6 million in both the corresponding periods of fiscal 2013. Such amortization is reflected in Equity earnings of affiliates in the Statements of Operations. (b) Includes equity earnings of FOX SPORTS Australia and SKY Network Television Ltd. The Company acquired the remaining interest in FOX SPORTS Australia in November 2012 as a result of the CMH acquisition and sold its investment in SKY Network Television Ltd. in March 2013. The results of FOX SPORTS Australia have been included within the Cable Network Programming segment in the Company's consolidated results of operations since November 2012. Interest, net-Interest, net decreased $2 million for the three months ended December 31, 2013 and increased $4 million for the six months ended December 31, 2013 as compared to the corresponding periods of fiscal 2013. The decrease for the three months ended December 31, 2013 was primarily due to lower interest income on cash balances, partially offset by increased interest income from the note receivable from Foxtel due to an increased investment in Foxtel as a result of the acquisition of CMH in November 2012. (See Note 4 to the unaudited Consolidated and Combined Financial Statements of News Corporation). The increase in Interest, net for the six months ended December 31, 2013 was primarily due to increased interest income from the note receivable from Foxtel. Other, net For the three months For the six months ended December 31, ended December 31, 2013 2012 2013 2012 (in millions) Foreign tax refund payable to 21st Century Fox(a) $ (238 ) $ - $ (721 ) $ - Gain on third party pension contribution(b) - - 37 - Gain on CMH transaction(c) - 1,258 - 1,258 Other, net 7 (6 ) 12 (3 ) Total Other, net $ (231 ) $ 1,252 $ (672 ) $ 1,255 (a) The Company filed refund claims for certain losses, pertaining to periods prior to the Separation, in a foreign jurisdiction that were subject to litigation. In the first quarter of fiscal 2014, the foreign tax authority determined that it would not appeal a ruling received by the Company in July 2013 and therefore, a portion of an uncertain matter was resolved during the three months ended September 30, 2013. In the second quarter of fiscal 2014, the foreign tax authority completed its review and the remainder of the uncertain matter was resolved during the three months ended December 31, 2013. The Company recorded $239 million and $794 million for the tax refund and interest and recorded a tax benefit, net of applicable taxes, of $238 million and $721 million to Income tax benefit in the Statements of Operations for the three and six months ended December 31, 2013, respectively. Pursuant to the Tax Sharing and Indemnification Agreement, refunds received related to these matters are to be remitted to 21st Century Fox. Accordingly, the Company recorded an expense to Other, net of $238 million and $721 million for the payable to 21st Century Fox in the Statements of Operations for the three months and six months ended December 31, 2013, respectively. (See Note 12 to the unaudited Consolidated and Combined Financial Statements of News Corporation). 39 -------------------------------------------------------------------------------- Table of Contents (b) During the first quarter of fiscal 2014, a $37 million contribution was made by a third party to one of the Company's pension plans in connection with the sale of a business in a prior period. The contribution was contractually stipulated in the sale agreement and was made on behalf of former employees who retained certain pension benefits. This resulted in a gain being recognized in Other, net in the Statements of Operations during the six months ended December 31, 2013. (See Note 11 to the unaudited Consolidated and Combined Financial Statements of News Corporation). (c) See Note 2 to the unaudited Consolidated and Combined Financial Statements of News Corporation. Income tax benefit-The Company's effective income tax rate for the three and six months ended December 31, 2013 was higher than the statutory rate, primarily due to the impact of the refund from a foreign jurisdiction, certain non-taxable indemnification payments received from 21st Century Fox, partially offset by the impact of other permanent differences. In addition, the Company's effective tax rate is impacted by the mix of pre-tax income or loss between jurisdictions and the overall level of pre-tax income, including the impact of non-recurring items. (See Note 12 to the unaudited Consolidated and Combined Financial Statements of News Corporation). The Company's effective income tax rate for the three and six months ended December 31, 2012 was lower than the statutory rate, primarily due to a rate reduction due to the non-taxable gain and reversal of the historic deferred tax liability related to the consolidation of FOX SPORTS Australia, the Company's foreign operations which are subject to lower tax rates partially offset by the impact of permanent differences. Net income-Net income decreased $1,245 million and $1,124 million for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The decreases in net income were primarily due to the gain on the CMH transaction included in the corresponding periods of fiscal 2013. Net income attributable to noncontrolling interests-Net income attributable to noncontrolling interests increased by $3 million and $5 million for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013, due to higher results at REA Group. Segment Analysis Segment EBITDA is defined as revenues less operating expenses and selling, general and administrative expenses. Segment EBITDA does not include: Depreciation and amortization, impairment and restructuring charges, equity earnings of affiliates, interest, net, other, net, income tax benefit and net income attributable to noncontrolling interests. Management believes that Segment EBITDA 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. Segment EBITDA 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). Total Segment EBITDA is a non-GAAP measure and should be considered in addition to, not as a substitute for, net income, cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment and restructuring charges, which are significant components in assessing the Company's financial performance. The following table reconciles Total Segment EBITDA to Net income. 40 -------------------------------------------------------------------------------- Table of Contents For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Revenues $ 2,238 $ 2,321 $ (83 ) (4 )% $ 4,310 $ 4,454 $ (144 ) (3 )% Operating expenses (1,274 ) (1,352 ) 78 (6 )% (2,569 ) (2,686 ) 117 (4 )% Selling, general and administrative expenses (637 ) (669 ) 32 (5 )% (1,273 ) (1,379 ) 106 (8 )% Total Segment EBITDA 327 300 27 9 % 468 389 79 20 % Depreciation and amortization (138 ) (129 ) (9 ) 7 % (279 ) (254 ) (25 ) 10 % Impairment and restructuring charges (36 ) (62 ) 26 (42 )% (63 ) (177 ) 114 (64 )% Equity earnings of affiliates 17 28 (11 ) (39 )% 30 54 (24 ) (44 )% Interest, net 16 18 (2 ) (11 )% 33 29 4 14 % Other, net (231 ) 1,252 (1,483 ) * * (672 ) 1,255 (1,927 ) * * (Loss) income before income tax benefit (45 ) 1,407 (1,452 ) * * (483 ) 1,296 (1,779 ) * * Income tax benefit 211 4 207 * * 687 32 655 * * Net income $ 166 $ 1,411 $ (1,245 ) (88 )% $ 204 $ 1,328 $ (1,124 ) (85 )% ** not meaningful For the three months ended December 31, 2013 2012 Segment Segment Revenues EBITDA Revenues EBITDA (in millions) News and Information Services $ 1,612 $ 255 $ 1,772 $ 292 Cable Network Programming 110 53 53 19 Digital Real Estate Services 103 55 87 46 Book Publishing 391 68 377 51 Other 22 (104 ) 32 (108 ) Total $ 2,238 $ 327 $ 2,321 $ 300 For the six months ended December 31, 2013 2012 Segment Segment Revenues EBITDA Revenues EBITDA (in millions) News and Information Services $ 3,107 $ 388 $ 3,438 $ 418 Cable Network Programming 242 82 53 19 Digital Real Estate Services 193 99 168 81 Book Publishing 719 111 729 91 Other 49 (212 ) 66 (220 ) Total $ 4,310 $ 468 $ 4,454 $ 389 41 -------------------------------------------------------------------------------- Table of Contents News and Information Services (72% of the Company's consolidated revenues in the first six months of fiscal 2014 and 77% of the Company's combined revenues in the first six months of fiscal 2013) For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Revenues: Advertising $ 961 $ 1,064 $ (103 ) (10 )% $ 1,803 $ 2,024 $ (221 ) (11 )% Circulation and Subscription 557 597 (40 ) (7 )% 1,123 1,197 (74 ) (6 )% Other 94 111 (17 ) (15 )% 181 217 (36 ) (17 )% Total Revenues 1,612 1,772 (160 ) (9 )% 3,107 3,438 (331 ) (10 )% Operating expenses (937 ) (1,037 ) 100 (10 )% (1,873 ) (2,098 ) 225 (11 )% Selling, general and administrative (420 ) (443 ) 23 (5 )% (846 ) (922 ) 76 (8 )% Segment EBITDA $ 255 $ 292 $ (37 ) (13 )% $ 388 $ 418 $ (30 ) (7 )% Revenues at the News and Information Services segment decreased $160 million, or 9%, and $331 million, or 10%, for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The revenue decreases for the three and six months ended December 31, 2013 were primarily due to lower advertising revenues of $103 million and $221 million, respectively, as compared to the corresponding periods of fiscal 2013. The decreases in advertising revenues for the three and six months ended December 31, 2013 were primarily due to lower advertising revenues at the Australian newspapers of $79 million and $180 million, respectively, resulting from the continued challenging economic environment in Australia and the negative impact of foreign exchange fluctuations; lower advertising revenues at Dow Jones of $30 million and $45 million, respectively, primarily due to the disposal of the Dow Jones Local Media Group; and lower advertising revenues at the U.K. newspapers of $3 million and $13 million, resulting from overall print market declines. The decrease in advertising revenues at the U.K. newspapers for the six months ended December 31, 2013 was also due to the absence of Olympic-related revenues in the six months ended December 31, 2013. The revenue decreases for the three and six months ended December 31, 2013 were partially offset by increased advertising revenues at the integrated marketing services business of $15 million and $24 million, respectively, primarily due to higher in-store marketing revenues. Circulation and subscription revenues for the three and six months ended December 31, 2013 decreased $40 million and $74 million, respectively, as compared to the corresponding periods of fiscal 2013. The decreases were due in large part to Dow Jones revenue decreases of $27 million and $34 million, respectively, primarily due to lower Institutional product revenue and the disposal of the Dow Jones Local Media Group, partially offset by increased circulation revenues at The Wall Street Journal and at WSJ.com. Revenues at the Australian newspapers decreased $12 million and $26 million, respectively, principally resulting from the negative impact of foreign exchange fluctuations, as decreased revenues due to lower print circulation volume were offset by price increases. Revenues at the U.K. newspapers for the three months ended December 31, 2013 were relatively consistent with the corresponding period as lower print circulation volume was offset by increased digital subscription revenues and price increases. Revenues at the U.K. newspapers decreased $8 million for the six months ended December 31, 2013 as compared to the corresponding period of fiscal 2013, principally resulting from lower print circulation volume, partially offset by price increases and increased digital subscription revenues in the first quarter of fiscal 2014. Other revenues for the three and six months ended December 31, 2013 decreased $17 million and $36 million, respectively, primarily resulting from lower revenues at Dow Jones due to the disposal of the Dow Jones Local Media Group and lower third party printing and content distribution revenues. Segment EBITDA at the News and Information Services segment decreased $37 million, or 13%, and $30 million, or 7%, for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. These decreases were primarily due to decreases at the Australian newspapers of $30 million and $57 million, respectively, principally as a result of lower advertising revenues as noted above, partially offset by lower production costs and the impact of cost savings 42-------------------------------------------------------------------------------- Table of Contents initiatives, and decreases at Dow Jones of $16 million for both the three and six months ended December 31, 2013, primarily due to lower Institutional product revenue and the disposal of the Dow Jones Local Media Group, partially offset by lower production costs and the impact of cost savings initiatives. These Segment EBITDA declines were partially offset by the absence of losses from The Daily which was shutdown in December 2012 and contributed $5 million and $12 million, respectively, and increases at the U.K. newspapers for the three and six months ended December 31, 2013, of $3 million and $20 million, respectively, primarily due to the positive impact of the release of legal reserves resulting from a favorable arbitration ruling and lower pension expenses, partially offset by increased promotional spending and higher sports right acquisition costs associated with the August 2013 launch of Sun+. The increase at the U.K. newspapers for the six months ended December 31, 2013 was also the result of production costs and Olympic-related promotional spending in the prior period that did not recur in the current period. The Segment EBITDA decline for the six months ended December 31, 2013 was also partially offset by an increase of $10 million at the integrated marketing service business, primarily due to higher revenues as noted above partially offset by increased retail commission and production costs. News Corp Australia Revenues at the Australian newspapers for the three and six months ended December 31, 2013 decreased 17% and 20%, respectively, as compared to the corresponding periods of fiscal 2013. The majority of the decreases are the result of the negative impact of foreign exchange fluctuations and to a lesser extent lower advertising revenues. The strengthening of the U.S. dollar against the Australian dollar resulted in revenue decreases of $54 million, or 10%, and $112 million, or 10%, for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. News U.K. For the three months ended December 31, 2013, revenues at the U.K. newspapers were relatively consistent with the corresponding period of fiscal 2013. Revenues for the six months ended December 31, 2013 decreased 3% as compared to the corresponding period of fiscal 2013, primarily due to lower advertising revenues, principally related to Olympic-related revenue in the prior period that did not recur in the current period. Circulation and subscription revenues decreased primarily due to lower print circulation volume, partially offset by price increases and increased digital subscription revenues. The impact of foreign currency exchange fluctuations of the U.S. dollar against the British pound resulted in a revenue increase of $3 million for the three months ended December 31, 2013 and a decrease of $4 million for the six months ended December 31, 2013 as compared to the corresponding periods of fiscal 2013. Dow Jones Revenues at Dow Jones for the three and six months ended December 31, 2013 decreased 14% and 10%, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to lower revenues of $41 million and $55 million, respectively, resulting from the sale of the Dow Jones Local Media Group in September 2013, lower Institutional product revenues of $17 million and $28 million, respectively, and lower other revenues of $5 million and $13 million, respectively, principally resulting from lower third party printing and content distribution revenues. The revenue decreases were partially offset by increased circulation revenues at The Wall Street Journal and at WSJ.com of $4 million and $13 million, respectively, due to price increases. News America Marketing For the three and six months ended December 31, 2013, revenues at the integrated marketing services business increased 4% and 3%, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to increased revenues for in-store advertising. 43 -------------------------------------------------------------------------------- Table of Contents Cable Network Programming (6% of the Company's consolidated revenues in the first six months of fiscal 2014 and 1% of the Company's combined revenues in the first six months of fiscal 2013) For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Revenues: Advertising $ 15 $ 6 $ 9 * * $ 41 $ 6 $ 35 * * Circulation and Subscription 94 45 49 * * 198 45 153 * * Other 1 2 (1 ) (50 )% 3 2 1 50 % Total Revenues 110 53 57 * * 242 53 189 * * Operating expenses (52 ) (27 ) (25 ) 93 % (149 ) (27 ) (122 ) * * Selling, general and administrative (5 ) (7 ) 2 (29 )% (11 ) (7 ) (4 ) 57 % Segment EBITDA $ 53 $ 19 $ 34 * * $ 82 $ 19 $ 63 * * ** not meaningful For the three and six months ended December 31, 2013, revenues at the Cable Network Programming segment increased $57 million and $189 million, respectively, as compared to the corresponding periods of fiscal 2013. For the three and six months ended December 31, 2013, Segment EBITDA at the Cable Network Programming segment increased $34 million and $63 million, respectively as compared to the three and six months ended December 31, 2012. These increases primarily reflect the consolidation of FOX SPORTS Australia beginning in November 2012 due to the acquisition of CMH. For the three and six months ended December 31, 2013, on a stand-alone basis, revenues at FOX SPORTS Australia decreased 3% and 1%, respectively, as compared to the corresponding periods of fiscal 2013 as increases in subscription revenues related to increases in digital platform subscribers and higher affiliate pricing and advertising revenues were more than offset by the negative impact of foreign currency fluctuations. On a stand-alone basis, Segment EBITDA for the three months ended December 31, 2013 increased 20% as compared to the corresponding period of fiscal 2013 due to increases in subscription and advertising revenues and expense decreases, partially offset by the negative impact of foreign currency fluctuations. The reduction in expenses was primarily associated with FOX SPORTS Australia not broadcasting and producing Domestic Cricket as in the corresponding period of fiscal 2013. On a stand-alone basis, Segment EBITDA for the six months ended December 31, 2013 decreased 5% as compared to the corresponding period of fiscal 2013 primarily due to increased expenses and the negative impact of foreign currency fluctuations, partially offset by increased subscription and advertising revenues. The expense increase for the six months ended December 31, 2013 was primarily due to increased expenses associated with the new National Rugby League contract, partially offset by the absence of costs associated with Domestic Cricket in the current year period. Digital Real Estate Services (4% of the Company's consolidated revenues in the first six months of fiscal 2014 and 4% of the Company's combined revenues in the first six months of fiscal 2013) For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Revenues: Advertising $ 103 $ 87 $ 16 18 % $ 193 $ 168 $ 25 15 % Total Revenues 103 87 16 18 % 193 168 25 15 % Selling, general and administrative (48 ) (41 ) (7 ) 17 % (94 ) (87 ) (7 ) 8 % Segment EBITDA $ 55 $ 46 $ 9 20 % $ 99 $ 81 $ 18 22 % Revenues at the Digital Real Estate Services segment increased $16 million, or 18%, and $25 million, or 15%, for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The revenue increases were primarily due to increased listing depth product penetration in Australia. 44 -------------------------------------------------------------------------------- Table of Contents Segment EBITDA at the Digital Real Estate Services segment increased $9 million, or 20%, and $18 million, or 22%, for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The improvements in segment EBITDA were primarily due to the revenue increases noted above. Book Publishing (17% of the Company's consolidated revenues in the first six months of fiscal 2014 and 16% of the Company's combined revenues in the first six months of fiscal 2013) For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Revenues: Consumer $ 377 $ 346 $ 31 9 % $ 688 $ 672 $ 16 2 % Other 14 31 (17 ) (55 )% 31 57 (26 ) (46 )% Total Revenues 391 377 14 4 % 719 729 (10 ) (1 )% Operating expenses (274 ) (273 ) (1 ) - (514 ) (534 ) 20 (4 )% Selling, general and administrative (49 ) (53 ) 4 (8 )% (94 ) (104 ) 10 (10 )% Segment EBITDA $ 68 $ 51 $ 17 33 % $ 111 $ 91 $ 20 22 % Revenues at the Book Publishing segment increased $14 million, or 4%, for the three months ended December 31, 2013, and decreased $10 million, or 1%, for the six months ended December 31, 2013, as compared to the corresponding periods of fiscal 2013. The increase in revenues for the three months ended December 31, 2013 was primarily due to higher print and digital book sales of $31 million, principally resulting from sales of the Divergent series by Veronica Roth following the launch of Allegiant in October 2013, The Pioneer Woman Cooks: A Year of Holidays by Ree Drummond and The First Phone Call from Heaven by Mitch Albom. The revenue increase for the three months ended December 31, 2013 was partially offset by a decrease in other revenues of $17 million primarily due to the sale of the Women of Faith live events business and the decision to exit the third party distribution business. The decrease in revenues for the six months ended December 31, 2013 was primarily due to a decrease in other revenues of $26 million, principally resulting from the sale of the Women of Faith live events business and the decision to exit the third party distribution business. The decrease in revenues for the six months ended December 31, 2013 was partially offset by increased book sales of $16 million, primarily resulting from the successful book sales noted above, partially offset by softness in the Christian publishing business primarily in the first quarter of fiscal 2014 which reduced revenues by approximately $11 million. The strengthening of the U.S. dollar against local currencies resulted in revenue decreases of $4 million and $8 million for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. E-book sales represented 17% of revenues during the three months ended December 31, 2013, as compared to 14% in the corresponding period of fiscal 2013, representing a 39% increase. E-book sales represented 19% of revenues during the six months ended December 31, 2013, as compared to 15% in the corresponding period of fiscal 2013, representing a 35% increase. During the six months ended December 31, 2013, HarperCollins had 92 titles on The New York Times Bestseller List, with 11 titles reaching the number one position. Segment EBITDA at the Book Publishing segment increased $17 million, or 33%, and $20 million, or 22%, for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013, primarily due to the increases in book sales noted above, as well as the impact of ongoing operational efficiencies and lower manufacturing costs reflecting the continued shift to e-book sales, partially offset by the decreases in other revenues noted above. 45 -------------------------------------------------------------------------------- Table of Contents Other (1% of the Company's consolidated revenues in the first six months of fiscal 2014 and 2% of the Company's combined revenues in the first six months of fiscal 2013) For the three months ended December 31, For the six months ended December 31, 2013 2012 Change % Change 2013 2012 Change % Change (in millions, except %) Revenues: Advertising $ 1 $ 6 $ (5 ) (83 )% $ 1 $ 6 $ (5 ) (83 )% Circulation and Subscription 10 12 (2 ) (17 )% 19 20 (1 ) (5 )% Other 11 14 (3 ) (21 )% 29 40 (11 ) (28 )% Total Revenues 22 32 (10 ) (31 )% 49 66 (17 ) (26 )% Operating expenses (11 ) (15 ) 4 (27 )% (33 ) (27 ) (6 ) 22 % Selling, general and administrative (115 ) (125 ) 10 (8 )% (228 ) (259 ) 31 (12 )% Segment EBITDA $ (104 ) $ (108 ) $ 4 (4 )% $ (212 ) $ (220 ) $ 8 (4 )% Revenues at the Other segment decreased $10 million, or 31%, and $17 million, or 26%, for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. These revenue decreases were primarily due to lower revenues at Amplify of $7 million and $6 million, respectively, primarily due to lower project-based consulting revenues at the Insight business, and lower revenues of $3 million and $11 million, respectively, due to the sale of certain of the Company's non-core Australian businesses during fiscal 2013. Segment EBITDA at the Other segment improved $4 million, or 4%, and $8 million, or 4% for the three and six months ended December 31, 2013, respectively, as compared to the corresponding periods of fiscal 2013. The improvements in Segment EBITDA were primarily due to lower fees and costs related to the U.K. Newspaper Matters of approximately $30 million and $74 million, respectively. The improvements in Segment EBITDA for the three and six months ended December 31, 2013 were partially offset by higher expenses of $10 million and $39 million, respectively, at Amplify related to increased product and curriculum development costs, higher corporate overhead expenses of $11 million and $19 million, respectively, compared to an allocated basis used for fiscal 2013 and $8 million and $14 million, respectively, incurred by the Company's corporate Strategy and Creative Group related to the development of new products and services and international rights acquisitions. Prior to the Separation, the Company's Statements of Operations included allocations of general corporate expenses for certain support functions that were provided on a centralized basis by 21st Century Fox. For the three and six months ended December 31, 2013, the Company's Statements of Operations reflect actual corporate overhead costs incurred by the Company as it performed these functions using its own resources or purchased services from either third parties or 21st Century Fox. As part of the Separation and Distribution Agreement, 21st Century Fox will indemnify the Company, on an after-tax basis, for payments made after the Distribution Date arising out of civil claims and investigations relating to the U.K. Newspaper Matters, as well as legal and professional fees and expenses paid in connection with the criminal matters, other than fees, expenses and costs relating to employees (i) who are not directors, officers or certain designated employees or (ii) with respect to civil matters, who are not co-defendants with the Company or 21st Century Fox. The Company incurred gross legal and professional fees and costs for civil settlements related to the U.K. Newspaper Matters in Selling, general and administrative expenses totaling approximately $51 million and $91 million during the three and six months ended December 31, 2013, respectively, of which $32 million and $55 million, respectively, net of tax, have been or will be indemnified. Accordingly, the Company recorded a contra expense for the after-tax costs that were or will be indemnified of $32 million and $55 million in Selling, general and administrative expenses for the three and six months ended December 31, 2013, respectively, and recorded a corresponding receivable from 21st Century Fox. The net expense included in Selling, general and administrative expenses was therefore $19 million and $36 million for the three and six months ended December 31, 2013, respectively, as compared to $49 million and $110 million for the three and six months ended December 31, 2012, respectively. 46 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Current Financial Condition The Company's principal source of liquidity is internally generated funds and cash and cash equivalents on hand. In accordance with the Separation and Distribution Agreement, 21st Century Fox made a cash contribution to the Company such that at the Distribution Date, the Company had approximately $2.4 billion of cash on hand and received the remaining $0.2 billion from 21st Century Fox during the first quarter of fiscal 2014. The Company expects these elements of liquidity will enable it to meet its liquidity needs in the foreseeable future. In addition, as anticipated in the 2013 Form 10-K, the Company established a revolving credit facility of $650 million in October 2013 and expects to have access to the worldwide capital markets, subject to market conditions, in order to issue debt if required. Although the Company believes that its future cash from operations, together with its access to the capital markets, will provide adequate resources to fund its operating and financing needs, its access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) the Company's performance, (ii) its credit rating or absence of a credit rating, (iii) the liquidity of the overall capital markets and (iv) the current state of the economy. There can be no assurances that the Company will continue to have access to the capital markets on acceptable terms. See "Item 1A. Risk Factors" for a further discussion. As of December 31, 2013, the Company's consolidated assets included $753 million in cash and cash equivalents that was held by its foreign subsidiaries. $254 million of this amount is cash held at the Digital Real Estate Services segment which is not readily accessible by the Company as it is held by REA Group, a majority owned but separately listed public company. REA Group must declare a dividend in order for the Company to have access to its share of REA Group's cash balance. The Company earns income outside the U.S., which is deemed to be permanently reinvested in certain foreign jurisdictions. The Company does not currently intend to repatriate these funds. Should the Company require more capital in the U.S. than is generated by and/or available to its domestic operations, the Company could elect to transfer funds held in foreign jurisdictions. The transfer of funds from foreign jurisdictions may be cumbersome due to local regulations, foreign exchange control and withholding taxes. Additionally, the transfer of funds from foreign jurisdictions may result in higher effective tax rates and higher cash paid for income taxes for the Company. The principal uses of cash that affect the Company's liquidity position include the following: operational expenditures including employee costs; paper purchases and capital expenditures; income tax payments; investments in associated entities and acquisitions. In addition to the acquisitions and sales 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 issuance of the Company's securities or the assumption of indebtedness. The Company's Board of Directors has authorized the Company to repurchase up to an aggregate of $500 million of its Class A Common Stock. All decisions regarding any future stock repurchases are at the sole discretion of a duly appointed committee of the Company's Board of Directors and management. The committee's decisions regarding future stock repurchases will be evaluated from time to time in light of many factors, including the Company's financial condition, earnings, capital requirements and debt facility covenants, other contractual restrictions, as well as legal requirements (including compliance with the IRS private letter ruling), regulatory constraints, industry practice and other factors that the committee may deem relevant. The stock repurchase authorization may be modified, extended, suspended or discontinued at any time by the Company's Board of Directors and the Company's Board of Directors cannot provide any assurances that any shares will be repurchased. Through February 3, 2014, the Company has not repurchased any common stock. 47-------------------------------------------------------------------------------- Table of Contents Sources and Uses of Cash-For the six months ended December 31, 2013 versus the six months ended December 31, 2012 Net cash provided by operating activities for the six months ended December 31, 2013 and 2012 was as follows (in millions): For the six months ended December 31, 2013 2012 Net cash provided by operating activities $ 407 $ 5 Net cash provided by operating activities improved by $402 million for the six months ended December 31, 2013 as compared to the corresponding period of fiscal 2013, which was primarily due to lower restructuring payments of $110 million, the timing of net receipts related to the foreign tax refund of $81 million, the increase in Cable Network Programming segment EBITDA in the current period of $63 million, and lower payments for fees and costs related to the U.K. Newspaper Matters of $58 million. The improvement was also due to improved working capital at the Book Publishing segment of $56 million primarily due to the e-Books legal settlement in the prior corresponding period of fiscal 2013 and lower vendor and royalty payments, improved working capital within the News & Information Services segment of approximately $20 million, lower tax payments of $29 million, improved working capital at Amplify of $17 million and improved segment EBITDA across the remainder of the Company of $16 million. The increases in net cash provided by operating activities were partially offset by lower cash distributions of $71 million primarily from the absence of cash distributions from SKY Network Television Ltd. as the Company sold its investment in SKY Network Television Ltd. in March 2013. Net cash used in investing activities for the six months ended December 31, 2013 and 2012 was as follows (in millions): For the six months ended December 31, 2013 2012 Net cash used in investing activities $ (75 ) $ (2,272 ) The Company had net cash used in investing activities of $75 million for the six months ended December 31, 2013 as compared to $2,272 million for the corresponding period of fiscal 2013. During the six months ended December 31, 2013, the Company had capital expenditures of $147 million and cash for acquisitions of $26 million primarily resulting from the acquisition of Storyful. The net cash used in investing activities for the six months ended December 31, 2013 was partially offset by proceeds from dispositions of $100 million primarily resulting from the sale of the Dow Jones Local Media Group. During the six months ended December 31, 2012, the Company utilized $2.2 billion in cash for acquisitions primarily resulting from the acquisition of Consolidated Media Holdings Ltd. and Thomas Nelson and had capital expenditures of $141 million. Net cash provided by financing activities for the six months ended December 31, 2013 and 2012 was as follows (in millions): For the six months ended December 31, 2013 2012 Net cash provided by financing activities $ 204 $ 1,861 The change in net cash provided by financing activities for the six months ended December 31, 2013 as compared to the corresponding period of fiscal 2013 was primarily due to net transfers from 21st Century Fox and its affiliates of $217 million during the six months ended December 31, 2013 as compared to $2.1 billion during the six months ended December 31, 2012, partially offset by the payment of debt acquired in the acquisition of Consolidated Media Holdings Ltd of approximately $235 million. 48-------------------------------------------------------------------------------- Table of Contents Reconciliation of Free Cash Flow Available to News Corporation Free cash flow available to News Corporation is a non-GAAP financial measure defined as net cash provided by operating activities, less capital expenditures and REA Group free cash flow, plus cash dividends received from REA Group. The Company considers free cash flow available to News Corporation to provide useful information to management and investors about the amount of cash generated by the business after capital expenditures which can then be used for strategic opportunities including, among others, investing in the Company's business, strategic acquisitions, strengthening the Company's balance sheet, dividend payouts and repurchasing stock. A limitation of free cash flow available to News Corporation is that it does not represent the total increase or decrease in the cash balance for the period. Management compensates for the limitation of free cash flow available to News Corporation by also relying on the net change in cash and cash equivalents as presented in the Company's consolidated and combined statements of cash flows prepared in accordance with GAAP which incorporates all cash movements during the period. The following table presents a reconciliation of net cash provided by operating activities to free cash flow available to News Corporation: For the six months ended December 31, 2013 2012 (in millions) Net cash provided by operating activities $ 407 $ 5 Less: Capital expenditures (147 ) (141 ) 260 (136 ) Less: REA Group free cash flow (62 ) (57 ) Plus: Cash dividends received from REA Group 19 17 Free cash flow available to News Corporation $ 217 $ (176 ) Free cash flow available to News Corporation improved by $393 million in the six months ended December 31, 2013 to $217 million from $(176) million in the corresponding period of fiscal 2013, primarily due to the change in net cash provided by operating activities noted above. Revolving Credit Agreement In October 2013, the Company entered into a Credit Agreement (the "Credit Agreement") which provides for an unsecured $650 million five-year revolving credit facility (the "Facility") to the Company for general corporate purposes. The Facility has a sublimit of $100 million available for issuances of letters of credit. Under the Credit Agreement, the Company may request increases in the amount of the credit facility up to a maximum amount of $900 million. Subject to certain conditions stated in the Credit Agreement, the Company may borrow, prepay and reborrow amounts under the Facility during the term of the Credit Agreement. All amounts under the Credit Agreement are due on October 23, 2018, unless the commitments are terminated earlier either at the request of the Company or, if an event of default occurs, by the designated agent at the request or with the consent of the lenders (or automatically in the case of certain bankruptcy-related events). The Company may request that the commitments be extended under certain circumstances as set forth in the Credit Agreement for up to two additional one-year periods. Additionally, interest on borrowings is based on either (a) a Eurodollar Rate formula or (b) the Base Rate formula, each as set forth in the Credit Agreement. The Credit Agreement contains certain customary affirmative and negative covenants and events of default, with customary exceptions, including limitations on the ability of the Company and the Company's subsidiaries to engage in transactions with affiliates, incur liens, merge into or consolidate with any other entity, incur subsidiary debt or dispose of all or substantially all of its assets or all or substantially all of the stock of its subsidiaries taken as a whole. In addition, the Credit Agreement requires the Company to maintain an adjusted operating income leverage ratio of not more than 3.0 to 1.0 and an interest coverage ratio of not less 49-------------------------------------------------------------------------------- Table of Contents than 3.0 to 1.0. If any of the events of default occur and are not cured within applicable grace periods or waived, any unpaid amounts under the Credit Agreement may be declared immediately due and payable. As of December 31, 2013, the Company was in compliance with all of the applicable debt covenants. The applicable margin and the commitment fee are based on the pricing grid in the Credit Agreement which varies based on the Company's adjusted operating income leverage ratio. Initially the Company will be paying a commitment fee of 0.25% on any undrawn balance and an applicable margin of 0.50% for a Base Rate borrowing and 1.50% for a Eurodollar Rate borrowing. At the time of this filing, the Company has not borrowed any funds under the Facility. 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. Other than as previously disclosed in these notes to the Company's consolidated and combined financial statements, the Company's commitments as of December 31, 2013 have not changed significantly from the disclosures included in the 2013 Form 10-K. In January 2014, the Company signed a 30 year lease to relocate all of its various London operations to a single new location. The lease terminates in fiscal 2044, with an early termination option in fiscal 2039. The Company's London-based staff of News UK, Dow Jones and HarperCollins will be housed together for the first time which the Company expects will allow for improved collaboration and additional efficiencies. Staff are expected to commence relocation to the new London site in the summer of 2014. In connection with this relocation, the Company will pay average rent of approximately $35 million a year. The rental expense along with other facility related costs expected to be incurred approximates the costs the Company would have incurred in its existing leased properties. Separately, the Company will relocate the current U.S. headquarters of HarperCollins in June 2014 to a new location in Manhattan. As a result of these relocations, the Company expects to incur incremental costs related to dual rent and other facility related costs during the second half of fiscal 2014 of approximately $30 million to $35 million, a majority of which is non-cash. In addition, the Company expects to incur a similar amount in the first half of fiscal 2015. Contingencies As disclosed in the notes to the Financial Statements, U.K. and U.S. regulators and governmental authorities continue to conduct investigations initiated in 2011 with respect to the U.K. Newspaper Matters. The investigation by the U.S. Department of Justice (the "DOJ") is directed at conduct that occurred within 21st Century Fox prior to the creation of the Company. Accordingly, 21st Century Fox has been and continues to be responsible for responding to the DOJ investigation. The Company, together with 21st Century Fox, is cooperating with these investigations. The Company has admitted liability in many civil cases related to the voicemail interception allegations and has settled many cases. The Company also announced a private compensation scheme under which parties could pursue claims against it. While additional civil lawsuits may be filed, no additional civil claims may be brought under the compensation scheme after April 8, 2013. In connection with the Separation, the Company and 21st Century Fox agreed in the Separation and Distribution Agreement that 21st Century Fox will indemnify the Company for payments made after the Distribution Date arising out of civil claims and investigations relating to the U.K. Newspaper Matters as well as legal and professional fees and expenses paid in connection with the criminal matters, other than fees, expenses and costs relating to employees (i) who are not directors, officers or certain designated employees or (ii) with respect to civil matters, who are not co-defendants with the Company or 21st Century Fox. In addition, violations of law may result in criminal fines or penalties for which the Company will not be indemnified by 21st Century Fox. 21st Century Fox's indemnification obligations with respect to these matters will be settled on an after-tax basis. As of December 31, 2013, the Company has provided for its best estimate of the liability for the claims that have been filed and costs incurred and has accrued approximately $95 million, of which $65 million will be indemnified by 21st Century Fox and a corresponding receivable was recorded in Amounts due to 21st Century Fox, net on the Balance Sheet. It is not 50-------------------------------------------------------------------------------- Table of Contents possible to estimate the liability or corresponding receivable for any additional claims that may be filed 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 and corresponding receivable for such matters. The Company is not able to predict the ultimate outcome or cost of the civil claims or criminal matters. It is possible that these proceedings and any adverse resolution thereof, including any fines or other penalties associated with any plea, judgment or similar result for which the Company will not be indemnified, could damage its reputation, impair its ability to conduct its business and adversely affect its 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, it 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 financial condition, future results of operations or liquidity. As subsidiaries of 21st Century Fox prior to the Separation, the Company and each of its domestic subsidiaries have joint and several liability with 21st Century Fox for the consolidated U.S. federal income taxes of the 21st Century Fox consolidated group relating to any taxable periods during which the Company or any of the Company's domestic subsidiaries are or were a member of the 21st Century Fox consolidated group. Consequently, the Company could be liable in the event any such liability is incurred, and not discharged, by any other member of the 21st Century Fox consolidated group. The Tax Sharing and Indemnification Agreement requires 21st Century Fox to indemnify the Company for any such liability. Disputes or assessments could arise during future audits by the IRS or other taxing authorities in amounts that the Company cannot quantify. 51 -------------------------------------------------------------------------------- Table of Contents |